Q3 2020 Sunstone Hotel Investors Inc Earnings Call
Good morning, ladies and gentlemen, and thank you for standing by welcome to the Sunstone Hotel Investors' third quarter 2020 earnings call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time I would like to remind everyone that this conference is being recorded today.
November six 2020 at 12 PM Eastern time.
I'll now turn the conference over to Aaron Reyes, Vice President of corporate Finance and Treasurer. Please go ahead Sir.
Thank you Sarah and good morning, everyone.
By now you should have all received a copy of our third quarter earnings release and.
Supplemental which were made available yesterday.
You do not yet have a copy you can access them on our website.
Before we begin I.
I would like to remind everyone that this call contains forward looking statements.
That are subject to risks and uncertainties include.
I think that was described in our perspective.
10-Q's.
Okay, and other filings with the FCC, which could cause actual results to differ materially from those projected.
We caution you to consider these factors in evaluating our forward looking statements.
We also note that this call may contain non-GAAP financial information, including adjusted EBITDA adjusted EBITDA.
Hotel adjusted EBITDA margins.
We are providing that information as a supplement to information prepared in accordance with generally accepted accounting principles.
With us on the call today are John Arabia, President and Chief Executive Officer, Brian.
Ryan Julia.
Chief Financial Officer.
And Marc Hoffman, Chief operating officer.
After our remarks, we will be available to answer your question.
With that I would like to turn the call over to John.
Hey, Scott.
Good morning, good afternoon, everybody. Thank you Aaron.
Everybody. Thank you for sticking through fives.
Earnings calls today, we appreciate you joining us this year.
Believed to be his last of the day.
As you are aware we are in unprecedented times.
Our third quarter results.
As a reminder, the devastation that the global pandemic has caused.
[music].
However.
I'm pleased to report that we are.
We're seeing several signs that the recovery that began in may and June appear.
Appears to be gaining steam and.
We believe better days ahead.
There are several encouraging factors that give us confidence.
First we have successfully resumed operations with the majority of our hotels.
Okay.
Those hotels that have been held in general have achieved sequential gains in occupancy.
Sure.
Transient room reservations have gradually improved over the past few months.
Enforce our group production, which remains well off normal levels.
Increased on a sequential basis.
Today I will provide more details on each of these topics.
Well, then discuss our monthly cash burn rate, which has been further reduced.
As well as our significant liquidity position.
In closing I'll provide an update on a few of our 2020 capital projects before I turn it over to Brian to provide more details on our recent earnings liquidity dividends.
So let's talk about our recent operating results, starting with the pace at which or hotels resumed operations.
Or 19 hotels six werent operations.
All of the third quarter, including oceans edge, which.
Opened in early June.
In Chicago Embassy suites that opened July 1st.
Six additional hotels resumed operation during the quarter, including our two hotels in the world.
Marry up Boston long wharf.
Chicago in July and then the Hilton San Diego Bayfront Renaissance DC.
Late August.
Three additional hotels opened in October.
Good well Portland.
The Hyatt Regency San Francisco.
And the Renaissance Orlando.
Finally, we are excited to report that our Wailea Beach resort.
Opened earlier this week on November 1st.
This leaves US today was 16 of our 19 hotels in operation.
Which comprised 88% of our rooms in our portfolio generated nearly 96%.
Before 2019 hotel EBITDA.
Despite having a larger subset of our hotels operating during the third quarter. It's important to note that a good portion of our larger and more economically important hotels did not resume operations until the middle of the third quarter until the fourth quarter.
As a result.
Third quarter results, well stronger than we had forecasted internally.
Underperformed portfolios with a higher percentage of rooms and operations.
Holding all other variables cost that we expect our portfolio performance to improve in the fourth quarter and beyond now that several of our larger hotels have resumed operations.
[noise] [noise] in the quarter comparable portfolio Rep revenues were $24 million and Revpar was $17.58, which represents a decline of 91% and 92% respectively compared to the third quarter of last year.
For the 12 hotels that were open at least some portion of the third quarter.
Poor decline by marginally better 86%.
And witness sequential monthly revpar improvement as the quarter progressed.
Similarly.
The six hotels that were opened for the entirety of the third quarter.
Revpar declined by marginally better 80%.
And also witness sequential monthly revpar improvement as the quarter progressed.
And finally, the four hotels are maintained operations throughout the year witnessed an 81% decline in the third quarter.
Which equated to a revpar up $36.
Andy marked improvement.
The $14 Revpar witnessed in the second quarter.
That's presented to our earnings release or hotels that have resumed operations have generally witness sequential monthly revpar gains.
