Q3 2020 RLJ Lodging Trust Earnings Call
Welcome to the RLJ lodging Trust third quarter Twentytwenty earnings Conference call.
All participants are in listen only mode and the conference is being recorded after.
After the presentation, there will be an opportunity to ask questions. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
I would now like to turn the call over to Mckeel Fellow RLJ, Vice President and Treasurer of corporate strategy and Investor Relations. Please go ahead.
Thank you operator good.
Good morning, and welcome to RLJ lodging trust 2023rd quarter earnings call.
On today's call let's deal.
And Chief Executive Officer will discuss key highlights for the quarter.
Sean Mahoney, our executive Vice President and Chief Financial Officer will discuss the company's financial results.
Tom Bartlett, our executive Vice President of asset management will be available for acuity.
But we are looking statements made on this call are subject to numerous risks and uncertainties.
Mainly the Companys actual results could differ materially from what had been communicated.
Factors that may impact the results of the company can be found in the Companys 10-Q, and other reports filed with the FTC.
The company undertakes no obligation.
Date forward looking statement.
Also as we discuss certain non-GAAP measures. It may be helpful to review the reconciliations to GAAP located in our press release from last night.
I will now turn the call over to let me think.
Thanks, Nick.
Good morning, everyone and thank you for joining us.
We sincerely hope that you and your loved ones continue to be healthy in sales. We also remain deeply grateful to our hotel associates, who want to frontline sales continue to help us navigate the multiple facets of the crisis that our industry is facing.
During the third quarter, we remain focused on executing on all fronts to bolster our liquidity and position the company for eventual recovery.
We reopened a significant number of hotel in a disciplined manner and continued our aggressive asset management efforts to minimize operating costs.
Which led to a further reduction in our burn rate.
Our execution has positioned us with long term growth opportunities that will allow us to achieve relative outperformance throughout my recovery.
In light of the continuing backdrop of this pandemic.
We are encouraged by our third quarter results, which.
Which exceeded our expectations as we benefited from a location and type of hotels in our portfolio.
We saw continued relative strength in leisure demand and an uptick in various pockets of corporate in small group demand, albeit from a very low base we.
We are pleased to see that these positive trends continued through October.
During the third quarter, we should American team to improve sequentially, reflecting the easing of restrictions nationwide, which drove industry weekend occupancy the highest levels of this pandemic.
We were also encouraged to see initial signs of demand in business transient industries, such as defense technology insurance and health care among others.
And also in small groups such as popular wedding training sessions and sports teams.
Well, both corporate transient and group remain anemic the increased demand from these segments contributed to the lift in occupancy throughout the quarter.
With respect to RLJ.
Our open hotels achieved 37.1% occupancy during the third quarter.
And saw sequential improvement each month.
Highlighting our ability to capture a significant portion of the limited demand that exists today.
Well weekend, which have now expanded to include Thursdays are open hotels achieved nearly 50% occupancy compared to 33% for weekday.
Our relative performance speaks to the benefits of our overall portfolio constructs and diversification, including a concentration of resorts drive to markets and select service assets.
Our portfolio is proving to be especially advantageous as it appeals to guests who have the ability of work from anywhere prefer larger living spaces and have a desire to minimize extraditing, which comprises the majority of the man that is available today.
Because of our portfolios appeal.
Our resort hotels achieved over 50% occupancy.
Our select service hotels achieved over 40% occupancy.
Many of our notable drive to markets, such as Charleston, Southern California, South, Florida achieved occupancy is a 47%.
40% and 37% respectively.
Additionally.
Our all suite hotel, which.
Which represent nearly 50% of our room.
Let's see the about 40% occupancy.
These hotels have always been popular among families and leisure travelers, but now provide a significant competitive advantage by offering the space and amenities to allow guest to work remotely.
As a testament to their tremendous value.
Are all suites brands, such as Doubletree business and an embassy suites, let's see the combined third quarter Revpar Index that was 16 point ahead of our competition.
And finally, our hotels have historically been preferred by small but.
Which is perfectly aligned with the limited group demand it is available today.
Therefore, we are well positioned to benefit from the uptick in small groups.
The improving momentum across our portfolio allowed us three open an additional 27 hotels during the quarter and reopen another three hotels subsequent to the quarter.
We now have 96 of our I didn't three hotels open.
Our seven hotels remain suspended consist of our urban full service hotels in markets, such as New York and San Francisco as well as three cluster hotels, we will evaluate the reopening of these hotels based on demand and castle potential.
As the occupancy that are open hotels indicate our portfolio orientation is enabling us to weather the pandemic, allowing us to maintain a burn rate as nearly half of our full service peers Wanna Perky basis.
As we continue to navigate this crisis.
Preserving liquidity remains our number one priority.
We have continued with our aggressive cost containment initiatives, including maintaining minimal staffing level.
The most ever be outlets close and maintaining only essential services.
Not only have these cost containment efforts were made in place and limited our burn rate. They also have added incremental efficiencies in many areas, which may allow us to return to our pre pandemic profitability sooner.
