Q4 2020 Hersha Hospitality Trust Earnings Call
And welcome to the Hershal Hospitality Trust fourth quarter, 'twenty, and 'twenty earnings call and webcast all participants will be at muscle only mode.
So sales play signal of conference specialist by pressing the star key followed by zero. After today's presentation, there will be and opportunity to ask questions and ask a question. You May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference.
Over to Greg Costa at Investor Relations. Please go ahead.
Thank you grant and good morning to everyone joining us today welcome to the Hershey Hospitality Trust full year and fourth quarter 'twenty and 'twenty Conference call today's call will be based on the full year and fourth quarter of 'twenty and 'twenty earnings release, which was distributed yesterday afternoon before proceeding I would like to remind everyone that todays conference call may contain forward looking.
These statements. These forward looking statements involve known and unknown risks and uncertainties and other factors that may cause the company's actual results performance or financial positions to be considerably different from any future results performance or financial positions. These factors are detailed within the company's press release as well as within the company's fine.
And so at the S E C.
At that it is now my pleasure to turn the call over to Mr. Neil H Shah Hershal Hospitality Trust, President and Chief Operating Officer, Neil You may begin.
Thank you, Greg and good morning, everyone.
Yeah.
Joining me. This morning are Jay Shah, our Chief Executive Officer, and Ashish Perique, our Chief Financial Officer.
We appreciate your joining US early this morning on such a busy day for earnings I'm going to focus my comments. This morning on recent performance and our announced asset sales before turning it over to ash to provide some further details on our recent capital raise the newly amended credit facility and what we're seeing and our portfolio year to day.
And through the first quarter.
The conclusion of the fourth quarter closes the most challenging year and Hershey's history.
Our operating teams remained on property throughout the pandemic, allowing us to welcome first responders and those that have begun to travel and these early days of the recovery.
And our above property team members, many here and our offices today enabled us to remain nimble and make prudent decisions and execute multiple leavers to provide financial flexibility for the foreseeable future.
Jay Ash and I stand at out on our team shoulders as we share some good news today.
We begin 2021 with optimism towards the recovery as the rollout of vaccinations gains momentum and more and more people choose to travel.
January started off stronger than we anticipated for our portfolio rich.
Returning to greater than 60 dollar Revpar with South, Florida, and Washington D C offsetting lockdowns on the West coast and the northeast.
We had our first month of hotel level positive EBITDA in January.
And we are encouraged with February performance to date.
The booking pace for Presidents' day weekend across the portfolio was the strongest since the pandemic one year ago.
We agree that leisure demand aided by continued government stimulus will again come first but with significantly more pent up demand and was actualized last summer.
We are also encouraged by data from the airlines most corporate accounts anticipate returning to at least 50 per cent of pre COVID-19 travel by the end of 'twenty and 'twenty, one and more than 40 per cent of these accounts expect of full recovery and corporate travel by 2022.
The return of leisure travel will kickstart this years recovery to be sure, but at the industry should see meaningful acceleration with the return of business travel, which we believe could begin as early as the second quarter and ramp up through the back half of the year.
Yeah.
Drive to resorts have been our strongest performers since the inception of the pandemic.
This portfolio of hotels about 25 per cent of our pre pandemic EBITDA at a weighted average occupancy nearing 40% and realized ADR growth of 2% for the full year 2020.
Government mandated shutdowns and California impacted performance in December and January for our coastal California properties, but we are seeing immediate improvement in February with the lifting of these and restrictions.
Not only have leisure travelers returned but we're also seeing early signs of business and small group activity.
New corporate accounts for near term projects and deposits for spring and fall weddings are building a base at the sanctuary Beach resort and hotel Milo.
Across the country and key west the parrot key hotel and villas was our best performing asset during the fourth quarter generating 55% occupancy and $8 four per cent year over year ADR growth to $306 for the period.
And the holiday weeks were especially strong most notably the period between Christmas and new year's which had greater than 90% occupancy and saw ADR exceed 2019 levels at the hotel.
We are expecting several strong quarters ahead at this exceptionally positioned resort.
Our largest asset the Cadillac Hotel and Beach club on Miami Beach is seeing increased demand on weekends and during special events generating occupancies approximating, 90% with rate on pace to improve incrementally throughout the balance of the quarter.
Momentum has been has been building year to date and Miami from leisure demand and recent announcements around major corporate relocations and highlight the tremendous draw to the region, which leaves us optimistic for this years recovery and substantial market growth for years to come.
Yeah.
Urban destinations were essentially shut down from March to September of last year, and then again from November through January.
We believe that the reopening of museums national parks theaters sports venues and more bars and restaurants and the coming months will lead to a pickup in both pent up leisure and business demand to our great cities.
As travel begins to resume.
Which we have already seen and warmer climates, such of South Florida and.
And even at our lifestyle hotels up north over Presidents' day weekend.
Our unique portfolio provides us multiple levers to capture market share, while continuing to operate and a cost efficient manner as occupancy builds towards normalization.
Washington D. C has been a very strong performing market, despite the significantly abbreviated inauguration activity.
Although the public was unable to attend the event the St. Gregory Hotel contracted with media outlets, including C. B S. B B C and al Jazeera.
The Hilton Garden Inn M Street, and the Hampton Inn and mass AV served the men and women of the National Guard, who are deployed to the city, leading up to and through the event.
