Q3 2020 Host Hotels & Resorts Inc Earnings Call
[music].
Good day and welcome to the host hotels and resorts third quarter 2020 earnings conference call today's.
Today's conference is being recorded at this time I would like to turn the call over to change all <unk> Senior Vice President of Investor Relations. Please go ahead.
Thank you and good morning, everyone. Before we begin please note that many of the comments made today I consider to be well would looking statements under federal securities laws.
Scott <unk> filings with the FCC. These statements are subject to numerous risks and uncertainties that could cause future results to differ from those expressed and we had most obligated to publicly update or revise these forward looking statements.
In addition on today's call, we will discuss certain non-GAAP financial information such a benefit we would have to be the dori Cashman hotel level of results you.
You can find mission together with a reconciliation to the most directly comparable GAAP information in todays earnings press release, not 8-K filed with the FCC and in the supplemental financial information on our website is to tell dot com.
Participating in todays call with me will be Jim with the view, President and Chief Executive Officer, I'm, Sorry, Gosh, Executive Vice President Chief Financial Officer, and Treasurer and.
Now I'd like to kind of quarter over to Jim.
Thank you Pedro and thanks, everyone for joining us this morning.
All of you and your families remain safe and healthy.
Over the last several months, we've transitioned from responding to the challenges posed by this pandemic to rebuilding our business within its current parts.
To that end I would like to highlight three key achievements since our last earnings call.
First we've achieved gradual but steady revenue growth with our portfolio delivering sequentially higher revpar each month.
<unk> historic low of approximately $9 in April to a preliminary estimate of $37 in October.
Although third quarter in October revpar remain more than 80% lower year over year.
Third quarter revenues grew over 90% quarter over quarter as our operators maximize their efforts to access all potential sources of hotel demand, which continues to gradually increase.
Second we have reduced our third quarter hotel level operating loss by approximately 40% from second quarter levels, including the benefit of a $23 million employee retention credits.
Based on third quarter results and excluding the employee retention credit benefit we have reduced our monthly ongoing hotel level operating loss by approximately 25% on average compared to the second quarter.
Our sequential revenue growth has flowed through to our bottom line as our operators have continued to do an outstanding job of minimizing expenses.
Finally, we have further strengthened our robust liquidity by raising over $600 million of capital.
We're opportunistic asset sales and debt refinancing and repayments.
As a result, it fourth quarter operations are commensurate with the third quarter, we expect to end the year with approximately $2.4 billion to $2.5 billion up total available liquidity, including cash and that many reserves with no debt maturities until 2023.
As we enter the nine month of the pandemic with daily Covidien 18 case counts and the United States. Their all time highs. We continue to believe that the demand recovery will remain gradual and choppy before the widespread availability of affected Tobin 19 vaccines and therapeutics.
Yes.
Therefore, our key near term priorities remain.
Number one working with our operators to continue to access all potential sources of demand.
Number two minimizing expenses and reducing hotel cash burn and number three maximizing liquidity.
We are equally focused on our longer term objectives of structurally redefining our operating model positioning our portfolio to gained Revpar index share and capitalizing on opportunistic investments to create long term value for our stockholders.
Let me walk you through our progress on these near and long term objectives before handing the call over to Mr., Rob to explain our third quarter operating performance.
Beginning with demand, although occupancy continues to be driven by leisure travelers. Our hotels are also capturing short term group airline crew and small but steady business transient volumes.
We booked 127000 group nights in the third quarter and deliberate 88000 more room nights than the second quarter. If you exclude New York, which accounted for the majority of group room nights in the second quarter due to medical and first responder business.
Excluding New York group rooms increase progressively throughout the quarter.
19000 in July to 40000 in August and 49000 at September primarily driven by core and smart events.
Nine of our hotels booked sports related group blocks for major League baseball and NFL teams to U.S.P.N. and other sports media with a notable 800 rooms balk at Hyatt Regency, San Francisco, Burlingame, where the P.T.A. Championship in August.
In addition, the Andaz Maui was personally bought out by a film production units, which generated over 8000 total room nights across September and October two months when regular hotel operations were temporarily suspended what's.
What's robust safety protocols in place, including testing attendees upon arrival and employees on a daily basis, the andaz generated a little over $1.7 million of incremental hotel level EBITDA from this business.
While our operators are striving to access all perpetual sources of hotel demand. They remain focused on working with meeting planners to restore confidence in traditional group meetings and events.
In October the Orlando World Center Marriott hosted this year's connect 2020 conference with more than a thousand in person attendees at our hotel and 175 virtual attendees at home.
Every detail with meticulously designed for safety, it's a trade show was spread across our 39000 square foot Crystal ball room with widely spaced booth at all so that large groups of attendees were able to socially distance safely.
Attendees complied with the hotels mass mandate and plenty of mass where available on site.