Our third quarter cash burn was 30% lower than our expectations due to a combination of higher than expected revenues at open hotels.
More hotels reopening and the continued success of our cost control initiatives.
Our burn rate improved throughout the quarter as our entire portfolio achieved positive gross operating profit in our open hotels exceeded our expectation and generated positive EBITDA during the quarter.
The success, we experience in reducing our burn rate through the third quarter enabled us to once again lower our monthly cash burn estimate by $2.5 million at the midpoint of our prior outlook.
With respect to the fourth quarter, we've been pleasantly surprised that we did not see the normal post labor day leisure demand drop off and then our occupancy levels continue to improve through October.
However, despite seen uptick in business transient and small group demand in select markets. The outlook for the remainder of this year has become increasingly uncertain.
With the rights of cobot infections accelerating during what has historically been a slower period of travel as we get deeper into the winter months we.
We have little visibility into what action state.
And local jurisdictions may take regarding additional social distancing and other restrictive measures, which would hamper the demand trends we saw in October.
Now looking ahead.
We are well positioned to not only continue to navigate the current environment and benefit early in a recovery, but also to outperform throughout the next lodging cycle.
During the early recovery phase, our lean operating model and the construct of our portfolio will have key advantages.
Our transit oriented hotels.
We'll continue to benefit from leisure demand as well as the recovery and business travel as it unfolds.
Our select service and compact full service hotels, which have smaller footprint and are less complex operationally will allow our hotels and minimize our cash burn.
In our lean operating model will allow us to achieve breakeven and profitability faster.
More importantly, our portfolio's poised to outperform throughout a sustained lodging recovery.
Given first our liquidity of approximately $1.2 billion and lower burn rate, which should enable us to emerge with a healthy balance sheet and minimize the need to raise unattractive capital.
Second our large asset base, which provide significant optionality relative to recycling capital without meaningfully shrinking or EBITDA base, although we do not have the need to sell any assets. We will remain active portfolio managers and we'll evaluate selective dispositions that create incremental capacity for growth.
Third.
Our pre pandemic portfolio transformation improve the long term growth profile of our portfolio, which will allow us to thrive throughout a sustained recovery as the business transient and group segments return.
And finally.
Our growth throughout the next cycle will be amplified by unlocking our embedded growth catalyst.
We have finalized plans to initiate the conversion of the Wyndham, Santa Monica and the mill House in Charleston, beginning in 2021.
And we are continuing to advance plans and timing, but the other conversions.
These catalyst position us for both internal and external growth.
With respect to external growth weeks.
We expect to be in a position to pull way growth capital as the recovery takes hold and.
Alright and September.
The third quarter results for our open hotels, where meaningfully better with occupancy of 37.1%.
And the average daily rate of $119, resulting in Revpar a $44.
We were especially pleased that are open hotels generated $2.2 million a positive EBITDA during the third quarter.
Driven by positive EBITDA during August and September.
Or monthly open hotel occupancy sequentially improve during the quarter.
At 32.6%, 38.4%.
39.9% in July August and September respectively.
We currently have 96 of 103 hotels open.
We are encouraged to see that early fourthquarter demand exceeded our expectations and accelerated after labor day.
In addition to October leisure demand remaining healthy and business transient and groups showing early signs of recovery. Our portfolio also benefited from unexpected demand relating to the storms in the south east and wildfires in the west.
During October are open hotels generated occupancy of approximately 41%.
And a D R. A approximately $115, which was in line with our open hotels ADR in September.
We would expect to generate positive G O P for the fourth quarter if October trends continue.
However, rising COVID-19 infection rates could reverse recent demand trans during November and December.
Our ability to quickly returned to positive G. O P is a good representation of how our portfolio can perform during a sustainable recovery.
Turning to the bottom line or third quarter pro forma hotel, EBITDA, and adjusted EBITDA, where negative $12.3 million and negative $19.2 million respectively.
And adjusted F. F O per share was negative 32 cents.
As Leslie mentioned, we remain committed to monitoring operator compliance with the aggressive cost containment initiatives that we instituted at the outset of the pandemic.
Underscoring are relentless focus on controlling costs.
Or a third quarter total hotel operating costs declined approximately 60% versus last year.
Our team was vigilant on controlling variable costs during the quarter.
Resulting in a 66% reduction in wages and benefits from prior year.
Additionally, as demand stabilized we were able to continue operating the hotels with minimal operating costs during the third quarter.
Specifically third quarter revenues increased over 155% from the second quarter or approximately $51 million.
While our operating costs, only increased approximately $21 million or 28%.
Which allowed our portfolio to increase the bottom line by approximately $30 million representing strong flow.
As you would expect our team remains focused on cost containment initiatives to minimize cash burn in the current environment.
Moreover, the cost efficiencies, we realized during this period have positive implications for margins during a sustained recovery.
Turning to liquidity I.
I would like to reemphasize that we entered a year and a strong position with approximately $900 million of cash and and Undrawn line of credit.
With a strong liquidity our efforts continue to be laser focus not only on ensuring that R. O J maintained adequate liquidity to withstand a protracted period of disruption.