The Ritz Carlton Georgetown was able to hold of $1000 ADR for for the peak nights for the few leisure guests and town.
Washington has begun 2021 on strong footing ending January with portfolio revenues more than double our expectations at the beginning of the month.
The new presidential administration is expected to lead to a pickup and activity among the lobbying federal government and diplomatic segments and we're also looking forward to the upcoming Cherry Blossom festival in the coming quarter.
Okay.
One of our better performing markets during the fourth quarter from our forecast perspective was our New York City portfolio, finishing the quarter with close to 40% occupancy which came in spite of having few leisure oriented attractions open and the city.
We continued to see strong performance from our JFK Submarket, but also saw an uptick and first responder business at our Brooklyn, and lower Manhattan assets.
These customers the New York Fire and police departments and a few medical groups continue to get rest at the New hotel, Brooklyn, and the Hampton Inn, and seaport, resulting in January occupancy of 97% and 51% respectively.
Although this business is transitory and related to the ongoing COVID-19 spread and we are grateful that these frontline workers are able to utilize our hotels to stay safe and guide us through this homestretch of this pandemic.
Urban market recovery is not only driven by vaccine distribution and the return of business and international travel.
But it is meaningfully enhanced with reductions or deterioration of supply.
In markets around the country aging hotels are being rendered obsolete.
The Wardman Park and D C at the embassy suites, and Philadelphia, the Buckminster in Boston and.
New York more than anywhere else consultants at forecasted and array of figures regarding the permanent supply reduction and in New York.
And may not actualize as highest 25%.
And some of predicted but to confirm closures in 'twenty and 'twenty alone provide of concrete realism that the supply will contract.
Adding to this is the newly announced proposal requiring special permits for new hotels and expansions and zoning districts throughout the city by the department of planning and <unk>.
Blick hearings on this proposal have commenced and if past will materially impact hotel construction across the five boroughs and provide a significant tailwind for hotel owners for years at home.
Before ash takes a deeper dive into our balance sheet and burn rates I want to spend a few minutes and our capital allocation strategy and sources of additional liquidity.
As we outlined on our previous earnings calls dispositions represented the lowest cost of capital as we considered alternatives to raise liquidity and increase our financial flexibility.
We ran wide and robust marketing processes with multiple brokers beginning this fall.
Our strong locations in major gateway markets attracted tremendous interest from private equity firms family offices and residential developers.
These were fee simple hotels that have remained open throughout the pandemic.
Unencumbered of management and onerous labor contracts.
Many of our unencumbered of brand.
All of which made the bidding process quite competitive.
Our goal was to generate $150 million to $200 million and proceeds from asset sales to pay down our senior credit facility.
The six recently announced asset sales will generate net proceeds of approximately $191 million.
At the Sheraton Wilmington closed in December while the courtyard and San Diego closed last week.
And the residents in Coconut Grove Capital Hill Hotel, Washington, and Holiday and Express Cambridge are all expected to close by the end of the first quarter.
While the sale of the Duane Street Hotel is slated to close in early Q2.
Many of these hotels represented those with capital intensive projects on the horizon and the successful completion of these sales will lower our capex budget by approximately $20 million over the coming years.
As part of our long term capital recycling strategy, the dispositions achieve liquidity and flexibility at a reasonable cost.
We transacted at at a discount to pre COVID-19 value, but we focused our sales on mature hotels.
Hotels that we'd owned from nearly 10 years hotels.
Hotels that would require additional capital investment during the recovery.
And the slowest growth hotel and each of our geographic clusters.
The successful sale of these hotels.
Marginally improves the absolute revpar and EBITDA per key of the remaining portfolio.
But meaningfully enhances portfolio of quality EBITDA growth rate and reduces capex spending and disruption at these assets and the recovery.
Okay.
Yeah.
We were also pleased to announce last week and fun just yesterday our.
And our strategic financial commitment with affiliates of Goldman Sachs merchant bank, providing $150 million unsecured term loan, which can be expanded to $200 million.
This capital infusion in conjunction with asset sales led to the successful amendment of our credit facility extending our covenant waiver until June 2022, and eliminating term loan maturities in 2021.
We are pleased to have cleared the runway and provided the financial flexibility to focus on the ramp up of our portfolio and the coming year.
As we've discussed on prior calls and at Investor meetings, we've been steadfast and our approach to capital allocation.
<unk>, the cash flow profile and liquidity of our assets and the upcoming recovery and travel and lodging. We were loads to pursue of transaction that would be unnecessarily dilutive to shareholders or constrain our strategic alternatives and the future.
For this capital raise we ran a fulsome process.
We were delighted with the depth and quality of investors interested and financing our portfolio.
And look forward to future transactions with many of them.
Ultimately the Goldman merchant bank offered the prepayment flexibility.
Draw and pick features.
And importantly, the potential for future partnerships in the coming cycle.
Yes.
And.
As we navigate through the tail end of the crisis and into the recovery.
We remain bullish on our portfolio positions and the markets, where we operate.
Innovation oriented urban gateway markets and regional resorts of <unk>.
Short drive away from them.
Yeah.
2020 showcase the allure of drive to resorts for all segments of the traveler.
And we believe this trend will not go away soon.
But we remind investors that innovation markets provided strong results prior to the pandemic.
And these markets have the most to recover with the rollout of the vaccine.
Since the pandemic Facebook and Google of expanded office space near our hotels on Manhattan's West side.