Well, we do not expect every hotel to follow this trend to every month.
The overall trend has been positive and gives us confidence that operating fundamentals are gradually improving.
Despite an impressive two thirds reduction in our property level expenses, the combination of only $24 million of comparable hotel revenue at approximately $62 million or total property level adjusted operating expenses.
Resulted in property level, adjusted EBITDA loss of $37 million.
As you would expect this compares terribly to the results last year, but.
The marks an improvement to the $42 million property level adjusted EBITDA loss witnessed in the second quarter.
Excluding the losses associated with the recently sold Renaissance Baltimore.
Similar to our second quarter.
Third quarter property level loss was several million dollars better than we had anticipated as we continue to work with our operators to streamline operations.
Eliminate non essential services and reduce property level expenses from the prior year.
Again as more of our larger hotels have resumed operations and generally demonstrated sequential revpar growth.
We would expect our property level losses continue to decline.
And eventually return to profitability.
When we look at the current segmentation, we continue to see the majority of our demand come from leisure.
Government and contract business.
Leisure demand has been the primary source of business for many of our hotels and it's generally remained steady even after labor day as people seek to travel opportunities away from their homes, particularly on the weekends.
Group business, which has become an increasingly important source of demand in the current environment incur.
Increased in the third quarter relative to the second quarter as more airline routes were stored.
The limited group business that didn't materialize in the third quarter was primarily composed of government related groups such as our courses in emergency management.
We have also recently witnessed the very small, but growing number of business transient rooms as the workforce has started to return to traditional offices.
Get back out on the road.
So lets dig in more to the forward looking trends for both group and transient business.
As you can imagine nearly all of our group business canceled in the third quarter.
We would expect the same result in the fourth quarter other than a few rooms only groups that are likely to travel.
Furthermore, as the pandemic continues to linger.
Group cancellations in the first quarter of 2021 had increased.
Cancellations for the second through fourth quarter of 2021 remain relatively low and we are hopeful that as progress continues on the vaccine or other therapeutics.
We will welcome these groups backdoor hotels in the latter part of next year.
That said fundamental view is a group business will not return in scale.
Well, there's greater comfort and traveling congregating.
This means that group business is unlikely to return in a meaningful way until a vaccine or reliable therapeutics are developed.
Nevertheless, we continue to see the value of keeping sales professionals on property and taking care of our customers.
[noise] from July through October, we booked 106000, new group rooms for all future months.
In addition to new bookings, we have re booked 197000 group room nights, the previously canceled or 23% of all cancel group room nights since the start of the pandemic.
Furthermore, an additional 56000 group room nights that had been canceled have expressed their attempt to rebook.
At various stages of reworking their group contract, which would increase our rebook percentage to 30% of total cancel group room nights should they be converted.
Taking together.
The recently booked groups and all definite tentative rebook groups represent approximately $90 million to $95 million or group room revenue and roughly $130 million total group revenue.
We are confident we would not have captured all of this business. If we did not keep sales professionals on property to work with and take care of our meeting planners group customers.
For 2021, while our group room night piece is down compared to pre covered levels. We currently have approximately 488000 group rooms on the books, representing a $120 million of group room revenue.
These groups equate to approximately 13% of our 2021 occupancy on the books, which is below our three year average of approximately 20% at this time of the year.
Yeah. It represents a significant increase from the 2020 actualized levels.
Well the group outlook remains a bit of a wait and see scenario.
The transient trends are.
Or more clearly showing signs of improvement.
In mid March.
Transient bookings quickly turned negative meaning reservation cancellations materially outpaced new reservations as travel came to historic standstill.
Weekly net transient reservations generally remain negative through the middle of July and since then have gradually increased as more of our hotels have opened and more people get back out on the road.
At August year over year, net transient reservation declined by roughly 90%.
Then in September and October that transient weekly reservations were down roughly 75%.
And nearly 67% respectively.
Constraining sequential monthly growth.
Well it is obvious we still have a long way to go to get back to normal operating levels.
The trend is clearly headed in the right direction.
Particularly now that several of our larger hotels have opened.
In the past couple of months.
Now, let's talk a bit about our improving casper.
On our last call, we provided an estimate of our monthly cash burn assuming approximately half of our portfolio had resumed operations, but would continue to run at very low occupancy.
And that we would endeavor.
Reopened additional hotels, if local restrictions allowed it and make it economically it made economic sense to do so.
Three months ago, we estimated that we would incur property level cash losses of approximately $12 billion to $15 billion them up and when combined with our corporate expenses debt service and preferred dividends represented a total monthly cash burn of 19 to 23 million before capex of extraordinary items.