But also ensure that our portfolio is well positioned to take advantage of opportunities to drive outperformance and the recovery and beyond.
To that end.
While we have continued minimizing capital allocation initiatives until we have more clarity on fundamentals, including certain Roy projects, we were able to successfully complete our in-flight twenty-twenty capital projects and will continue to prioritize high value projects such as the addition of new rooms in Emeryville in Buckhead.
Conversion of Mandalay Beach, as well as our parking initiatives.
We were encouraged that our third quarter monthly cash burn was significantly lower than expected, which was driven by our portfolio generating positive operating cashflow during the quarter.
Our third quarter average monthly cash burn of $13 million was 30% lower than our expectations at the beginning of the quarter.
Which was primarily driven by revenue at our open hotels, including the twenty-seven hotels that we open during the quarter was stronger than expected.
And our cost containment initiatives were more effective than assumed with particular success and labor and benefits.
The operating cash flow at individual hotels will differ by hotel type location and other factors.
Overall based on our portfolios lean operating model or hotels operating shortfalls will continue to be substantially better than portfolios comprised of traditional full service hotels.
For the other costs are assumptions have not meaningfully changed for hotel fixed costs, primarily property taxes and insurance.
And corporate level outflows, including dividends that service and G N a.
These factors enabled us to reduce our cash burn estimates again this quarter.
Inclusive of the second and third quarters are average monthly cash burn is now expected to range between $23 million and $27 million, which equates to approximately 48 months a total runway at midpoint.
The change in our Casper and estimates reflect that 3 million dollar reduction to the top end of the range and a $2.5 million reduction at midpoint.
Since providing our initial cash burn estimates and May we have reduced the top end of the monthly estimates by $8 million and $5 million at midpoint, representing accumulative April to December reduction of over $70 million from the high end of our initial estimates.
Or monthly cash burned is expected to be towards the low end of the range. If fourthquarter lodge a demand remains of current levels and the high end of the range, if fourthquarter larger demand contracts from current levels.
Although we expect our hotels to operate an ear or slightly below breakeven during the fourth quarter, the quarterly Casper and will be higher than the third quarter. As a result of the timing of payments of senior note interest you.
Insurance premiums and property taxes.
These estimates exclude R O J funded capital expenditures.
Turning or solid balance sheet, we ended the quarter with approximately $1 billion of unrestricted cash too.
$200 million of availability on our corporate revolver.
$2.6 billion of debt.
And no debt maturities until 2022.
R O J significant liquidity provides us with for years, everyone way at the midpoint of the current monthly Casper an estimate.
What ranks among the best position lodging reads to a strand, a protracted period of limited hotel demand.
We continue to maintain significant flexibility on our balance sheet.
As of the end of the quarter approximately 83% of our that is fixed or hedged and 84 of or 103 hotels are unencumbered.
As we look ahead, giving the high degree of uncertainty we continue to lack visibility on the timing and cadence of returning to pre COVID-19 levels of demand.
Therefore, we will continue to monitor lodging fundamentals and based on the potential impact on our corporate financial covenants determine if an extension of the covenant waiver period is needed.
That said, we are confident that lodging a man will ultimately returned to pre crisis levels.
In the meantime, we will stay nimble and will react appropriately to the changing environment.
Despite all of the uncertainty facing our industry R. O J remains well positioned with a flexible balance sheet.
Simple liquidity.
Lean operating model and a transient oriented portfolio with embedded catalyst.
Thank you and this concludes our prepared remarks.
We will now open the lines for Q&A.
Brighter.
Thank you if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tele indicate your line as in the question queue. You May Press Star too if you would like to remove your question from they killed and for practice did using speaker equipment. It may be necessary to pick up the handset before pressing this darkies hour.
First question is from Michael Bellisario with Bird. Please proceed.
Good morning, everyone.
Good morning like.
First question for you and dispositions that you get your question is really what changed in your view from 90 days ago, because it does sound like you'd.
Consider asset sales today versus I think last quarter. When you said you you didn't need to sell assets over there was no rush to necessarily sell assets can you help us bridge that gap and what made me change in your view.
Oh, Yeah, My Kid actually has it changed we we don't have a catalyst to sell and he asked it immediately we sold a third of our assets last year and did a lot of heavy lifting we are strong liquidity and in fact, you know selling assets, we would only sell acids in order to recycle those capital that capital into growth opportunities.
<unk> and if we were to sell assets you know today because of the covenant restrictions we have in place. It would have to go to pay down debt and we did not introduced crisis with a debt situation, we enter it because of the revenue issue and so from our perspective, we don't see a need to sell as of today, what I was saying was.
Is that as we you know.
See the recovery unfolding, we may look to sell assets in order to recycle it for growth opportunities, but I'm I'm, not indicating that we're selling today.
Got it Okay. That's helpful. Thank you for clarifying and then just on your <unk> your outlook or maybe you're you're near term outlook. Previously you were relatively cautious things seem to have been earliest had progressed less bad. Since then can you maybe provide some more details on the main drivers of the adult.