And our Tribeca Union square and Midtown East hotels will all have major new office developments opening in the coming years.
Amazon announcing the addition of 3000 jobs and the Boston Seaport.
Walking distance from our envoy hotel.
Our courtyard at La is well positioned and Culver city for the booming Tech and studio related office growth implied of Vista.
Philadelphia has attracted several new life science and pharma companies downtown and state of the art and new space.
Even our locations and Miami are attracting new class, a office space and coconut Grove and on Miami Beach, as there is increasing momentum from northeastern and asset management firms and West coast technology firms.
All of this proving out the corporate expansion remains intact and will add to the already robust demand generators in our gateway markets, particularly for our carefully assembled submarkets and locations.
Our disposition announcements this year should also reinforce the high quality nature of our portfolio.
Our hotels are precisely the kinds of hotels sophisticated investors seek our.
Our hotels of our high absolute revpar, while still producing sector leading margins.
The hotels are young and purpose built for today's traveler with minimal capex requirements for the foreseeable future.
Our hotels are fee simple and have pre payable financing.
And have few management or brand encumbrances.
All located in the most valuable markets and the United States.
Our portfolio has proven to be attractive to a vast buyer pool.
And still offers incredible operational and financial leverage to this recovery.
And with the increased financial flexibility from our capital infusion and no near term encumbrances following our credit facility Amendment.
We are able to focus on capturing market share and operating our hotels and a cost efficient manager manner to drive cash flow.
With that let me turn it over to ash to discuss in more detail our balance sheet.
Great. Thanks.
Thanks, Neil Good morning, everyone as Neil mentioned I'm going to do a deeper dive on our recently announced capital transactions Bank Amendment and their impact on our balance sheet and interest expense before closing with an update on our operating results and current outlook.
Last week, we announced a strategic financing commitment with affiliates of Goldman Sachs merchant bank to provide $150 million and unsecured notes, which can be upsized to $200 million at any point on or before September 30 of this year with a maturity date on the notes of February of 2026.
We successfully closed on this financing yesterday and look forward to furthering our partnership with Gfs's merchant Bank.
When we began our capital raising process earlier this year to provide us additional liquidity and Optionality, we prioritize two items capital that was not dilutive to our equity and significant prepayment flexibility and this bespoke solutions satisfied both of these key criteria and several others that we had prioritized.
This capital is unsecured and fully subordinated to our bank facility and allows us to defer of cash interest on 50% of our financing for the first year, creating substantial near term cash savings and providing us additional runway during this period of recovery.
This capital does not prohibit supplementary junior capital and allows us additional unsecured debt as long as we maintain compliance with certainty and karnes tests.
These unsecured notes do not place any further restrictions and our ability to operate the business or enter into strategic ventures that may be available to us.
Last week, we also highlighted that we went under contract to sell two additional hotels, bringing our year to date total asset value of dispositions to $178 $5 million.
The successful closing of closing of these sales in addition to the Sheraton Wilmington, which closed in December and the Duane Street Hotel, which is expected to close during the second quarter, we will generate total proceeds of $216 million and following the repayment of the $25 million mortgage loan on the capital Hill Hotel net.
Proceeds from these dispositions will amount to approximately $191 million.
Which we will utilize in tandem with the proceeds from our unsecured notes to pay off our 2021 term loan and reduce our overall debt by approximately $150 million.
With the resulting reduction of overall leverage and the payment and kind feature of our unsecured notes.
We estimate that our cash interest expense will decrease by approximately $4 million and 2021 and that of our total interest expense, including the deferred interest from the notes will remain similar to our 2020 interest expense.
We completed these asset sales and closed on the unsecured notes placement contemporaneously with the amendment of our revolving credit facility and we're very pleased with the continued support from our consortium of over 15 Bank group members.
The amendment eliminates all term loan maturities until August of 'twenty, two and extends a covenant waiver holiday with our next financial Covenant test occurring on June 30 of 2022.
The first test will be applied to the annualized second quarter performance with the third quarter tests annualized and second and third quarter results and so on.
The amendment allows us to pay off the accrual of our preferred dividend and maintain quarterly preferred dividend distributions moving forward.
At this time, we anticipate clearing our accrual on the preferred dividend by the end of the first quarter.
The completion of these capital transactions allows us to continue to focus on our operational performance and accretive opportunities that may emerge and the recovery.
Results at our properties of incrementally improved over the past six weeks and ultimately led to the validation of our breakeven and forecast during January and what is seasonally the slowest months of the year our properties generated positive property level cash flow during the month of January and 40% occupancy with Revpar.
Our level of 60% below January of 2020.
In January of 20 of our 36 operational hotels broke even on the GOP line with 14, achieving EBITDA breakeven levels.
These results represent a 75% increase and 40% increase and properties that broke even on the EBITDA line compared to November and December respectively.
Based on January's results and our forecast for the first quarter.
And are comfortable with our previous estimates at the entire portfolio of breaks even at property level with the GOP with of 60% Revpar decline at the corporate level, our revpar breakeven occurs at a 40% decline.
Our franchise operating strategy allows us to run our hotels and very lean labor models until improved demand warrants additional staffing.
Applying various cost cutting strategies, such as cross utilizing management personnel and outsourcing and job sharing within the hotel and across our clusters lowers our overall cost of.
The model of force flexibility to continue to operate and current staffing levels at our breakeven occupancies approximating, 35% up to 55% to 60% at some of our hotels.