The property was able to complement the in person events with virtual suppliers and a digital trade show that occurred simultaneously.
We believe this hybrid meeting format, well I've met in person demand and marry up plants. The hosts for global hybrid meeting events, starting on November night at our Ritz Carlton Tysons corner.
While such events helped publicize the fact that meetings can take place safely. Despite the complexities posed by the pandemic restart.
Restrictions on large group gatherings remain in place for most states and local jurisdictions and nearly all conventions and Citywides had been canceled through the first quarter of next year.
We remain optimistic about group business on a medium to long term basis due to encouraging group booking patterns.
Three bookings as a percentage of cancellations continued to increase with approximately 16% of group book that business that was canceled and 2020 now rebooked into future years up from 11.6% in the second quarter Morris.
Moreover, root cancellations for 2021 remain concentrated through April.
With groups that are scheduled for the second half of next year holding fairly steady.
In the third quarter, we booked a net 81000 group rooms for the second half of 2021, driven by San Francisco, San Jose Orlando, New York, and the DC Metro region.
We have 2.2 million definite rooms on the books for 2021, which on a full year basis is 31.5% lower than the same time last year and on a second half basis is 7.7% lower.
Context, we had approximately 3.2 million definite rooms on the books for full year 2020 at the same time last year.
Finally, our operators achieved a robust sequential increase in 2022 to 2024 group bookings.
We booked nearly 100000 more room nights for these out years and the third quarter than we did in the second quarter with room night activity down only 13% to the same time last year.
Importantly for these out years HDR is only 80 basis points lower than the same time last year in contrast to the deep discounting that prevailed in the aftermath of 911 and the great financial crisis.
Moving on to business transient demand remains minimal but has improved from 11000 room nights in July the 13000 in August and 14000 in September it.
A variety of industries are driving demand, including health care consulting technology, and financial and business services with no particular standouts.
In general both group and business transient demand is being driven by smaller organizations rather than by the large corporate accounts.
We continue to believe that business travel or recover in line with the broader economic recovery because of the ROI it generates for businesses.
For every dollar spent on business travel there was a 10 dollar returning revenue and a $3 returning profit. According to a 2013 analysis by U.S. travel and Oxford, economics, which statistically modeled 14 industries over 18 years more.
Moreover, travel makes up only 1% of total U.S. corporate sales and roughly 2% of operating expenses. According to the U.S. Bureau of economic analysis, making travel costs less impactful to long term profitability that is commonly perceived.
Turning to contract revenues, although T. S. Eight passenger volumes have slowed recently they grew steadily during the third quarter as airlines continue to add more destinations.
Our operators drove additional crew business to our hotels, resulting in 31000 more contract rooms in the third quarter compared to the second quarter, a 71% sequential increase and finally leisure demand, which relatively outperform other types of demand through the summer.
He has held up better than historically does post labor day.
Lies between work school and at home remain blurred our operators have created new offerings to appeal to consumers looking to escape, but not being at home.
Hi to introduce the work from Hyatt package, and Marianne Marianne bonds, the work anywhere with Marriott Bondpoint package the.
The packages facilitate working productively from a hotel for the day, a short stay or an extended resort workstation. Another example of our operators innovating to access all potential sources of demand.
Moving on to cash burn our hotel level operating loss averaged $40 million a month in the third quarter not including the employee retention think credit received under the care that.
That's $10 million per month lower than the monthly cash burn scenario, we outlined on our second quarter call and approximately half the worst case scenario of $70 million to $80 million that we discussed in may.
Our third quarter hotel level cash expenses last the employee retention credits increased by 19% on a revenue increase of over 90% compared to the second quarter.
Our operators have demonstrated their commitment to achieving hotel level breakeven as soon as possible by continuing to minimize cost and add back expenses only as necessary to service business levels at the current low occupancy rates.
Assuming operational performance remains at third quarter levels, we would expect approximately $95 million to $105 million of total monthly cash outflows, reflecting an average hotel level loss were approximately $40 million a month as well as estimated capex interest payments and John.
Corporate overhead.
Above property corporate level monthly cash flows will be sequentially higher in the fourth quarter.
Due to the timing of Capex and interest payments, So Rob will provide greater details on our near term cash burn good trajectory and his prepared remarks.
Moving to our vital near term objective of maximizing liquidity, we raised over $600 million of capital through opportunistic asset sales and debt refinancing since our last earnings call. We.
We sold the 532 room, Newport Beach, Marriott Hotel, and Spa for $260 million, which exceeds our pre covered internal hold value for this asset more.
Moreover, we reduce our future capex commitments with the sale of this hotel, including $19 million of contractually required owner funded capex for the Marriott transformational capital program and associated systems renovations.
This was an opportunity if they excel at free koby pricing way buyer, who asked strategic reasons to own the asset.