And talk a little bit more about markets are segments that were better or worse than expected.
Well I would say that yes, you are right. We we did expect to see leisure travel dip off after labor day S. Kids went back to school et cetera, and we just did not see that we saw on fat we saw it accelerate and we.
Call accelerated into October S. Sean mentioned in his remarks October was up 41%, which is acceleration off of September and it's really not one segment you can look at unlike it's a continuation of the segments that we saw in the third quarter leisure continues to be the dominant player here in terms of or.
Riding on demand <unk>.
Tennessee weekends Ah relatively strong and we're starting to see as we mentioned in up taken B T. But we started out in third quarter as well and small group as well. So it's not any one particular a market or segment that's different from what we saw in the third quarter. It's just that we didn't see the drop off that we had expected I'll, let the Tom add some.
Comments around any particular markets.
So Mike we did say weekends continue to grow is Leslie stated and even to the tune where October weekend started to bridge the gap compared to September where we're up to almost 55% on weekend occupancy. So leisure was the dominant factor in regards to why October continued at that same pace and even after labor day September did well.
<unk> in regards to markets, we are seeing some uptick in corporate business and some some some smaller levels, but b T is happening some of our northern California hotels, the likes of Abbott Labs G Bear Tesla Amazon is starting to get on the road again government business is still continuing to come in at some of our.
Hotels, which is you know more related to Raytheon Boeing in north of Grumman and that's primarily in the southern California market, and then South Florida outperformed as well primarily because of weekends leisure and we have the resort hotels that we spoke about in our script and key West Deerfield Beach in Miami, So altogether, we felt pretty.
<unk> good about what happened in September and October and we did get some project business that also helped us on a midweek slash weekend with some of our extended stay hotels. So hopefully that helps you with a little bit of a color around what happened and Q3 and what's currently happening in October.
Just very helpful. Thank you.
Our next question is from Dory Teston with Wells Fargo. Please proceed.
Oh, Thanks in the morning, and you guys mentioned that you were looking at various investment structures for eventual acquisition opportunities. I was just wondering if you can provide a bit more detail around what the instructions can be.
Sure sorry, what I would say is that look from our.
Perspective, this is sort of step back for a second you know given the lack of visibility preserving liquidity continues to be our number one priority, particularly given the the the complexity in the environment, we're in as well as the unknown duration. You know that said you know we do expect this this location to create opportunities over time.
It's gonna be a slow ramp and it's gonna be multiyear window. So we're looking at structures that it will allow us to balance our priorities of preserving liquidity wow positioning ourselves to be active and a part of the window that we might not otherwise be active and so we are going to be disciplined and patient.
But we're looking at off balance sheet structures, it could be something like a JV and L or a separate account as you know we have experienced in that from her a prior life in the private equity we would leverage third party capital to be active and we would be able to use our our industry knowledge.
And uhm experienced access to opportunities to to create that venture.
Uh-huh.
Alright, and can you also give us an update on the total scope of the Wyndham rebranding over the next few years Uhm, how you're thinking about the old <unk> and any potential timing on reinstating dividends is if our assumption is that that demand is improving by the second half of next year.
Sure door I'll start with the what what the dead I mean as as we entered 2020, we our base case plan was to was the refinance Baghdad Ah more attractive interest rates the financing markets of obviously shifted as as well as fundamentals and so our view today that 6% that is.
Generally online with market today, and also has five years or 10 or left on it and so you know I think our view based on where we stand today is that we're gonna be patient with respect to that that would be probably be more opportunistic as we think about refinancing opportunity there as well. In addition, you know.
A lot of credit waivers. There's you know there's limitations on on sort of where new capital would get deployed which would would would impact that as well because those assets are ring fenced within you know within a within our corporate structure and then I'll start over to Leslie talking about window.
Uhm Adore, you mentioned sort of the the scope as as a reminder, we have eight wyndham assets and if you may recall, we said earlier this year that we would start renovations on two of those assets and we'd start to more next year, obviously that was shifted because of the covid situation and so we have advanced our our our plans for those assets and.
We'll start to ask it's next year and the following to ask this will be the following year. So the sequencing remains the same it was just shifted by a year what I would say, though is that we've used this time this window to continue to advance the negotiations in the plans and so Santa Monica in Charleston, and the first two assets. These are assets that are bullseye real estate.
Eight and that we think will be well positioned to benefit from the shape of the recovery in Santa Monica. We are looking at movie that ask you to an independent uhm asset. It is a market that has historically supported independent assets that are well located in this asset sits seven steps from the pier and so we we think that will be.
<unk> very well as an independent acid in that market in in in Charleston, We are in the throes of negotiating with a global brand to convert it to a lifestyle brand and so we feel very good about where we are in the progress of those assets and we feel good about the positioning these athletes will have coming out of the coming out of this pandemic.
Is there any update on the total cost of the eight.
That during this is Shaun we we have not provided and sort of an estimate of where the where the total capex is gonna be there, but what I can say is our conviction around my value creation continues to be there. When you think about the ability for those hotels to to gain share in excess of where they were before.