As Occupancies increase at our hotels, we are seeing flow through is as high of 75% on the GOP line and as we push both rate and occupancy we anticipate maintaining them for the remainder of the year.
And the flexibility.
<unk> of the model and the resulting cost efficiencies economically justified continuing operations at our urban independent resort destinations throughout the pandemic mitigating cash burn over the course of 2020.
Our total property level cash burn for the fourth quarter was $5 9 million and in January of the property generated property level cash flow for the first time since March of last year.
Corporate cash burn of $4 3 million and January represents a 60% reduction compared to April of 2020 at the depths of the crisis we.
We expect our February performance to be in line with January with March operating results projected to surpass that of January and February at the pace of vaccination distribution easing government restrictions spring break travel and warm weather along the northeast should yield increased bookings across the portfolio.
Before I close of comments regarding our balance sheet of quick update on Hirsch's relationship with our New York City Joint venture Partners <unk> Capital management as you May recall, following our 2016 transaction, where we sold a majority of this portfolio and <unk>.
And in which we netted of gain of $213 million, we retained of subordinated minority interest and the portfolio, which was junior defend at equity position.
Earlier this month the equity interest of that portfolio were transferred and we have no remaining equity interest or economic or legal commitments to the joint venture.
We removed these seven hotels from our portfolio accounts and they will no longer be part of our operating results after the first quarter.
We ended the fourth quarter was $23 6 million and cash and cash equivalents and deposits during the quarter, we received $8 1 million and business interruption proceeds from hurricane Irma as impact on and our South Florida portfolio and these receivables had a positive impact on our <unk> performance in the quarter.
We spent $4 3 million on capital projects last quarter, bringing our 2020 spend of $26 million approximately $15 million below our forecast at the beginning of the year or.
Our 2021, Capex load will be primarily focused on maintenance Capex and life safety renovation and we anticipate it will be roughly 35% below our 2020 spend.
Because we have minimal as we have very minimal capex moving forward. After the $200 million. We have spent on capital projects since 2017, and the recent disposition of lower growth higher cost hotels, our portfolio, we will experience very little disruption or capital spend for the coming years.
As highlighted in our earnings release last night, and our capital allocation and transformation release last week we.
We have materially strengthened our balance sheet. The unsecured notes facility from Goldman Sachs Merchant Bank combined with the announced asset sales will be utilized to reduce our leverage provide liquidity and pay off the accrual on a preferred dividend. These actions increased our weighted average debt maturity of $3 six years and result in more than 80.
Eight per cent of our debt being either fixed or swapped.
Over the past year, we've taken aggressive and swift action to minimize our operational losses.
We successfully zero based budgeting at our hotels, allowing for margin improvement well into the recovery.
We reopened all of our wholly owned hotels, and we incrementally reduced our cash burn rate at the lowest at has been since the onset of the pandemic of.
All are a testament to our aggressive asset management and nimble franchise operating model.
Following the strategic transactions announced last week, we right size of the balance sheet and turned our focus to operational performance of the portfolio as demand re emerges and accretive opportunities become available across their recovery.
So this concludes my portion of the call. We can now proceed to Q&A, where we're happy to address any questions at you may have operator.
We will now begin the question and answer social task of question you May Post Star then one of your children.
Paul Youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question from Michael Bellisario with Baird.
Please go ahead.
Good morning, everyone.
Good morning, Mike.
Neil first question free as you think forward about the ramp up and fundamentals. What's your updated view on the portfolio of target leverage level and that and what else do you think needs to be done between now and that on the balance sheet from to get there.
You know Mike.
Really follows kind of just the the broader recovery, which is just so uncertain still today I think industry.
Analysts.
Couldn't look to a kind of recovery of EBITDA back to.
19 levels in <unk>.
2023 or 2024.
Until that time, I think most hotel portfolios, most public hotel portfolio and the U S are going to remain at leverage levels higher than they'd like to be at.
And I think.
We'll likely.
As this as the market recovers, we will continue to have leverage levels at or higher than pre pandemic levels. Just a series of recovery and cash flows and that's going to be according to the pace of this recovery, which we're we're uncertain about.
But we think we've taken the steps to make a meaningful reduction reduced over 10%, 20% of the total debt load as of today.
And as.
As the year goes and cash flow begins to ramp up we'll be able to significantly.
Improve those metrics I think there are a lot of other public portfolios of will continue to burn significant amounts of cash through the end of this year.
We don't expect that to be the case for our portfolio, which we think will will show some differentiation over time.
But again on overall metrics until you get out to 'twenty three 'twenty four it's unlikely for.
Debt to EBITDA metrics to feel normalized because of the world and won't be normalized until then.
Got it and then.
Just on the flip side, though you mentioned the the Goldman of investment and I. Thank you so ex future partnership opportunities and what could that look like and how are you thinking about that relationship longer term.
Yes.
The merchant bank and their various.
Facilities and and investment.
<unk>.
Investment funds.
A lot of first off have a lot of capital.
They are looking to invest in sectors that are clear.
Clearly.
Facing any kind of cyclical recovery.
And so there's just a dedicated.
And maybe hundreds of billions of dollars of access of capital, which is which is very attractive.
They are a firm that.
This entity is.
Making this investment look very carefully at the.
At our portfolio, we even explored at some time for some time, having a larger facility in order to kind of address future.