We are pleased to have achieved a total capex adjusted valuation of 13.8 times 2019, EBITDA and a 6.8% cap rate based on 2019 at Hawaii and to have further enhanced our liquidity and reduce our near term capital spending requirements.
Moreover, there will be no incremental redistribution requirement imposed by the tax gain generated by the sales in Newport Beach Marriott due to a combination of the first quarter. How many cash dividend was paid in April 2020, and the anticipated net operating tax loss to be incurred by hosting.
In 2000 2020 also.
We also completed the second closing on the sale of development land at the Phoenician, bringing our total land sales at that asset to approximately $83 million this year.
We have discussed in the past the sales this land wasn't in our underwriting when we acquired the hotel in 2015. However.
However, it was the part of our vision to unlock the tremendous value we saw nothing nishan.
We are pleased to have executed an incredibly complex rezoning entitlement process by solving multiple technical issues.
In so doing we have successfully monetized approximately 38 acres of non income producing land and created value for our stockholders.
Attaining an additional 21 and a half bakers up land to create further value through a combination of future sales or resource expansion.
The buyer plans to build approximately 165 luxury condominium units 85 single family homes, and 30 bellows and these parcels and residents will have the option to purchase an amenity program with the Phoenician who access resort amenities and other services.
We anticipate that this building demand will help drive food and beverage Spa and golf revenues at the resort.
To conclude on our near term objectives, we further enhanced our liquidity position by issuing a total of $750 million of series <unk> senior notes into substantially over describe oversubscribed trances, resulting in an attractive coupon of 3.5% they reorder.
Really a 3.6% to 3.7%.
In conjunction with our series I issuance, we completed a tender offer.
Of our 4.75% series C senior notes due 2023.
Within approximately 81% participation rate.
As a result, we brother argument it our cash position by $343 million, while extending our average debt maturity and maintaining our weighted average interest rate.
Shifting to our longer term objectives.
We are working with our operators to redefine our operating model.
Price utilization of management functions and a reduction in the fixed component of above property charges are two of the biggest contributors to our long term cost savings target of $100 million to $150 million.
Which is based on 2019 revenues and represents approximately 3% to 4% pro forma 2019 hotel level expenses.
Today, our operators have made solid progress on both of these priorities as they restructure their workforce and they're about property shared services for sales marketing revenue management Nike.
We remain deeply committed to working with our operators to create long term efficiencies that will allow us to generate greater profitability at lower levels of occupancy.
More profitable operating model will not only make for a faster recovery to 2019 EBITDA levels, but it will also improve the long term value of our assets.
Now turning to investments, let me begin with our capital investment plans for the portfolio.
We believe our ability to continue to invest in our portfolio as a unique competitive advantage that will positively influence our relative performance and our growth trajectory throughout this lodging cycle.
Although we have cut our 2020 maintenance capex budget by nearly 40% we continue to invest in the Marriott transformational capital program as well as in other ROI projects on a combined basis. These represent nearly 70% of our 2020 capital spend.
Moreover, nearly 70% of our investment in the Marriott <unk> program will be complete by year end 2020, and the entire program will be substantially completed by year end 2022.
As a result, we expect the game Revpar index share during the heart of the recovery first.
First as we outperformed the competition that is unable to invest this year or next and second as we maintain our Revpar index share gains when competitors disruptor operations to renovate assets later in the cycle, where 2022 likely being the first year that many will be able to meaningfully invest in their portfolios.
The corn Auto Island Marriott resort and Spa for example completed its transparent various transformational program renovations last year and has improved its revpar index share by 9.8 points through August this year compared with the same period in 2018.
This is nearly three times the program's expectations of three to four points of index share gains.
It has also outperformed the San Diego downtown Upper upscale Submarket by 16 points year to date, implying over $2 million, an incremental room revenues.
Moving on to acquisition opportunities and the transaction markets a record 26% of CMBS Hotel those were in special servicing and September 2020, compared with 1.9% in December 2019, and 70% of hotel loans are either.
Special servicing on special servicing watch list. According to trip resource research delinquency rates are expected to move higher as forbearance agreement start to roll off.
Additionally, some hotel owners your we're hoping for a speedy recovery may not be able to sustain the cash outflows required to service their indebtedness and may decide to throwing the towel.
So, although we don't see high quality assets trading at this time, we continue to focus on opportunities, where we can leverage our competitive advantages such as deep owner broker and operator relationships and our ability to do large transactions.
Our reputation for providing speed and certainty of closing and ability to offer tax advantage structure sellers or additional distinguishing factors.
To conclude our near term objectives aimed to lower our cash burn and maximize our liquidity our longer term objectives are designed to drive faster EBITDA recovery by structurally improving margins gaining market share and acquiring assets with $2.4 billion to $2.5 billion.