I'm happy to report that as a result of more hotels resuming operation.
Continued rightsizing of the operating model and strong expense reports.
Our estimate of future cash burn has been reduced by approximately $3 million a month.
Resulting in total monthly corporate cash burn rate for capital investment of approximately $16 million to $20 million a month.
Or 14% decline from the previous range.
Furthermore, as occupancy.
Continues to increase specifically those for those hotels that was recently resumed operations in October and November.
Our cash burn rate is expected to decline further.
So, let's switch gears and talk a bit about our significant enviable liquidity position.
We ended the quarter with $504 million of total cash and cash equivalents.
Full availability on our $500 million credit facility.
Our low leverage meaningful cash balance gives us significant liquidity to weather the storm.
Even if it unexpectedly continues for a prolonged period.
As our cash burn rate continues to decline we gained confidence that a notable portion for our existing unrestricted cash balance is available for investments that we believe are likely to become available in the next several quarters.
That is we are one of the few companies that is not dependent on credit facility draws or incremental borrowings to fund incremental investments.
Now, let's talk about our ongoing capital projects.
As you are likely to remember, we postponed approximately $35 million of capital projects. This year, leaving approximately $40 million of our 2020 initial budgeted renovations.
At the same time, taking a long term view of our business, we accelerated $6 million to $8 million of very disruptive projects that were on hold waiting a quiet time to be completed.
Of the roughly $50 million of capital projects, we expect to complete this year, we invested approximately $11 million into our portfolio in the third quarter and $44 million year to date.
This leaves roughly $6 million of capital projects completed in this final fourth quarter.
Our largest project of the years the repositioning.
Of our rebranded Bidwell Portland.
Which we reopened to guests in October the Bidwell was relaunched.
They are.
Equal parts of nature, and nurture with one foot in the city.
In one the natural beauty of the Pacific Northwest.
The substantially completed reinvention includes a complete.
Environmentally friendly rent vegetables rose restaurants, fitness center meeting space and club lounge as well as the addition of nine new guest rooms.
For more details on many of the sustainable features of the bid well I encourage you to review our 2020 sustainability report, which can be found on our investor relations portion of our website.
Looking at our other key projects there was substantially complete our Renaissance Orlando resumed operations in October with a refreshed you trim lobby, including an updated design to brighten up the overall feeling create a cohesive while the experience.
At our Wailea Beach resort, we've added 32 beautiful a night ducts, which significantly increased the appeal of these ocean front rooms.
Also in Wailea, we are on track to complete in the first quarter of 2021 is solar project, which will eliminate approximately 650000 kilowatt hours annually and reduce not only our carbon footprint.
But also our energy bill by roughly $160000 per year.
Finally at our Renaissance DC, we have completed the refresh or product to share and the meeting space elevator modernization.
To sum things up we believe that the worst is behind us.
16 of our 19 hotels are operating.
The hotels that remain open or have resumed operations have witness encouraging occupancy trends and are reducing our overall losses and cash burn.
And finally, our significant cash on hand, before drawing down on our credit facility.
Not only provides us with a good credible stability during these uncertain times.
But will allow us to fund attractive investments earlier than others, who may be forced onshore focused on shoring up liquidity.
With that I'll turn it over to Brian Brian. Please go ahead.
Thank you John and good morning, everyone as at the end of the quarter, we had approximately 504 million of total cash and cash equivalents, including $42 million of restricted cash.
And an undrawn 500 million revolving credit facility.
During the quarter, we repaid 35 million in outstanding senior notes at par with a portion of the proceeds from the sale of the Baltimore Renaissance.
Our balance sheet strength and significant liquidity have positioned us not only to survive. The economic shock. We are experiencing but you also come out of it with more flexibility and greater ability to capitalize on opportunities and many others will house.
We continue to focus on managing our costs and minimizing hotel expenses, while maintaining our properties in good condition and opportunistically investing in projects that would have resulted in material displacement.
Working with our operators, we have reduced operating expenses by approximately 60% to 70% since the start of the pandemic.
Based on our current projected cash burn rate of 16 to 20 million per month before capital expenditures, which was reduced from our previous range of 19 to 23 million per month with an actual third quarter burn of approximately 19 million.
We estimate that we have approximately two years of liquidity based on existing cash again that is more than 24 months of liquidity before I really need to take on additional leverage from proceeds from our line or other capital sources, including asset sales, which could extend that liquidity for several more years that need it.
This is a very important distinction.