Maturities and 22% and 23 in the end, we determined that we would be we could do so much more cost effectively in the future and because we have this kind of relationship with a firm that is can expand their facility. We can just time at four when we needed if we need it.
And so it's on one hand at say, it's a capital source that I think and serve as well in during this recovery period. We also think that at.
We've really focused on the prepayment and the prepay ability of this.
Unsecured notes and other way to think of it there were another positive part of it could be depending on how the market recovers its portability.
And it's being a piece of capital that day.
Potential buyer of the portfolio could keep it in place or expand according to their and their plans.
We don't know what's going to come in the coming years, but we're really pleased to have as ashman and mentioned in his remarks, it's become kind of of <unk> term and the financial services World, but this is truly a bespoke solution.
Really fitting exactly what our cash flow profile liquidity profile and business plan.
<unk> has in store for us. So it just provides a lot of flexibility.
And and potentially a strong partnership moving forward.
Very helpful. Thank you.
Our next question will come from Ari Klein with BMO capital markets. Please go ahead.
Thank you and then.
Maybe a little bit of a follow up on the balance sheet.
Done a lot of the heavy lifting as far.
And as asset sales are concerned.
How are you thinking about.
And that moving forward are there still assets that you're marketing.
Or are you largely done for the time being.
Okay.
Yes, we are largely done for the time being we'll always remain opportunistic.
But at this stage, we are not marketing.
Any assets for sale.
And we've discussed our joint venture assets and South Boston and those discussions continue with our joint venture partner.
But we no longer have any assets for sale and the broader marketplace.
Sure.
Okay, and then just as far as the improving trends that youre seeing.
And how broad based and has that been and when you look at a market like New York are you seeing.
And <unk>.
Bookings pick up and markets like that and then just on the resorts.
And how that quite well throughout the pandemic.
And how sustainable do you think some of those trends are and is part of it just a function of Len.
At places for people to travel to and where are these things that the trends net you would expect to continue moving forward.
Okay.
Uh huh.
Maybe I'll start with the second one and.
In terms of the resorts trend and we do believe that it's here for here to stay at least for the next several years.
I think it will take it takes some time for.
For everyone to want to travel overseas and and and really take.
Some of the additional risk of going into countries, where you don't know.
The level of healthcare or what you would do at and emergency and the like so we think that there is some.
For our domestic market and the U S. We think there will be more domestic travel in the coming years, and we had seen pre pandemic and we think that will be a.
A boon to our drive to resort portfolio.
I think that when international demand does rebound that will be and additional kind of tailwind for some of these resorts markets, particularly our California coastal markets.
Are very attractive to European travelers, and Australia, and travelers and Asian travelers.
Coming to see the PCH and things so.
We think it's of.
There is.
They performed very well to date and we think that this new stimulus will lead to a very robust year for for resorts and 21, and then in 'twenty two and 'twenty three we do expect that international demand and group and just the general recovery will continue to lead to very strong results from the resort side.
I think that right now what we tried to stress in our prepared remarks was that there's just sentiment is just show negative towards urban markets.
And and we see that is perhaps something thats been underappreciated is just the amount of recovery and the level of recovery of that can come and markets like New York, Boston, and Washington, and Silicon Valley Los Angeles.
And youre seeing it already and.
We don't have enough data to beat out of drum here, but but we are seeing if you just look at the TSA data for the country of just every day, there's more people traveling than there ever has been since the pandemic and and Thats, Despite frigid conditions, and and Reacceleration of case counts and the like and you're still seeing.
People moving around and cities getting going and airports getting moving and so we do love the resort markets and we're glad that we have about a 25% position there.
At the 75% of our portfolio of that is gateway urban innovation oriented we're expecting really strong things from in the coming year or two.
Okay.
Thanks.
Okay.
Our next question will come from Dori Kesten with Wells Fargo. Please go ahead.
Hi, Thanks, good morning, and.
And I believe initially your plan was to move onto to luxury or at the higher end sales. After this current round of dispositions that with the ability.
Placement you don't you don't need to move forward with those.
And you did you ever test the market with these assets I'm just I'm just wondering if you're out of a sense of pricing at this point.
On the luxury assets story.
Yes.
No.
We didnt formally market.
And.
Any of our luxury hotels and.
And the our reasoning there was that the market just hadn't developed yet for luxury assets and trophy sales, while we feel but we as well as kind of the brokerage community and the investment community.
Phil was that what was difficult to market luxury hotels and to get.
Strong values was a function of a few things one just the significant amount of cash burn that exists and the luxury segment and of time like this so it's very hard for investors to be able to to underwrite when they didn't know when the bleeding would stop so that is a rational reason I think for investors.
Two of been hesitant and other second and maybe even more important reason was that the luxury markets have generally been dominated by international buyers.
That.
And I really do need to see of hotel before they buy it and and because there was no international travel and there are clearly wasn't any international investor travel to buy hotels and and so we think that that the luxury trades.
Or something that will become potentially more attractive.
The end of this year as the vaccine is distributed and you just see more international travel begin and.
And you see cash burn moderate so that investors can Ken can think about growth rather than.
Focus on.
On the bleed.
So we think probably more if there was a good time to market luxury hotels, and we think it's later in 'twenty one.
But at this stage, we really we.
We're not anticipating.
Any kind of further marketing of assets and the portfolio. We do think that the hotels that we have remaining and our portfolio are and particularly fine shape and are going to have great leverage to the recovery, which we do want to hold onto.