We expect the total available liquidity at year end, we believe we have the ability to withstand prolong business disruption and capitalize on opportunities for growth.
We entered this crisis is one of the lodging Reits with the lowest leverage and greatest balance sheet capacity and believe these remain key attributes that are necessary to create meaningful long term value and this new lodging cycle.
With that I will turn the call over to Sohrab.
Thank you Jim and good morning, everyone.
Building on Jim's comments, our third quarter topline performance improved from the historic lows recorded in the second quarter.
Revpar for the third quarter declined by 84.1% year over year, compared with 93% year over year decline in the second quarter.
You will hear your occupancy and MTR declines both improved on a sequential basis as we reopened 20 hotels in the third quarter and summer leisure travel bolstered overall hotel demand.
Compared to STR data for U.S. upper tier hotels, and our top markets. Our total portfolios MTR declines were.
150 basis points better than the industries.
We outperformed on average occupancy in 11 of our top markets in the third quarter.
However, our overall occupancy declines were 370 basis points greater than STR, primarily because our portfolio has more hotels and prime downtown locations than the industry does.
Notably our Revpar was in line or better than the industries in our resort oriented markets, such as Jacksonville, Florida Gulf Coast, Miami, Phoenix, and Hawaii, as well as in Northern Virginia, and New York, where we benefited from crew business and corporate room blocks.
Our operators continue to be able to preserve and in some cases, even exceed rates versus the same time last year I properties that are high in demand, especially on strong compression data such as national holidays for.
For example, our Florida coastal divorce delivered 22% year over year 80, all growth in September.
In general rate doesn't appear to be driving occupancy to the extent it normally would in a downturn.
Customers are more sensitive to cleanliness and sensation standards then to room rates.
We therefore remain hopeful that rate degradation will be less severe than in prior downturns and that branded hotels will benefit from having stringent cleanliness standards to help gain customer trust and strong loyalty programs to help drive demand.
Shifting to non rooms revenue third quarter food and beverage revenues on a pro forma basis declined by approximately 90% year over year due to a 96.5% reduction in bank put an easy revenue and an 81% reduction in object revenue.
And our open resort properties, however outlook revenue per occupied room, where nearly 28% higher year over year as leisure transient guests continue to dine on property during their stay.
While other revenues included approximately $10 million of group and attrition.
And cancellation fees, we do not expect to recognize material cancellation and attrition revenues related to the pandemic going forward as we continue to prioritize the rebooking of group business.
So let them any top line numbers for October reflect a gradual but steady month over month improvement with October revpar at approximately $37 compared to September revpar of $34.64 driven by 20.7% occupancy.
And an approximately $179 80 yard.
Year over year Revpar declined by approximately 82% and was almost the same as a year over year Revpar decline reported in September.
Looking at November we expect topline performance to be negatively impacted by the election. This week, but are hopeful that demand will gradually improve around the holidays.
Although visibility remains limited as the length of the booking window remains extremely short our portfolio is generally well positioned to capture short lead time demand as we now have 75 or 79 hotels, representing 94% of our total room count open.
Speaking of Reopenings, Let me provide you with a brief update on Hawaii, which reopened to tourists on October 15th.
Travelers, who get a COVID-19 test no more than 72 hours before departure and show proof of a negative test. Upon arrival are now exempt from the mandatory 14, Dick one single.
Multiple airlines and airports are now offering rapid COVID-19 testing for Hawaii bound passengers, thereby enabling a gradual return of tourists to the islands for.
For November occupancy on the books is currently ranging between 20% to 35% across all four properties in Maui and wobbled well.
Well over the November through January transient HDR pays for all hotels in Hawaii is up 3.8% year over year.
Moving onto expenses, we work with our operators to reduce third quarter hotel operating costs by over 65% year over year, excluding the $43 million of severance paid in the quarter.
Although operators recorded a $23 million reduction in expenses related to the employee retention credits received in the third quarter. This benefit was more than offset by $31 million of health care benefits paid to furloughed employees.
As a reminder, we accrued 32 million well that expense in the second quarter.
In the third quarter, we accrued an additional 26 million for similar payments that will be made in the fourth quarter.
As previously disclosed we expect to incur another $16 million to $26 million of severance expense in the fourth quarter.
Operators continue to reevaluate the workforce structure and implement changes that are expected to lead to a more efficient operating model in the long term.
We have worked closely with our operators to minimize expenses in the third quarter, despite reopening more hotels and achieving greater levels of occupancy.
Fixed cost declined 46% year over year, excluding the employee retention credits, which is remarkable when you consider that a significant portion of the remaining fixed expenses consist of property taxes and insurance.
The quarter over quarter increase in the fixed cost was largely due to improving business level and increased maintenance utilities and contract service costs at the 20 hotels that were reopened during the third quarter.