When we emerge from this pen Dan pandemic, we will have significantly more capacity than others, our balance sheet, which already designed to handle a major downturn.
So even if we emerge into a recessionary macro environment, which is possible, we will not need to access additional equity capital to shore up our balance sheet or right size or leverage it's me not likely be the case with everyone in our industry.
Shifting to third quarter operations financial results are provided in our earnings release in our supplemental.
Well third quarter performance was better than second quarter operations continue to reflect the most dramatic decline in hotel demand the industry has ever seen.
Third quarter adjusted EBITDA was a loss of 36 million and third quarter adjusted FFO per diluted share was a loss of 26 cents.
As John indicated earlier on the call three of our largest hotels, the Renaissance Orlando Hyatt Regency, San Francisco and Wiley at Beach resort did not resume operations until the fourth quarter.
While these hotels did not help third quarter results now that they have resumed operations. We expect these hotels to increase portfolio revpar and reduce cash burn in Q4 and into <unk> and into 2021.
Now turning to dividends, we have suspended our common dividend and show we returns taxable income at this time, we do not anticipate generating taxable income in 2020.
Or have the need for any additional distributions this year.
Separately, our board has approved the routine quarterly distributions for both outstanding series of our preferred securities.
With that I'd like to now open the call the questions CRM. Please go ahead.
All right. Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again that is star one to ask a question.
And the first question will take is from Lukas Hartwich with Green Street.
Good morning.
Hey, Lucas good morning.
So John your comments on having the capacity to go on the offensive weren't interesting Keith can you talk a bit more about how you're thinking about that opportunity in terms of timing and scope of a that opportunity.
Sure.
Unfortunately, I think it's going to take a little bit of time Lucas.
What we've seen thus far there are very few hotels that fit our strategy that have come out we continue to be in dialogue with.
With various counterparties with the folks want to either partner with store transact with.
They know that we have the capital available to transact they know that we can transact.
Relatively quickly.
Say, there's probably a lot of hand wringing going on out there.
Out of the hotel land right now with owners that don't quite know what they want to do trying to hold on having discussions with their lenders.
And have bought time, but I think what youre going to see is that true.
And that they have been given from lenders if they have levered assets.
Starting to tick down.
So those types of things take time to work out.
But I really think that at some time in 2021 business to really have those conversations in a material way that obviously are normal course. It just takes some time to get things closed.
I wish it was sooner I wish it was faster I wish it was right now, but I think the reality of the matter is it's just going to take a little time for some of those opportunities that fit our strategy to come our way.
Great and you sort of answered it but it sounds like the catalyst that would force.
And here is a lot on how this is going to be lenders do you think.
It really depends Lucas. It also there I think that there are also some owners that a major maybe either have fun and timing issues or.
Uh huh.
[music].
That they might not be under specific pressure, but want to exit the space.
So I think there's a whole host of various reasons why somebody might transact.
So we'll see.
Some of the assets that we typically go after one of the reasons, we actually love long term relevant real estate.
Is I don't think you're going to see as wider discounts as some of the commodity assets that are currently being priced.
I think there will be discounts, but not to the tune of the 25% to 30% that we've seen in some of the commodity assets.
So those assets just tend to hold their value longer even in great uncertainty in downturns, because there's always going to be.
A group of folks that want those assets that would put us.
Assets like Wailea Beach resort in that.
Several of our other assets that they just hold their asset value.
Even in great uncertainty.
Great and then you might have touched on this in your earlier comments I joined late.
But did you talk at all about booking trends in Milan.
Oh, we do not specifically talking about booking trends and while a Lucas we just opened up while lay he on this past Sunday November Onest I feel pretty comfortable that you know first month, we should get up to call. It 18, 20% occupancy remember with the average length of stay there being longer just to.
It's a little while to load up so to speak.
There clearly is a lot of pent up demand to travel to a place like why.
The process for getting to Hawaii.
Requires testing there were some hiccups in the very early beginning days are locked in middle October in terms of verifying tests and what tests would be accepted but it does seem that from what we have heard both from our property another owner.
Yes, it does seem that many of those items have been worked out.
And people are really enjoying.
Being back on the islands.
So I'm I am I feel strongly.
I am hopeful that a place like while last should continue to do well.
Holding all other variables constant.
Great. That's it for me thank you.
Thanks Lucas.
[noise] Oh rates. If you find your question has been answered you may remove yourself from the queue by pressing star too and the next question is from Smedes Rose with Citi.
Hey, good morning out there.
Hey, Steve.
Hi.