Okay and you get.
As mentioned at the 75 per cent of the portfolio and its more urban focused and is expected to recover well and the next one to two years do you think New York City leads and lags and that is kind of neutral to the I guess the rest of the top 25.
And we're probably neutral.
Neutral.
We think New York.
And from ours.
Yeah and neutral for hours at play so that's a good point you know at least for our locations and our kind of non union newly built boxes, we think it's going to be.
Neutral to the.
The urban set.
As a market.
It is working through a lot of new supply and.
And still a mall.
That is dominated by large employers that arent back to work and back to travel yet.
So we are sensitive to the pace of recovery and New York, but the positions we have there the locations. We're in we're still very confident about.
We put the early recovers and the kind of weed.
We've put Washington is an early recovery market.
Southern California, and early recovery kind of urban market.
<unk>.
While.
New York and Boston.
Or more kind of mid term kind of recovery markets and our view.
And just to finish that what would you consider to be late.
Yeah.
There's just some dynamics at play and Philadelphia with some new supply coming on the horizon and and.
And some real uncertainty around when the convention center really gets going again.
Which do.
To make us a little bit more concerned about the pace of recovery and Philadelphia now that said, we have three exceptionally located assets here and.
And we will capture more than our fair share and the likes of where it's not overly concerned but there is some concern there.
Silicon Valley, and Seattle, where we're just it's just still question marks a little bit on just when things get back and when people start traveling or.
And when the remote workers come back for business meetings at corporate center, and Silicon Valley and things.
So so not laggards, but just questions still.
Okay. Thank you.
Okay.
Our next question will come from Bryan Maher of her with the.
Securities. Please go ahead.
Good morning, guys, and maybe taking a little bit different of attack and maybe there's nothing to talk about but we'll see.
With the new funds.
And other levers that you have is there and the ability at all and what are your thoughts ongoing on the expenses in 2021 and looking at acquisitions or is that just off the table and.
And specifically when we look at the AGA Waldorf trading at $55 million and other potential opportunities out there and with where stock valuations have moved how are you thinking about growing the portfolio over the next year or two.
Yes, Brian.
It's not off the table.
But we're not seeing compelling enough opportunities.
To make it a common conversation and the office of these days, but we're just not seeing anything to really get excited about.
There are discounts to pre COVID-19 for sure.
But this recovery is still.
Uncertain about the pace of at.
And so the values.
Although perhaps attractive for at absolutely new investor to the space.
For a company that has.
<unk> really exceptional hotels, and some of the best markets and the country.
Our expected growth on our existing portfolio I think make.
It makes us.
Less focused on the acquisition environment today.
As you know we're always in the marketplace, we're buying and selling and our manager is.
It's a very active buyer and the marketplace today.
But we're just we havent been compelled to date by anything now.
That is some of the flexibility and the capital solution that we have.
We can clearly sell more hotels and we think this is a very liquid portfolio and as New York starts to recover towards the end of the year and there could be some additional recycling to take advantage of acquisition opportunities.
Or there could be of scale up of our financing.
Either with with Goldman or with.
Some of the other investors that we've met through this process.
We're just not there right now and we're just not seeing opportunities to make us.
Find a way to get deals done today.
Okay and as a follow up question.
And when we look at ADR of it seems like the industry has done at decent job of holding up ADR. During this morass for lack of a better term.
Term much better than we saw happen during the great recession. When it was just cut rate cut rate cut rate do you feel like the industry has lessons learned from 10 years ago and it is asking more rational and do you expect that to continue at least through the first half of 2021.
Yeah.
Okay.
Yeah, Hey, Brian and I think that you know.
There are probably there are some lessons learned we always worry about our weakest competitor that could drop rate, but I think that when you look at these cash burn analysis and we like every other owner and operator is running them.
Discount rates and off and you're driving occupancy, but youre not really moving the needle on cash burn by doing that.
I think some of it is also a function of just.
The occupancy levels and the demand levels have been so low.
And people you can't really induced demand by just lowering rates.
And I think that.
And the industry has become better at understanding that concept and maybe it's a little more sophisticated institutional investors that own these assets as well that has made a difference.
Great. Thank you.
Yes.
Our next question will come from Danny Assad with Bank of America. Please go ahead.
Hey, good morning, everybody.
Ashish you guys have and the past given us a bridge too.
Getting to a $200 million EBITDA target look clearly a lot has happened since then but we're just trying to think of and a normalized environment can you maybe help us walk through like what and <unk>.
<unk> bridge could theoretically look like for Hershey.
Okay.
I was thinking about your $2 target.
It's no longer.
Or two but.
Yeah.
Yeah.
Yes, Dan and look I think that we would we would look at this portfolio and say we have sold now Rob.
Roughly give or take $18 million or so of EBITDA. So that will reduce the overall target, but we've also consequently reduced our leverage from these sales.
So when we look at the bridge, it's probably we went into 2020 with really high expectations on the ramp up from assets like the Cadillac parrot key White Plains Pan Pacific with.
Coconut growth things that we'd put a lot of money into and unfortunately of the pandemic really impacted operating results. So we do believe that there are significant ramp up and those assets that can help bridge that gap.
It's difficult for us to right now sit here and say look we.
We have a target for 2023 of 24, we just know that at least 50% to 75% of what we lost and EBITDA from.
And from asset sales, we can make up through the ramp up of this portfolio.