Variable costs were down 85.5% on a total revenue decline of 84% year over year.
Since April variable cost declines a broadly matched revenue declines well ongoing wage and benefit costs have only slightly increased with improving volumes.
Well tell management teams have implemented productivity saving protocols restructured food and beverage platforms and improved the cross utilization of associates.
As an example, our operators have more than offset the cost increase associated with revised cleanliness protocols by driving productivity improvements in housekeeping.
For the fourth quarter, we believe we will see continued cost containment for wages and benefits and variable expenses, where cost reductions mirror reductions in overall volume.
With regards to fixed cost the brands have already communicated reduction in about property costs. Moreover.
We would also expect the tax benefit we experienced at the corporate level in the third quarter to continue along the same trajectory.
15 hotels delivered a hotel level operating profit for the third entire third quarter quarter with 18 hotels recording a hotel level operating profit in September.
Excluding the impact of the employee retention credits.
At the hotel EBITDA level, we are breaking even in the 35% to 45% occupancy range. When HDR is down 15% to 30% inline with the estimates we provided in April.
Assuming the inclusion of corporate level expenses for interest and corporate DNA of approximately $20 million per month on average.
We would break even at occupancy levels of approximately 45 and 60% at the same HDR declining levels of 15% to 30%.
As you think about path to EBITDA breakeven and subsequent growth. It is important to note that once we achieve hotel breakeven for the consolidated portfolio.
We would expect operating expenses to ramp commensurate with business volumes.
Therefore, we would expect to remain at breakeven within a range of occupancy before inflecting upwards.
Moving onto cash burn as Jim noted, we expect fourth quarter above property corporate level monthly cash outflows to be higher than the third quarter, largely due to the timing of capex and interest payments.
At the hotel level its operational performance remains at third quarter levels. We would expect an operating loss of approximately $40 million a month, excluding the benefit of the employee retention credit.
Based on this scenario overall fourth quarter cash burn would be higher than the third quarter and in the range of approximately $95 million to $105 million a month.
Of this amount approximately $35 million a month is related to our Capex program.
I would like to note that we haven't provided a hotel level cash burn breakdown for each month of the third quarter, because the lumpiness of cash inflows and outflows may make monthly level disclosures misleading. For example September includes the operating profit guaranteed for the Marriott.
Transformational capital program as well as the employee retention credit.
And would therefore not to provide an accurate run rate for subsequent months.
As Jim mentioned, we successfully refinanced debt in transactions that further strengthened our liquidity by $343 million, while extending our weighted average debt maturity and maintaining a weighted average interest rate.
This combined with approximately $265 million of net proceeds from the sale of the Newport Beach Marriott and the land the Phoenician further maximizes our liquidity, which can be deployed in multiple ways to create value for our shareholders.
To conclude although limited visibility continues to make forecasting extremely challenging we continue to focus on what we can influence which includes minimizing our cash burn and maximize on to liquidity in the near term well.
While working with our operators to redefine the hotel operating model and investing our assets. So they may outperform over the long term.
Similarly, the strength of our balance sheet and liquidity position allows us to enjoy an unprecedented crisis today, while enabling us to be opportunistic and grow shareholder value in the future.
And with that we will now open it up to you in a swing.
To ensure we have time to address questions from as many of you as possible. Please limit yourself to one question.
If youd like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star key one moment. Please while we poll for questions.
Your first question comes from the line of Rich Hightower with Evercore.
Please proceed with your question.
Hey, good morning, and good afternoon as the case, maybe you guys.
Good morning, Rich good afternoon, as the case may be to you.
Exactly.
A lot of ground, we could cover here, but from my I guess one question I wanted to talk about you know maybe the impediments to.
Stronger sort of group business bookings as we think about the second half of next year and beyond and if you had to sort of.
You know weight the different factors that might that might be holding that back I mean is it is a public health.
Or is it sort of a corporate profits and companies thinking about their budgets I mean between those two or maybe other factors what do you think might be might.
Might be the biggest hindrance at this point thanks.
All right Yeah, rich, it's Rob can jump in as well on the way here I'll start.
I think it's you know that the whole back that were seeing generally.
And bookings both on the business transient side and the group side is related to a couple things number one government restrictions.
And that's being driven and driven by public health concerns. So I think we as we've talked many times.
We're not going to see business returned to any sense of normalcy.
Until we have a effective vaccine or vaccines or therapeutics combined with the vaccine.
That said you know we did talk.
Talk.
About that I think it's Rob talked in his comments or maybe was mine.
About what we're seeing happen next year with respect to a group cancellations you know it's.
Clear to US you know with connect 2020 being held at.
Orlando World Center that meeting planners Wanna get groups back out on.
On the road in hotels, it's very important for associations to meet.
And for corporate groups to come together as well so our mix.
Oh from 2017.
Like average.
Mix.