I, Yeah I wanted to ask you with the cost cutting that you guys have been able to do at the property level a lot of which I think is expected to be relatively sustainable even as you get back to more normal levels and then there's been talk about the brands reducing.
You know some of their programs. So it should help owners in terms of the percentage of revenues you're paying to them.
Could you maybe just put some color around what maybe what the brands have done that's been that you think is helpful. If anything and how that might translate to higher margin. If you were at or close.
Close to 30% on 2019 like on a pro forma basis do you have a sense of.
Hi, this stuff in place then what sort of increase in March and late you have seen.
Yes me, it's a that is a very long conversation about try and summarize it quickly because many ongoing conversations.
Over the past several months on these topics and I think that will those conversations will be continuing.
We continue to progress over the next couple of years quite honestly.
I've said this before my hat to my hat is off to our operating partners that have.
Done a herculean things with fewer people in a incredibly difficult time period and that.
That's from on property above property and at the corporate level.
As a sustain their own difficulties in this environment and I think has really come through stroke.
After a couple of decades of centralizing a lot of services in our industry.
What I believe is going to happen is the decentralization of certain services or moving to more of them all a cart men.
Menu environments, which owners instead of being required to participate.
As either the option to participate or some of those services will come back into the property level.
If you are an active asset manager that allows you to maneuver and pick those services that best work for your hotel in the hotel guests. We think that that is a positive move and Mark Kaufmann, Our chief operating officer has been in direct communication with with our operating partners.
On that front. So what I think you will see is somebody pushed out cost from the brands from the operators will be reduced.
A little bit of that might be picked up at the property level, but net net of savings.
And I think youre going to see efficiency on the labor front.
And.
What that translates into I still think it's a bit early but premature to come up with a specific number but if I had to guess and nothing more than a gas holding all other variables constant.
That said, probably equates to maybe 100, maybe 300 basis points of EBITDA margin down the road again Smedes holding all other variables cost.
Great. Okay. That's that's helpful. I'm, just trying to get you know kind of a range. So maybe you out at somewhere in the 100 to 300 Bips.
Yeah, I think that that's that covers that you you covered a lot of stuff in your opening remarks, So I think a quick I'd appreciate it.
Thanks, Mitch and good luck.
[laughter].
All right. The next question is from Dori tested with Wells Fargo.
Hi, good morning, guys.
Yes.
Hey, certainly peers have noted that they plan to use JB I over the next few years should we assume that you'll continue to go it alone or that situation. It really keeps you started that structure.
Yes, I think weve had the conversation before that.
Generally joint ventures are not our first choice.
Unless we find a partner that is very tightly aligned on our philosophy of long term ownership long term relevant real estates.
Low leverage and keeping the properties in great condition.
It takes a specific type of hotel investor to fit that mold.
We believe that there are partners out there that we have cultivated relationships with over the past decade, not just recently that do fit that mold.
We have been contacted by numerous people that would like to joint venture with us.
Not my absolute first choice, but with the right operating with the right excuse me a joint venture partner and.
With the right asset.
We would.
Clearly underwrite the.
Investment opportunity.
It would allow us to stretch more dollars.
I think thats, what the appeal is right now too many folks is to try and stretched the limited dollars that people have and I can see that strategy, making sense. So we will evaluate it but.
Under the specific caveats that I just went through.
[laughter] and you touched a little bit about.
The I guess the lack of quality of assets currently on the market that that fits your strategy and a little bit on pricing and how I don't think you you mentioned how crowded.
Bidding process is right now.
There haven't been many for the assets, we're looking at but I will tell you the ones that we have either participated in.
It wasn't we participated in the crowd was pretty significant.
There is a property that just was announced that traded in Beverly Hills.
A very nice asset and I would from what we understand that that was a pretty crowded field, particularly because.
Brand.
And franchise were available as an independent hotel.
Correct.
So it depends on the it depends on the asset, but there is other capital form forms of capital out there outside of retail and that continues to be interested in hotels.
Okay. Thank you very much.
Thanks Stuart.
Alright, and your next question is from Michael Bellisario with Great Baird.
Good morning, everyone.
Hey, Michael.
[noise] generally go back to the first question, but maybe ask it a little differently.
Can you give us a sense about your thinking in terms of how you think the best ways are what the best ways are to create shareholder value today, and maybe how did that answer change. If you fast forward six or 12 months say when <unk> fundamentals are better than they have.
Better clarity on <unk> therapeutics and vaccines.
Yeah, that's the best way to I I would I would maybe say a little differently best way to preserve and then grow shareholder value. At this point is quite honestly to navigate this mess that we're in right now.