Four and benefit from <unk> in front of recovery you know that obviously is all part of our underwriting, but our confidence around the ability for those assets to create value is is is high but we have not given a specific number what the capex needs on on that are gonna be.
And in the current environment Dory too I would add that we've taken a look at unconventional business and this pandemic and I think the the Wyndham team has done a good job for instance University of Pittsburgh, We've located uhm and 100% occupancy at that hotel for the next eight months and that's just a sign of in regards to you know how to be <unk>.
Creative in an environment, that's a little bit different where you have different business demand same thing in Boston, where we secured some room nights. So the Wyndham team is doing a good job in the current environment, making sure that we're landing pieces of business that can help us through this this current environment at the time.
Okay. Thanks.
Our next question is from Austin, whereas Schmidt with Keybanc capital markets. Please proceed.
Yeah. Thanks, everybody I'm, just going back to the windows for a minute I'm curious what the measurement stick is you know on those Wyndham renovations given the potential tailwind in the business you know leading into the next cycle as as I think those hotels were running you know 80% of of index. Prior to the pandemic I think you discuss getting maybe back to par.
<unk>, what's kind of the measuring stick that we should be looking at today as we think about that capital getting invested for the rebranding.
Sure. That's a great question Austin I mean, our our our measurement stick is similar to what it would've been pre covid, which is how much market share can those assets gain and what does that translate to the bottom line relative be incremental investment. We think there's two drivers of the value creation marijuana is just incremental cash flow.
From gaining his share. The other is we believe that there's a navy appreciation from having affiliation uhm you know with with with different brands to as a result of cap rate compression you know for from that affiliation.
As a reminder, on the pre Covid levels. Your the the sure was actually 90 per cent not 80% in in our portfolio was about 110% and so on pre covid numbers that represented an upside opportunity of roughly $30 million on the top line and then you can apply whatever margin you want to that.
If you apply sort of our portfolio average that's got a little north of $10 million of incremental profitability just to get to portfolio average I think our conviction around the upside potential for me. The assets is is a little stronger than that and we believe that we should we should we will be stronger than average, but uhm within our portfolio.
But our underwriting only assumes they will get back to portfolio average in a match still works and is compelling.
And I would also add I would also add Austin as we looked at the Palais capital in this environment, we have to have some visibility into the returns right and our greatest visibility into into the risk return of deploying capital is in our own portfolio and so we have a high conviction and how we think these athletes ultimately perform.
No. That's that's really helpful and kind of goes into my next question, which was beyond the windows you'd previously hide it highlighted I think it was 20 hotels in total so 12 extra wisdoms that that have near term franchise explorations and I was curious if the state of the current logging environment or the timing of those explorations change the appetite to convert those hotels or or.
Whether or not the other opportunities you alluded to earlier supersede. These these internal you know these internal investments.
Yeah, I mean, Austin did the beauty of where a balance sheets hits today is that we have optionality to pursue what we think is the most valuable R Y initiatives and so you know with respect to the assets within our portfolio that have rebranding opportunities. We're gonna look at them on a one off basis amount of risk adjusted basis determine whether.
<unk>. The returns there are sufficient to to you know obviously take risking rebrand et cetera, I think the the when we think about the majority of those assets. We believe that you know the conversions are still gonna be compelling the sequencing my changed a little bit, but we still believe it.
In the embedded Roy opportunities within with within our portfolio and well well what are we talking about those will talk about those as we announced I'm gonna one off basis Mandalay would be the first example of that that we that we're we're going to convert that to a curio and that that that is ongoing and so that's the first of that but there are others within the.
A portfolio that will follow but we'll talk about those as we as we announced them yeah I I think another part of <unk> I'll Skip that before Austin was also just our investment in the embassy suites, and particularly around various elements of those hotels and I think that the pandemic is given us more conviction in terms of how appealing those ho.
<unk> because of the size of their of their base and a lobby space.
And so I would say that many of the ROI projects that we had articulated earlier, we have greater conviction in today as a result of what we're experiencing.
And then just last one for me on the joint venture you know opportunities that you're exploring how far along are you in and sort of negotiating or are seeking out a partner in and can you give us a sense of maybe the scale of of adventure.
It also it it's extremely early and so I you know I am hesitant sort of articulate a size and scale, but what I would say is is that you know we have the experience having private equity background, we bring a lot to the table from the standpoint of industry knowledge access to deal flow F.
And a track record around buying and selling assets instead, we feel pretty good about being able to attract the right capital, but I would also just like they articulate to you that you know we we have the ability to be nimble that to the extent that market conditions evolve and we can pivot to our own balance sheet as well and so you know.
Really look at this as an opportunity to be active in a in a point in time, where we might not otherwise be active but if things change we can always pivot to our balance sheet, because we have the cash to be active on our balance sheet.
<unk> thanks for the time.
Our next question is from Chris Rock with <unk>. Please proceed.
Hey, good morning, everyone wanted to ask you about clothes hotels I I think there's seven you said still remain close it sounds like if my math is correct. The cash burnt on those was about maybe 14 million and.