Understood and then just my follow up is just.
And then thinking about like this coming cycle. So look we know.
Hershey has this hybrid model of high margin limited service assets and higher end lifestyle hotels with a little bit more to offer on the service side. So just with that and mine can you help us think about the longer term margin opportunity at the four wall operating levels and other portfolio.
Yeah, absolutely look at I think that the the basic operating premise rather it's a three star Force Star Five Star Hotel and our portfolio is somewhat limited F&B.
And if it is F&B kind of our focus on high margin and beverage business and trying to run all of these assets as much as we can.
For the luxury wines with really of select service model and what we found through this pandemic by actually going to zero based budgeting, because we had to close a lot of them is.
Youre not going to bring back as many people you are not going to bring back as many services until you are well into the recovery and I think even then its hard for us to look at this and say, we'll bring the FTE count back at 2019 levels.
We found more efficient ways to do <unk> do things either through technology.
Mobile check in.
Having virtual meetings from our salespeople going out to an end.
Less sales needed or less kind of contact points and needed at this time. So I think the margin opportunities for our portfolio of going to be really on the labor side on utilizing our earth few platform to reduce utilities and operating costs and we do get.
150 to 200 basis points of margin improvement.
Even in a stabilized level of and a few years.
Got it thank you.
Yeah.
Okay.
Our next question comes from Bill Crow with Raymond James. Please go ahead of them.
Hey, good morning, guys.
Just three quick hopefully quick.
Balance sheet questions how.
And how much pressure was exerted by the bank group.
In order to.
Provide the covenant waiver extension.
And that pressure is what led to the Goldman Sachs can answer.
Yeah, Hey, Bill.
I think that we had good conversations with the bank group they were very constructive and commercial but at the same time, we knew that we had to raise some level of junior capital in conjunction with what we had already planned on asset sales to ensure that we had full commitment from the bank group on the waivers and the amendment.
I think that it was expected from our standpoint, we knew that the markets were going to improve in 2021.
And that's why we didn't undertake a debt offering or any kind of dilutive offering in 2020 and.
And at.
Played out exactly as we anticipated we started the amendment process right. After the new year, we start at the capital raising process and we.
We were able to get both of them done, but I think there was a clear expectation that we would raise some level of junior capital whether it was unsecured notes or a convert or something else and this is what we felt was the best option for us.
Alright, I think at was the very first question.
About the goal and the balance sheet looking ahead, and you talked about EBITDA levels getting back to 19 and pro forma 19 levels by 23 of 24, which I think everybody of users and just kind of a correct trajectory but.
And I guess my question is simply getting back to the leverage levels you had pre pandemic were at.
They were materially higher than the rest of the REIT group and certainly weighed on your equity performance is that the goal or is the goal to get at.
Three times of four times and.
At more kind of uniform most of the rest of the industry.
And I mean I think.
Bill probably not for the early part of the recovery I wouldn't.
Wouldn't hold your breath for three to four times.
But by the middle end of the recovery.
We think that that would be that would be our goal.
But in the early part of the recovery.
Until.
Until existing EBITDA normalizes, the only way to get to meaningfully less.
Leverage would be through.
Through acquisitions of unencumbered assets.
Using equity to.
And to buy hotels, and we just don't see of.
Opportunity for that to where we would be willing to dilute.
For those kinds of acquisition opportunities now that could very well change by.
Early 'twenty, two or 'twenty three we've gone through many cycles now together as a team and and we've always found that there was great acquisition opportunities for three years to four years. The early part of every cycle and of your cost of capital was a lot better at year three than it was in year one.
So if you were.
Really trying to be.
Quantitative.
Hey, Dave about it there was really no reason to jump in very early on and unless you were blessed with with a lot of cash or.
And particularly attractive cost of capital so.
So thats.
By end of cycle like we definitely would want to.
And the public markets run at a significantly lower leverage profile.
In mid mid to end of cycles, but we don't think that that will be the case and the early part of this recovery.
Alright, one more from me real quick.
And we're relieved at just getting this financing done but as you look at heads at 2022.
Fairly sizeable maturity.
And any.
The strategy.
Address that as you think of it has.
Yes Bill.
And as we did this year and we'll continue to monitor our cost of capital we have the flex to raise additional junior capital, but we don't think that something that we would entertain and the next few quarters I think that as the recovery progresses and clearly.
Look at where people were.
Anything either equity or debt.
Last summer of last fall I mean, the cost of capital has gone down so significantly on every level of rather at the high yield offering or bespoke offering like ours. So we.
And we feel like we can be patient now the next real maturities don't happen until August of 'twenty two.
We can be patient and monitor the markets and.
We have support from the bank group and will find ways to extend at those maturities and to raise additional capital if needed.
Okay I appreciate it thanks for the time.
Thank you.
Our next question will come from Tyler battery with Janney. Please go ahead.
Good morning. This is Jonathan on for Tyler Thanks for taking our questions first one from me.
Wondering if you could provide some additional color on how the conversations with group business had been going and.
There has been any noticeable changes and those discussions recently.
Yeah.
This is just anecdotal here, but.
We're seeing weddings again, which is great.
And this this past weekend and coconut Grove, we had.
172 person wedding.
Where we're booking weddings now at most of our hotels that have that kind of meeting space at not only resorts, but even in our urban gateway markets.
So the wedding business is starting to pick up and Theres clearly tons of pent up demand for that business and.