And you know, we've we've definitely taken attacked of continuing divest and invest in certain assets continuing to keep people or property to make sure that we're continuing to.
Focused on the future to sell business et cetera et cetera.
It's not going to go in a straight line, but you know as I said in my prepared remarks, we are seeing signs of improvement and it's it's it's trying as quickly as possible to get back to breakeven and profitability.
The other way that we're focused on is.
His investments.
And we are pounding the pounding the pavement, we're not just waiting for marketed deals actually searching quite a bit for off market deals and with with either partners or or.
Transaction parties that we.
No no well.
And so that's our that's been our focus now for the past many months.
Got it and then where do dispositions not preserving value category that you described today whats your latest thought on pricing and how you think about a pick up in value is today.
Yeah pretty covered values like.
Mike.
I think we're starting to coalesce around or you.
Values in general being down maybe 10.
10% to 30%, maybe even a little more depending on the call quality of the asset sometimes you get lucky sometimes what what I believe to be a couple of trades have actually gone off bids.
At or above pre cobot levels, our friends over at hosts just sold a property down the street from us and they are where the pricing on that looks really attractive to host and good for them.
So it.
It really depends.
But getting on to dispositions I think there are there is room for dispositions, we continue to focus on selling noncore assets, which we still have.
A few in our portfolio not interested whatsoever on bargain basement pricing fire sales, but that does nothing for US we are not in a position where we have to sell we have plenty enough liquidity. So.
So we don't have to do that but to the extent that there.
Are folks that want certain assets.
We've been contacted.
By some potential buyers.
A pretty quick conversation that somebody is looking for a steep steep discount.
But if the pricing makes sense, we will we will continue forward.
Got it and then just one more question from Brian can you provide some more details on the the operating guarantee payments in San Francisco is that [noise].
And actual cash payment you're getting in that kind of what the hurdle rates are there for how we should think about that.
Support maybe over the next 234 quarter, even into next year like what's the timing there.
Hi morning, like and it is a the hotel is structured.
It's somewhat of a unique structure and its actually structured as a lease that.
For the most part Ninex why they would.
Normal management agreement looks like.
Except in the event that there is a negative cash flow and so it's looked at on an annual basis and if there is a negative sales for that.
To make it easy we're basically kept it.
Zero EBITDA on an annual basis.
So we are.
We don't pay we wouldn't pay the monthly shortfalls.
The anticipation is that for the full year the hotel would have negative cash flow.
Which is what we're looking at in 2000 22021.
See what happens at that point.
Got it helpful. Thank you.
Thanks, Mike.
Oh right and the next question is from Anthony Powell with Barclays.
Hi, good morning Stan.
Question on the operating trends that totality you opened in August and October and some of the larger markets.
How are those doing in terms of the tracking either at leisure or corporate customers and are you actually able to bring down the cash burn in those properties, given given the size and and locations.
Specifically to corporate customers ethylene is like this.
Just a couple of the general I mean, those are kind of large hotels in markets that yeah. Some of which are are more or less not open. So I'm just curious how you're able to bring down the cash burn in those properties I, given the size and locations.
Yeah, most of our hotels when they reopen they reopen up slowly I mean its up to.
Pretty typical to see mid single digit occupancy and then increase from there.
Some very quickly like oceans edge when we reopened it opened up very quickly and got a 50 60, 70% occupancy is on certain days. It hasnt helped that obviously, there's a weather issues and seasonality and without it other properties downtown located properties. Some hubs started off weak and taken a.
While to grow or.
Others have ramped.
Wrapped up fairly quickly either because of traditional business or we found nontraditional business or business that would not normally seek out that type.
Type of hotel, but we fell the business anyway.
So I'd say, it's a wide range of potential outcomes, one thing, we though feel strongly about.
These hotels are currently operating or able to reopen in general is very low occupancy is much lower occupancy than we ever thought was possible.
To keep the cash burn at the same level because of the herculean efforts of our operating partners and our focus on on cutting expenses now. Unfortunately that means a lot of people out of work, which weighs heavily on us, but the ability to reopen these hotels it let's say five.
Six 7% occupancy and not lose any more money has been surprising to us.
The other thing to note is we feel strongly about is an open hotel captures more business than a closed hotel and that seems so obvious.
But it is true and that.
We are doing site inspections at our hotels when they are open.
We are capturing pieces of contract business because we are open.
And that has been a positive factor again, its not going up in a straight line.
But it's allowed us to pick up pieces of business that we would not have otherwise.
Understood. Thanks, and maybe you're talking about this earlier can you provide an update on the Hilton times square I make the loan matures in a few days ago, just whatever the current update there would be great.