In the corner, what's <unk>, what's the difference point on opening those and is it just a significantly higher than than where you're running on the on the other hotels.
Yeah, I mean, the the hotel that we have we have two in New York that are not open to in San Francisco one in San Francisco that is open is under renovation and once the renovation is complete we would open that but those athletes generally large boxes have high cost structures and so remember our objective here is simply to read.
<unk> or burn rate and so we have to be able to open those hotels in a way that brings down that burn rate and so if you take New York for example, where you have a high cost structure, which is almost two X R portfolio Uhm at these low occupancy levels, we can't get enough right to to overcome that that cost structure and so we really need to see.
Higher occupancy or the ability to garner a higher rate in order to justify opening those assets and that's that's a matter of time. If you look at New York, you know feel kind of 45% of the hotels are still closed. So this is it is a market issue not an asset is issue for us. The other assets that are closer clustered assets in Houston and.
Chicago, when we have multiple athletes on a single pad based on low occupancy. We are we are in it's more strategic to push all that demand to fewer hotels, then to try to spread it across multiple assets in so that's more of a strategic play and and profitability play than it is b as a specific in the cluster.
Ethics.
Okay that that is helpful. And then as you think about some day going on offense again on acquisitions whenever whenever that May may occur is your thinking changed at all in terms of.
Would you would you deemphasize urban a little bit if if we're going to see a prolonged period of of people doing more business activity out in the suburbs or would you try to go even deeper on resource what's your segmentation view on on acquisitions, when you get back to that.
What I would say is is that we all believe that dependent I guess temporary and we're looking through it you know we believe in a diversification of our portfolio.
We did a lot of heavy lifting on disposing of assets in certain markets that we did last year.
And we have greater conviction and what we invest in today from our rooms oriented.
Branded high margin assets, and we're seeing the benefits of that today in our profitability, we're seeing that in our ability to get to break even and so by and large we have greater conviction in our diversification and the types of asset that we invest in and so you know we're looking for ask that fit that profile as opposed to specific markets is way out.
Articulated.
Okay very helpful. Thanks.
Our next question is from Neil Malkin with a capital insecurities. Please proceed.
Good morning, everyone.
Morning, Mushy Alright question on I guess for Tom just given you know.
Covid and obviously, that's a once in a generation a lifetime type of event.
I was just wondering you know if if that's kind of made you maybe rethink when you think your the way that you manage revenues with maybe layering in some more lower cost base in terms of either contract.
You know government it et cetera to that has you know more staying power and could diversify the the the revenue streams. If in fact, we have.
Another event that impacts the B T and group, which can change rather quickly.
Yeah, I I would say that.
That we believe that lodging demand will recover and that in order to have a real recovery you need all three segments Sue to recover until again as I said before we're looking through the recovery in terms of how we think about our portfolio, but in this environment today, there isn't the ability to revenue manage you're simply using our heads.
[noise] bad strategy. The objective here is to reduce our burn rate and so we've opened up all channels. The dominant demand today is in leisure, which is generally a lower rate. It you know demand segment and so I you know, we're not making decisions about how to manage our portfolio based on the contract of what we see today, because we do believe.
That it is temporary we are sober about the fact that the shape of the recovery will be a slow ramp initially, but we don't believe that this is a state sustained environment for our industry longterm.
The other thing I would add to Neil is if you think about our footprint and.
The construct of our portfolio, we are smaller in nature. Many of our hotels on the select service side or 120 to 150 keys and then the compact full service somewhere between 203 hundred so the contract piece of business you don't Wanna have too much inventory in there at that at that inventory because it's important to be able to build a little.
At a base to be able to have that compression when group and corporate come back. So we want to be thoughtful about what type of business, we take in that environment in the right right because it obviously gives you a seven day week demand for instance, you know in our portfolio you know for the third quarter. We ended up around 6% of total mix on contract. It was a little up from cute.
Too. So we're looking for you know 510 rooms and contract, but we're not looking for a big block of contract rooms. Just give you. An example, the other thing that I would say is when we think about the mix and what Leslie referred to as we're seeing that and Oh between discount and retail those are the two segments that are growing right now so from a pricing standpoint were.
Thoughtful having parity within the expedient in the booking dot com windows, because we know that businesses booking but at the same time, because we're one of five and a set we want to make sure. We're the price leader and have right integrity. So we lead the charge out of the pandemic versus fall.
And then the last thing to add on to that Neo is that we did a lot of heavy lifting with a portfolio last year. So our portfolio locations. Today are in locations that we believe are gonna be a strong recovery markets and so by layering in that contract business that would limit our ability to drive right during the recovery and we are <unk>.
<unk> with our locations in our hotel types as Tom mentioned that we are we have a very well positioned hotel it'll be able to yield manage I'm coming into the recovery and so that also helps us have confidence as well.
Okay. Thanks, I appreciate all the all the commentary Uhm other thing I had is now with the you know the the the work with the brands is the model kind of changes or is is rationalized it.
It seems like the you know the brand standard the F. F. N. B is is one of the top.
Of the list of things that will be changed significantly and this is more related to your full and compact cool service portfolio.