Business was roughly on a revenue basis call It 35% Association, 47% corporate and 18% another which is really smart <unk>.
I would tell you that we're seeing are you there are.
Our strong desire on the part of association business that come back.
Our area were all praying that we have an effective vaccine. So we.
We can talk about how group pace is booking.
Into 2022 and beyond.
Thats, Rob take that.
I'm sure. So rich I think you know more than pays what we're focused on right now and so we talked about last quarter was really the tentative bookings, which was waiting on the sidelines because pace. Obviously as you would expect is down because of the uncertainty, but the tentative bookings have really pushed to the second half of next.
This year right now a tentative revenue on the books is up 32%.
Clearly people do want to me, it's just a matter of like Jim said when they are comfortable traveling again, and that's obviously a broader concern.
The other stuff I don't throw out there as we did book, which is encouraging we booked 303000 rooms in the third quarter were 22 to 24, so for future years.
Pared back to same time last year, it's only down about 45000 rooms.
And from an HDR perspective, the other encouraging thing is it yours for the room that we book is less than a point down to same time last year. So again encouraging trends when you look out into the future.
Thank you guys.
Your next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.
Hi, Good afternoon question on transactions do you still think that you will see an increase in activity. The overall environment for transactions in the first half of next year and a lot of your peers have talked about structures like Jvs and club deals another kind of alternative ways to just start acquiring your child and you can get.
Are those as we start to ramp up your activity.
Anthony I think we would be very open to exploring club.
Club deals and Jvs.
Balance sheet formats.
If it makes sense to us we are in a unique position where under our existing credit facility waiver agreement, we can acquire up to $1.5 billion of hotels out of existing liquidity subject to maintaining $500 million.
Liquidity in the company and you know as we as we discussed we expect assuming that the fourth quarter trends mirror, the third quarter trends and.
You know, we're very pleased with how October has played out.
That will have $2.4 billion to $2.5 billion of available liquidity.
At the end of this year, taking us into next year. So I think that not only are club deals available.
Available as you know we got.
Were very successful in putting together a club deal.
And Youre with Oh, Gee, I see and HPG, a euro JV, where we acquired over 20 hotels.
As general partner, and we would be very happy to do something like that again in the U.S.
Got it if the opportunity presented itself one of the other distinguishing factors that we have available to us.
On the acquisition side is the ability to issue operating partnership units that is truly distinguishing given the liquidity in our stock.
And just the share of you know I think were trading on average now close to 14 million shares.
Oh stock a day.
And it gives a it gives an owner or the opportunity to.
Provide some liquidity, but to ride the upside as well going forward. So I drive the upside and posted as our EBITDA continues to improve and you know our stock price continues to improve as well so.
To answer your question about what do we expect to see every indication is and we're talking to a lot of people about this every indication is that come the first half of next year as for various periods of way start to to.
To expire and you know as owners.
Who are in the unfortunate position, where they don't have the liquidity or or they choose had not been a debt service payments and other expenses, we expect to see a significant number of properties come to market. So the answer is yes to both your questions.
Thank you.
Your next question comes from the line of Dori testing with Wells Fargo. Please proceed with your question.
Hi, Thanks, guys I'm you detailed in your release your reasoning for drawing down your revolver quarter and when would you expect to be out from under that on kind of the minimum and are there any other similar constraints that we should be keeping an eye on at this point.
Hi, Dorothy.
Hey, it's awfully difficult to speculate when we would be out from underneath the debt incurrence test either I think a lot of it is going to depend on how.
How quickly we had a vaccine and how quickly it's rolled out to the public and when businesses are are comfortable sending people on the road, which as I you know in answering Rich's question. I mean, we have a lot of government restrictions out there.
We're going to have to see the restrictions that loosened a it I don't think that various government authorities are going to be prepared to do that until we have a vaccine.
So the short answer is we don't know whenever the.
The debt Incurrence test will Oh, we will come back in compliance with the debt Incurrence test.
We don't have any other issues that that.
You should be aware of today you know we're in very good shape you know we've got a I think eight.
Very good job, an admirable job of raising another $600 million of cash this quarter, and a very opportunistic and low cost way.
So you know we.
We are today focus on.
Reducing expenses.
You know, putting the portfolio and a position where we can outperform when the markets do open up and maximizing our liquidity.
Okay. Thanks.
Your next question comes from the line of Smedes Rose with Citi. Please proceed with your question.
Hi. Thanks. This is on for Smedes, you spoke a little bit and opening remarks about the breakeven right.
So in that scenario would you be more focused on driving occupancy before striking rate just given a cost savings you're targeting or and then just does that how are you also thinking about margin.
With a shift and the.
Thanks.
Yeah I'll take the first part of the answer Rob can jump in so.
Clearly our margins will perform better if we can drive rate.