Anthony.
We continue to work with our lender.
On on resolution at the Hilton Times square, but we don't have anything to update at this time.
As soon as we come to a resolution will make the appropriate disclosures at that time, but we don't have any update right now.
All right. Thank you.
Thanks, Stephanie.
All right and the next question is from rich Hightower with Evercore.
Hi, good morning out there guys.
Hi, rich.
John I want to go back to a part of the prepared comments and its a topic weve discussed plenty of times before but obviously.
Obviously, some stones lack of the need to issue common equity or some other or some other form of capital for investment purposes is a is a pretty tremendous competitive advantage at the moment and hopefully you know well into the future as well, but just maybe putting your old research analysts had on for a second do you.
Based on everything you know about the World do you anticipate a wave of common equity issuance across the lodging REIT space, why or why not and what do you. What do you think some of the moving parts. There are if you don't mind.
[noise].
Let me just speak in general it strikes me that given this unprecedented downturn one that none of us could have imagined before and will significantly worse than anything we've ever seen it's left what some thought was an appropriate balance sheet is left.
Those balance sheets, probably stretched in that event you only have so many ways of one gaining liquidity, which I think is probably going on in the space right now but to fundamentally reducing leverage.
Which longer term is the is the larger issue.
That can be done by asset sales, but it takes time.
That can be done by a recovery in operating fundamentals and earnings that appears that it will take time.
And the other way to do that.
He is issuing equity.
That is a issuing equity in a downturn.
Is likely one of the greatest sins that we wanted to avoid and had told people why we were taking our leverage so we didn't anticipate this.
But one of the things that we wanted to avoid issuing equity on the cheap because it causes permanent dilution depending on the price.
I feel I can't speak for others I feel.
Comfortable in fact, very comfortable where we sit right now.
That we are highly highly highly unlikely to have to issue equity to shore up our liquidity or ticked up on leverage.
In fact in as I said in my prepared remarks.
Not only do we believe that we have enough cash cash our cash our cash not line draws.
Enough cash to see through this cash burn even for an unanticipated extended time.
But even after assuming a cushion pass that we probably have.
At least $200 million of cash.
That we could put towards investments now if this goes on considerably longer than anybody anticipated, maybe we don't have 200 million, but that gives us enough opportunity to raise capital through other sources like.
As I sit here today, unless our share price increases massively.
I, just don't see the need or desire to issue equity in fact, I would say very differently not a seller at this point of equity much rather be a buyer of our equity at this point.
Got it thanks, thanks for those comments.
My other question is just around.
Dividend policy and I'm going back to.
More than a decade ago in sunstone is a very different company very different balance sheet, but.
Youre able to extend.
And all else you know from the global financial crisis, well into the future and then it presented the company from happening to pay common dividends for several years ago.
Again, not not the same situation, where we sit today, but.
How do you think that that.
That's going to look maybe into 2021 2022, I mean do you foresee the need at some point based on your expectations for a recovery whatever it is tied to to pay cash common dividend at some point between now and now and let's call. It the medium term.
Yeah, rich a very interesting conversation.
We we have a very simple dividend policy and that dividend policies, we try to pay out or we pay out effectively 100% of our taxable income to the extent that we do not have taxable income I would not expect us holding all other things constant to pay out a dividend.
I would highlight in our unusual dividend policy of paying out a very small.
Quarterly dividend and paying out a much larger topper dividend. It was that strategy that dividend strategy was built.
For exactly this type of scenario.
Maybe not we never thought it would be this magnitude of a scenario, but in any event.
If we had thought that we had to pay out lets say 60, 70 80 cents. This year just to pick a number.
And if we had gone into the first quarter paying out lets say, 25% of that and maybe Dan the downturn started in the second or third quarter, we would have.
Put out a lot of dividends that we wish we could have pulled back.
And that probably would have been better use.
Inside the company for incremental liquidity.
I think it's the right dividends strategy for a company that has this level of quality. This industry that has this level of volatility in your earnings stream.
And I do not see chain.
Changing that dividend strategy to the way we approach our dividend at all.
Okay got it thanks.
Thank you.
And your next question is from David Katz with Jefferies.
Hi, everyone. Thanks.
Thanks for taking my question.
Hey.
Okay, you've covered an awful lot of ground, but what I wanted to pose was you know the notion of you know today, what we know and how little we know if we were sitting down to no value an urban asset.
You know pick the top half dozen cities and obviously, we're thinking about the next couple of years. The next five years next 10 years cash flows and then we're putting a terminal value on it also.