You know I.
I I assume that with that F M B and maybe some other lower margin aspects of the hotel non non room aspects uhm going away that would create potential for you know space or underutilized space you know I I I, just wonder what you think that looks like.
You know going forward it at least in part you know how that works with you know the the the business either traveler or or person who's working from home with Hyatt in the work from hide in marriott's pushed to to have people work there as opposed to the the house.
Uhm, and then I I I wonder if if you think that there could be potential shadow demand for this space in your those types of hotels, you have uhm with office space footprints shrinking and maybe people use Uhm hotel meeting space as an alternative to having you know bigger office space.
[noise] lots of unpack there [laughter] I just wanted to start with the first thing and that is the space component. If you think about what Sean was talking about as well as lazy about the embassy suites footprint one of the things that we really had from a premise in regards to why we were doing the evolutions was exactly what you were referring to.
Having that public space, but be also private so people could utilize that space, depending upon after breakfast or the reception area. So it also gave us the ability to think about you know you'd <unk> utilizing that for receptions in catering and when group comes back we know that's gonna be a huge benefits.
To your point about you know using space and unique in our hotels because of S. M. B, we have seen the demand where people reading and their guestrooms more we talked specifically about family and the value of the Sweet where you have two components in a guest room, where people are utilizing our space differently. So we think that's also been a plus and.
In regards to working with the brands and how we're dealing with all the relationships in regards to how we're providing the deliverables on breakfast and where we're going that's where we've seen quite a few of the savings right out of the gate that we think can continue into the future and we're pretty positive about some of those adjustments for instance.
Our comp food services was down significantly percentage wise, because we didn't have buffet's and we didn't have room service. So as we reinvent ourselves going into the future. We think there's a great opportunity to try to think about hours of operations, the food and beverage deliverable and reinvent the opportunity to be able to have a better cost structure and relationship to still provide the <unk>.
<unk>, what they're looking for going going forward.
And then the last thing that I would add is uhm you hinted to the fact that what are the brands doing in regards to the cost model. We do thank the future is going to be brighter because of the thought process of more variable relationships versus fixed and we've already seen that with the family of brands as we are with hi, Marianne Hilton.
Specifically talking to them about how that structure works in regards to I T area sales revenue management and sales and marketing. So those are the areas that were most excited about on the margins side to be able to kind of reinvent ourselves as we get out of the pandemic and mood Board. In addition to currently in in the environment that we're marketing today.
Yeah, Neil and I think when you think that your your point is spot on about you know the F&B restaurants, being having having lower margin and probably being a less important post pandemic them pre pandemic, but I would remind you. This is a trend that was going on in the industry for quite some time and so a lot of our renovations.
Mentioned embassy suites, but elsewhere within the portfolio was to allow that space to be cross functional and so to allow us to cross sell that space and use it at a at a restaurant and that made sense, but also have that convert to flexible meeting space when that made the most sense, so having a flexible footprint within the space in our hotels I think you know gives us the best of both worlds.
So that's something that we've thought about before and it's probably to your point gonna be an increasing emphasis in our hotels going forward.
Thank you.
Our next question is from Tyler Batori with Danny Capital markets. Please proceed.
Good morning. This is Jonathan on for Tyler Thanks for taking our questions first one for me and you touched on this but for your extended stay hotels could you just provide some additional color on trends you know how how they would continue to October and how that compares to the total portfolio.
Yeah sure Uhm, so when we think about our extended stay hotels. What we've noticed is we typically track extended stay occupancy, which is five plus room nights in regards to when people stay with them.
What we've seen at our residents ends in our high at house in Homewood suites that are in that category as people really have enjoyed the opportunity to have that full kitchen, the ability to cook and a full refrigerator because when they're staying at a longer term basis or utilizing that space. So just think about the environment that we're in today, where you know restaurants have capacity.
Shoes, and and the current environment of people meeting more in the room because of the lack of availability and location. So that's become a significant presence in regards to where people are thinking about where to book.
The other thing that I would say is what we've noticed is there's been an increase in the amount of people staying in that 10 to 16 night typically the power L or power Alea pricing for extended stay hotels is usually when you stay a week to three weeks and we've seen a lot of that project business come in that we talked about earlier.
The government business the training business that still has to the farm or business and then as unfortunately, we've all experienced with the wildfires in the storms, we get a significant amount of business, whether it's beam a red cross or restoration companies that are coming to help people in that current environment. So we feel good about our footprint of extended stay in there always the most <unk>.
Laughable, because they run the highest occupancies with in length of stay in the fact that the housekeeping model is you don't clean those as often when somebody's in there for that period of time. So hopefully that helps you answer the question in regards to what we're doing at our extended stay hotels.
And Jonathan when you're trying to think about it just from our numbers perspective, our our suites were up 40 per cent and 40% occupancy in the third quarter and by and large we expect that trend to carry into October did carry it October one leading character the fourth quarter.
Okay, Great. That's very helpful. And then uhm turning to the booking window was wondering if you could provide some additional color you know in the book and window and what you guys receiver.