At the expense of occupancy.
You know it it will just provide for better flow through to the bottom line and we won't have the incremental cost associated with that housekeeping and other expenses associated with that having more rooms occupied that's not to say that we're not going to take every.
Every room nights that we can but as we think about margin performance.
The better margin performance is driven by rate going forward and you know we are very very pleased with the fact that we're not seeing the.
The rate degradation that we've seen and other recovery curious when we look at what happened after 911 and what happened after the great recession. So fingers crossed that that continues to be the trend.
Going forward and outlets are I've talked a little bit about how we think about breakeven occupancy in HDR.
So for me mix perspective, let's talk about the second part of the question and how we are managing margins I'm just.
Despite changes in mix right now the situation we are in as most of my writing is probably Lim is really rooms only revenue. So reality is whether we look at.
You know leisure business or any business coming in because its primarily rooms only our focus in is really on expenses that can really reduce and drive a higher margins are the rooms, a level of food and beverage outlets and a lot of cases are running and limited operations and as we have said before.
Before we bring back on any food and beverage offerings, we are ensuring its actually profitable and we drive profit to the bottom line from a margin perspective, obviously it is a lower margin business, but at the end the day when looking at EBITDA dollars not necessarily EBIT margin. So once revenues due to.
Recover and and we are sort of in a position, where we're getting back to pre coal bed levels of revenue then the focus will be on margin expansion.
And as we have message before you know we are really focused on driving the 100 to 150 million of incremental EBITDA compared to 2019 levels.
Levels, and we have made quite a bit of progress on that and a lot of it is tied to the food and beverage Department, where there has been significant level of management a reduction.
The severance that we had in the third quarter odd is directly tied to reduction of almost 30% of Madison headcount, which we believe is going to be a permanent reduction going forward.
Okay. Thanks, and then just one more on transaction can you just talk about competitive positioning first as you know private equity or other institutional kind of capital I'm, just given that they can use higher leverage and then as you think about it.
Potential acquisitions or dispositions, whether it's market you'd like to add exposure to or exit.
Yeah.
Yeah I'll take the second part of the question first we.
We are generally.
Market agnostic, we do believe that.
Maintaining a broad geographic diversification.
Is the way to run the business that said you know some markets are going to open up better in sooner than other markets. So we will take all that into consideration.
In our underwriting criteria as we as we evaluate opportunities going forward with respect to competitive positioning.
Hi, just make an observation that today.
The debt markets are are generally closed or for the level of debt that private equity firms typically.
Ah need.
To to drive their returns there you know there there are levered returns and the.
Hi teens to low Twentys are call it mid teens to low twentys. So.
So we're not seeing any really.
Competition out there today, you know in fairness Theres, just not a lot of product on the market right. Now I mean, we are evaluating every deal that that we would deem to be attractive we haven't come across anything that that meets our under credit underwriting criteria.
Given that you know the facts and circumstances of where we are in the cycle and the recovery case.
Okay. Thanks.
Your next question comes from the line of David Katz with Jefferies. Please proceed with your question.
Hi, good morning, everyone. Thanks for all the detail and thanks for taking my questions.
And Jim I will admit I've gone back and forth just a little bit.
But I wanted to just get your updated thoughts about discussions you know with the largest branch.
You know the degree to which they can.
Our Oh.
We are evaluating the value that they deliver on.
What you frankly, what you pay for it.
What we can reasonably expect to sort of come out of all this what your view of success really us.
Sure well.
I think with the brands deliver to us is a testing.
Testament to the way, we have been able to grow the business and a.
Very challenged environment and.
We love the fact that the brands are listening today and all that Serrano jump in on this in a in a few minutes they hurt us loud and clear they hurt us with respect to brand standards.
As you know that there are roughly 300 brand standards.
At a at the major brands.
That would be you know Marriott Hyatt in Hilton and we have worked closely with them to re evaluate each of those standards going forward and it relates to the most basic David you know food and beverage offerings when when to restaurants have to be open how how long do they have to be okay.
You have to offer.
To your customers.
The fact that we are fine.
King about and seeing and I'm going to let Rob give a little more detail on this as being a true reduction.
Uh huh.
<unk> expenses of between a 100 $450 million.
They saw in 2019 pro forma performance I think as it is a strong testament to the fact that the brands get it today or they.
They are there.
One with us when it comes to understanding the challenges that owners face and we interface with with both brands are two major operators Marianne I. It on a weekly basis. So suraj.
Sure I'm going to talk little bit about how or what sort of progress we're making on 100 hundred 50.
I'm sure.
Hey, David So I would start by saying that Marriott has actually restructured and reduced about property shared services for sales and marketing revenue management and I T and right now working towards reductions of that program shared services fees for the following year for this year high. It has also reduced the fixed component.