And so my sense is we we'd have an easier time with the terminal value, but you know do you think that that that terminal value is affected are impaired.
In anyway, and you know how would you sort of think about doing that value exercise.
Today.
I think your question it was really and so if we went out 567 years from now and say what our values out there whether that's terminal value and are in evaluation exercise. So.
Yep.
Well that is a really good question.
Parts of me that say.
That the market is going to struggle with the risk premium for hotels.
In general and that would likely suggest that that terminal value might be lower.
[laughter], what I'm struggling with David and where I think the the answer probably heads to is with all the liquidity that has been put into the system.
And.
Continue of dropping of overall yields.
I actually think that the terminal value is as much if not more.
Right I think it's a very good debate.
But if I had to guess right now it probably lean to the latter argument.
Right.
Okay I appreciate it thanks very much good luck. Thank you.
And the next question is from Chris Woronka with Deutsche Bank.
Hey, good morning, guys.
Hey, Chris.
Hey morning, John just to circle back to the to the going back on offense at some point on acquisitions.
I understand what you said, there's not a lot of high quality product out there right now at a at a price you'd you'd pay.
Are you open to a to a turnaround story right now given that you could you could effectively renovate during a very down period is that even on the radar.
No our track record on value add I think is very good and we have the we have the resources in house I think the track record is good value add doesnt scare us with a long term view.
So we would look at it now.
Honestly Chris.
By the time, we were able to find something get it get it sourced even if.
Our design and construction team at asset management team was designing a renovation before weve or close which by the way we've done before in fact, I think I'm looking at Mark to market are laughing a little bit we've done it a couple of times now.
It would take some time to actually planned out renovation get it bought out.
Yet the labor on site and get it working so while I'd love to say, yes, we did close something of some value add quickly and get to it while things are quiet.
[noise] realistically I don't quite know.
[noise], how feasible that is.
No having that said.
We're accelerating other projects, we have the capital to do it there is a couple of other projects that are you know, we will announce and they're not so distant future that where our mindset is rather than talking about specific where mindset is is while things are quiet.
And I anticipate the first half of next year to be quiet, we are going to accelerate certain capital projects and makes the most sense. If you have the capital to do something now.
And you have planned it.
No better time to know if you have the capital.
Yeah, Yeah for sure very helpful and then.
To go back to the to the cost side and also understand we've said about some of these shared services and that sounds like a permanent change on some of the other things the rethinking of the operational model everyone talks about I mean much.
How much of that is I guess kind of real <unk> are the brands going to going to play ball I mean, I think it's easy right now everybody's down it out and it it's easy to work together, but you get back to 90% of 2019 revenues and do you think the brands are still were working with you or do they go a different direction.
I think your comment has some merit, but I'm optimistic we're in those conversations everyday and.
I am optimistic that.
We will achieve.
Many of those changes and those changes will be a.
Long lived.
So I hear your point about its it's easier to have these conversations in downturns and as things get better people, maybe sometimes forget but.
But I.
I think they're sustainable.
Okay, and I guess quick follow up along those same lines I mean, John do you have do you have a world view on kind of our labor costs on a on a per well per employee basis. I mean can they can they stay down or do you think something in the macro is going to change in the next three to five years.
Oh I think in general.
Look right now in the very near term I think wages in general or.
Staying wage growth is staying pretty contained there is an abundance of labor et cetera.
And there's there's just not a lot of money to be paying.
Be paying more however, having that said.
I think it's very realistic to see what's going on in the country and see what's going on with living wage initiatives see.
Whether it's being done at a corporate level community level state level debts.
There is a move to pull up the bottom end of wage earners.
So for example.
But weve, Florida, just passed a living wage initiative I don't know if that's they called it specifically living wage, but I think it was to get up to $15. After a certain number of years.
I will tell you we're already there we've been there for a while that the Orlando market led by Disney made that move maybe a year or two ago and.
You know we've gotten there so I'm I'm glad to say, we have already made a lot of those moves.
But I think there will continue to be.
Wage pressure over time.
Okay. Appreciate all the color thanks, Sean.
Thank you Chris.
[noise] Oh right and it appears there are no further questions at this time I'd now like to turn the conference back to John Arabia for any additional or closing remarks.
Well. Thank you again, everybody I know, it's been a long day in the hotel world getting through a lot of earnings calls we really appreciate you sticking through this one if you have any follow up questions. We are we are here in the office. Please give us Rick thanks, everybody have a great weekend.
This concludes today's call. Thank you for your participation you may now disconnect.
[music].
Hmm.