And as anyone in the group business will tell you that's the best kind of group business.
You could have.
On the social side on the corporate side were also seeing at actually.
Mentioned and our prepared remarks about.
Some California some of our California resort property is actually getting some some corporate group business.
And some small retreat business.
Getting.
Employees together brainstorming kinds of sessions and the like.
We've been having meetings at at our Western here in Philadelphia.
Yeah.
And some of our hotels, we're blessed with really large ballrooms now there are only being filled with 100 people instead of 350 people.
But they are paying and they are paying for the privilege and where we are starting to generate some income from it. So it is still all very anecdotal.
Our portfolio is highly transient so I'm.
The group part of our business is probably less than 15% of our business, but even that part of the business is starting to show signs of life.
Okay.
Okay, Great I appreciate all of that detail and then and multi part question from me strategic on your cluster strategy you sold a couple of assets and your clusters are you still a believer.
And that strategy and as you look at at potential opportunities and the future would it be your preference I guess, the stay and those current market share when you think about diversifying into new markets.
Hmm.
But first off just other clusters, we absolutely continue to believe and the clusters and believing in the clusters for US just means that we believe that we get advantage from knowledge from sales from revenue management and from efficiencies and kind of economies of scale and so we can.
Run the hotels at a better margin and get higher market share and yield management results. Because we have five to 10 hotels and each market. We can play and different Submarkets you use different brand channel strategies.
So we absolutely believe and that and our sales here was was basically one hotel per cluster we sold.
So keeping intact the.
Strong clusters for the remainder of those portfolios, but selling our oldest hotel per cluster.
As we look at to the future we are.
I think buying and our existing clusters has a little lower risk and our mind. We can just plug and play we know that going into a market. We will have a cost advantage because we have multiple hotels. There. We will have a sales of advantage because we have established centers, but but each of our clusters was started with one.
And hotel and so we often will enter a market with a single assets and then build out the cluster.
And 2011, we entered.
California with the courtyard and Los Angeles, and then soon followed at with the courtyard and San Diego and the Ambrose and the rest of our California portfolio, We entered Miami and in 2011 with the Cadillac Miami Beach, and then added 56 hotels there across the time.
Late in the past cycle, we entered Seattle.
And with an exceptional assets of Pan Pacific.
It was a larger assets and we felt like we could still get some efficiencies there.
But our long term intent was to kind of build out more of a presence and that market.
So we will we will see what the future holds where theres good opportunities, where there is good pricing for assets, where theres good EBITDA growth.
And we will look at at some new markets across the coming years, but.
But we do believe and the advantage of our existing cluster strategy as well.
Okay. Thank you for all of the color that's all from me.
Our next question will come from Chris Slew of Jefferies. Please go ahead.
This is Chris filling in for Dave and Thanks for the time I just wanted to ask a little bit about New York just for one how much of that recent quarter business was from first responders and I guess, a little longer term. How do you really think that reconciles list I believe you mentioned and a reduction in supplies at potential for special permits and that.
Innovation market coming on and really any other points of failure and so.
I might be missing for that market.
Mhm.
Yes of course, yes, we did receive some first responder business.
Primarily at New Hotel and Brooklyn, We had the FDA and why we've had a smattering of other in the fourth quarter and in January but not nearly at similar to the levels. We had last year and April May June so that business is starting to really wean away and we're starting to get just more.
Transient business as Neil described even over Presidents' day, we were surprised at sort of of bookings that came in.
On the leisure side, and we think as things open and other theaters are open and restaurants are open and hopefully Broadway is opening and the next few months that should really pickup. So we're not anticipating too much more on the per.
First responder business going forward I think overall as we as we look at New York.
The thing about the special permits and.
A few years ago, and New York instituted a special permit requirement for the and <unk> zones, which of the manufacturing zone and it's interesting to note that since that ordinance was passed there has been zero of special permits filed zero new hotels in those end markets because of how difficult it is to obtain.
Department, how costly that construction would be.
And if that was to occur for the entire.
Hi boroughs of New York, We think the future level of supply would go down precipitously.
And we do believe that there are a lot of hotels coming into Covid and New York.
Big kind of encumbered by land lease unions old.
Net are looking at ways to open at something else or not open at all and you've already seen at with the hotel Roosevelt and pain.
And number of at least 10% to 12 other assets, we do think thats going to stick. So we think the long term supply picture gets markedly better and New York, We're big believers in the city, we saw what happened after 911 when people wrote it off it's been at 20 year run from New York, and we think that it comes back strong.
And it comes back.
Probably as Neil mentioned, a little later in the year than other markets, but we do think that it comes back very strong.
Alright, Thank you and I guess quick.
Quick follow up unrelated follow up on Capex I know you guided towards about 35% below 2020 I. Just how are you thinking about 2022 is there anything thats really needs to be done going through those quarters.
No no at this time, we're not planning anything materially different in 'twenty. One 'twenty two I think the first time, we would take on hips.
And other projects at <unk> 23 of 24, and we're fortunate and then we have the luxury and mass.
And with the amount of money, we put into the portfolio of pre pandemic.
Okay and Thats a lot that's all from me.
Yeah.
This concludes our question and answer session and I would like to turn the conference back over to management for any closing remarks.
Yes.
Thank you. Thank you everyone with no more questions, we'll we'll.
And we'll we'll just be available here for any follow up questions later today.
Throughout this week. Thank you for your time.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.