They're about property I T cost by 15% and chain marketing fees by as much as 50% and moving forward there really committed to making that more variable. So that the cost is actually tied to exactly what you were talking about the value proposition.
To the owner.
In terms of the 100 to 150 the way we think about it is we.
We would expect that long term there will be permanent reduction of the fixed portion of the about property costs by as much as 10% to 20% so putting that into the context of dollars that would be somewhere between $20 million to $25 million off that 100, 250, obviously I would remind everybody that's tied to 2019 revenues so assuming.
We get back to 19 revenues.
We'd be on the about property piece 20 to 25 million of savings with the 10% to 20% reduction of the fixed piece of the about property costs.
Got it thank you very much and good luck.
Thanks, David.
Your next question comes from the line of Lukas Hartwich with Green Street. Please proceed with your question.
Thanks morning, So boring look in a sold.
Good morning, Jim.
When looking at forward group bookings I'm, just curious what's the curve looks like <unk> is that a gradual rate of improvement in activity over time or is there kind of a point on the calendar, where things really start to hockey stick.
Hey look at it right now.
Sorry, guys, Rob that's fine.
Right now I think right now what's happening is even for future bookings there be encouraging thing like I was saying there is booking activity for future years. However, their activity is definitely lower than what you would have expected because their folks waiting on the sidelines. That's why you have a lot of tentative bookings, but not necessary definite.
On the books looking out to the future years.
However, there isn't really cancellations that are taking place and that's encouraging it shifted the booking activity is somewhat sort of I would say you know slower than you would typically expect because of all the in certain get it exists in the short term.
Right. So in terms of that tentative demand that's kind of waiting on the sidelines is there essentially have no in their mind. They thinking well you know third quarter next year is really on will strongly consider.
You know bookings some business.
Is there some point in mind that these meeting planners, where they're thinking.
Where they're going to get serious about booking or is it kind of more of a gradual increase in just wait and see.
No I think I think your your third quarter.
Timeframe as the right timeframe Lucas I mean, everyone feels that you.
You know that the first half of next year is going to be continued to be challenging.
And that as you know when.
When we do get a vaccine it's going to take some time to get it rolled out among the the population. So people are looking at the second half of next year and beyond.
Great. Thank you.
Your next question comes from the line of Chris Growe Wanko with Deutsche Bank. Please proceed with your question.
Hey, good afternoon guys.
Was hoping to drill down maybe a little bit on the on the actual property cost you guys covered a lot of ground on on shared services and above property, but you know how much of an opportunity do you see on some of these labor initiatives like no state you ever housekeeping and changing up some of the food and beverage operations.
How much of that realistically do you think you can you can make permanent or are the brands willing to accept it or the customers willing to accept it.
I think on the housekeeping side, Chris it's hub.
It it is really going to be opt in a housekeeping services as opposed to opt out going forward and it's going to vary on the frankly the type of property, we have in the personal profile of the customer.
We're going to be some customers, if they're saying at one of our luxury hotels or who were going to continue to demand housekeeping on a daily basis, and you know depending on up.
Different types of properties that customers may not very well they may not when people in their rooms to clean the rooms as long as they can get you know.
Clean linens, and towels and bathroom amenities that they need to deliver to the front door. So you know with respect to food and beverage I think that we have seen a meaningful.
Meaningful change on the SMB side.
Hi, going forward I don't think you're going to see as one example breakfast buffets.
ER are likely hot breakfast buffets are likely to be a thing of the past hot offerings. In you know the m. clubs and the the Hyatt cause years lounges or are likely to be a thing of the past. So those are going to be permanent cost savings Hatteras, Rob you have anything else you want to add with respect to how we're.
Thinking about the operating model yeah.
Yeah, I think the only thing I'd add is what this pandemic sort of it allowed us to do is really look at zero based budgeting and ground up budgeting and and tie that with what the value proposition is to the customer and not only to the customer but also from a brand perspective, what the value proposition is to the owner so at the property level.
It's really understanding what the customer wants and what the customer needs and how we would ship the operating model based on that sort of minimum sort of base labor standards are being completely redefine so going forward and its complete it's going to be tied to what Jim talked about earlier is how brand standards get reevaluated based.
Customer preferences.
So this is an opportunity where we are able to actually do a zero based budgeting roundup.
Budgets to figure out what is the right the labor model and that's where we are pretty confident we think they're going to get savings I'm not only from a housekeeping perspective, but from food and beverage, particularly in the kitchen department as well.
Okay very good thanks, guys.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Mr., Jim resilience for closing remarks.
[noise] I'd like to thank everybody for joining us on the call today as always we appreciate the opportunity to discuss our results with you I look forward to talking to you. We all look forward to talking to you next week or the week after it in a read that.
And over the coming weeks and months. So please everyone stay healthy and stayed positive we will all get through this and I wish you all good day.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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