Yeah, I mean look our booking window continues to be short kind of zeroed is three days, we're seeing 70% of our demand booked in at zero to three day window and so that's also what gives us as we could look at Uhm November and December as we move into you know a part of the of our cycle that is normally I'm.
Sorry, it's part of the season that is normally uhm slower you know the lack of visibility uhm gives us the perspective that we expect November December to be softer than in October, but you know until we can sort of see the booking window around the holidays. So the Thanksgiving Christmas, we really won't know, but they're booking window was about zero.
Three day, 70% of our demand comes in that window.
Okay, Great I appreciate all the details that's all for me. Thank you.
Our next question is from Gregory Melero. It show as security is please proceed.
Thank you good morning.
I'd like to ask you about corporate renegotiations I'm curious how they are progressing for 2021 in terms of volumes and rates.
And <unk> lately do you expect we may have a delay timeframe before right negotiations can include this year.
Uhm, Yes, and yes. So the first question is in regards to the negotiation.
The branch you've done a good job in regards to trying to rollover twenty-twenty rates to 2021, but keep in mind as we have earlier spoken about office is still being clothes or just gradually opening up there's not going to be a significant amount of travel until their own offices open up so what rate they have.
In 2020 going into 2021 is not as much of a significant issue is how much volume in demand is actually gonna come from those corporations that have that right. That's first and foremost the second thing that I would say is because of what you do with negotiated rate is you have two choices you can either give a fixed price of what.
It was in 2020 to go to 2021 or you can put them on dynamic pricing, which means they float off of your best available right that day and companies that don't have as much volume typically like that because they don't have the volume to be able to secure a fixed rate in many markets. What we're finding is there's more companies that want to.
<unk> flowed off a bar thinking that 2021 bar pricing might be lower than 2020. So we think that that's going to be something to monitor and look at and then my last point to you Uhm, Greg is if you're not in the preferred program in 2020, it's gonna be hard to get into the preferred program for these companies in 2021 and as I.
Stated earlier, many of our hotels because of their premium brands premium locations. We think we've got a good book in regards to who we're dealing with in business that we have in the loyalty that we've shown them over the years will benefit us when we come out from a pre pandemic and start to get corporate traveling again.
That's that's fantastic color really appreciate that I want to ask a second question Unrelatedly on conversions of hotels to residential use there are some cities in the U S where hotels are being sold to municipalities for.
For residential conversion to affordable and transient housing I haven't heard this amongst you know much if any on the upper tier select service them curious if you see this as a possible rising trend and some of your markets.
Or selectively in certain locations.
It's an interesting question, we we have definitely seen uhm razee investors start to inquire about hotels in certain markets Uhm and you would be one of those you know I would say that we have received kind of one or two inbound <unk>.
<unk> from Ah for alternative use on hotel and so it's definitely out there, but I can't tell you that is significant or meaningful I haven't necessarily seen it from the standpoint of selling to municipalities, but I've seen you know ready investors sort of sorry to inquire and so there there may be a trend there, but I can't give you.
A sense of order of magnitude relative to that yeah, and Greg work, we're getting the best of both worlds and some of that respect on our University business and both Pittsburgh in Boston, where we're able to have you know.
You know occupancy rates like an alternative use and residential which flows.
Flows fantastic the bottom line. So we've taken advantage of that trend not necessarily on the asset disposition side, but on the ability.
To manage the business with the pandemic in this environment.
Okay. Thanks, everyone that's great.
Our next question is from Anthony Powell at Barclays. Please proceed.
Hi, Good morning, a question on the Santa Monica I guess, some version would you like independent that'd be lack of queue money to take a plane enroll in terms of not one with a bland there and how do you look at T money in your conversion activity goes well.
No. It was definitely not a lack of kimani, we had a lot of interest in this asset Santa Monica is a very solid after market and it's one of the few markets. It still has high barriers to entry and so that was not the issue. It was really looking at what we thought we could drive from a topline perspective and what was.
Needed in order to do that and we think that this market really supports independent hotels that are well located in given the fact that our hotel is literally seven steps from the pier that we think that this is the type of asset I think also the size of the hotel and the general footprint of the hotel also influenced our decision as well because we can be more <unk>.
<unk>, an independent uhm space than rather than them, Nebraska. So it was not related to keep my.
Got it thanks and someone question you know R. O J historically has focused on brand new properties would you consider more independent properties overtime as you're trying to whip up your offensive activity two years.
Look I think that being premium brand. It is still a core component of our investment thesis you will see is expand into them to the lifestyle brands, but we still believe that brands are important and we think that because of the pandemic brands will symbolize safety and so uhm, we believe that branch.
Will be more important coming out of this we just think that in particular for Santa Monica Independent is the right way to go for that effort.
Alright, thank you.
We have reached the end of our question and answer session I would like to turn the conference back over to Miss Hell for closing remarks.
Thank you everybody for joining us for our call. We hope again that you and your families remain safe. We we feel that we have made a lot of progress since our last call and that we are well positioned to take advantage of both opportunities as a materialized have a good weekend everybody.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.