Q4 2020 RLJ Lodging Trust Earnings Call
Yes.
Welcome to the R. L J lodging Trust fourth quarter 2020 earnings conference call.
As a reminder, all participants are in listen only mode as the conference is being recorded.
After the presentation, there will be an opportunity to ask questions. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
I would now like to turn the call over to Nikhil Bhalla.
L J as vice President and Treasurer of corporate strategy and Investor Relations. Please go ahead.
Thank you operator.
Good morning, and welcome to origin logging costs, 2024th quarter and year end earnings call.
On today's call Leslie Hale, our President and Chief Executive Officer will discuss key highlights for the quarter.
Sean Mahoney, our executive Vice President and Chief Financial Officer will discuss the company's financial results.
From Barnett, our executive Vice President of asset management will be available for Q&A.
Forward looking statements made on this call are subject to numerous risks and uncertainties that may lead the company's actual results could differ materially from what had been communicated.
Factors that may impact the results of the company can be found in the company's 10-K and other reports filed with the SEC.
The company undertakes no obligation to update forward looking statements.
Also as we discuss certain non-GAAP measure it maybe helpful to review the reconciliations to GAAP located in our press release from last night.
I will now turn the call over to Leslie.
Thanks for the kill didn't morning, everyone and thank you for joining us.
I would like to start by saying that.
We are saddened by the loss of Arnie.
He was an exceptional leader for Marriott and the entire hotel industry.
He was a mentor to many myself included but more importantly, he was an exceptional person.
And it was truly an honor to have had the privilege of knowing him.
He will be profoundly mis and our prayers are with his family.
As the new year continues to unfold, we sincerely hope that everyone remains safe and healthy.
Main deeply grateful to our front line associates, whose tremendous efforts and personal sacrifice helped us navigate an extremely challenging year.
We would also like to thank our management companies and our lenders who were also instrumental and helping us through these uncertain times.
Given the severity of the impact of the pandemic on our industry and the entire country I'm very proud of how well we responded.
Our team was nimble and quickly pivoted to adjust the cost structure of our operating model and to preserve our liquidity position.
We're not only positioned to benefit early during the recovery, but also to outperform throughout the entire cycle as we advance our long term growth opportunities.
During the year, we executed on a number of fronts.
First we took decisive actions at the corporate level to preserve liquidity relative to our dividends capital expenditures and G&A expenses.
Second we developed and executed a framework for operating with minimal cost and a low occupancy environment, allowing us to end the year with 95 of our hotels open.
Third we positioned our portfolio to benefit early as demand recovers, which allowed our open hotels to generate positive hotel EBITDA for each of the last two quarters for.
Fourth we reduced our cash burn rate throughout the year ending the year near the low end of our most recent guidance and.
And finally.
We completed multiple amendments to our unsecured debt.
The whole times, while retaining balance sheet flexibility to continue executing our growth initiatives.
The successful execution of all of these efforts allowed us to end the year with over $1 billion of liquidity.
Which will enable us to take advantage of both internal and external value creation opportunities.
As it relates to our fourth quarter performance, we achieved $34 one per cent occupancy for our entire portfolio.
We were pleased to see the continued sequential improvement in occupancy.
Our results exceeded the third quarter.
Right the man in November and December moderating due to seasonality and increased restriction given a rise in COVID-19 cases at that time.
Our open hotels achieve an absolute occupancy of 37 five per cent, which was ahead of our expectations and exceeded the urban segment of the industry by 470 basis points.
Additionally, our open until also gained over 900 basis points of market share during the quarter further highlighting the overall quality and appeal of our portfolio.
From a segmentation standpoint, our leisure oriented markets continued to outperform with markets, such as South, Florida, Orlando and Charleston, achieving occupancy of 50 per cent or more.
For our portfolio mix once again enable us to capture pent up leisure demand, especially during weekends and around the holidays are fourth quarter weekend occupancy of 47% at our open hotels continue to meaningfully outperform weekday occupancy highlighting our portfolio's broad appeal.
For the leisure demand segment.
We also saw the continuation of a positive uptick in both business transient and group demand, our fourth quarter business transient and group rooms revenue increased 12% and 4% respectively for.
The third quarter.
Evidence in that both of these segments are beginning to see a small level of improvement.
This is transient demand continued to be primarily generated from industries, such as healthcare insurance and government.
And our group demand continued to benefit from our hotels being attractive for small social groups, such as weddings and sports teams.
Overall, our fourth quarter results underscore the favorable positioning of our portfolio as the recovery unfolds illustrated by.
Our resort hotels, achieving 56 per cent occupancy are all suite hotel, which represent nearly 50% of our room TV 42 per cent occupancy and finally, our drive to markets of TV, 41% occupancy.
The level of occupancy.
Combined with the continuation of our aggressive asset management initiatives led to our entire portfolio achieving positive growth operating profit during the quarter and our 95 open hotels generating positive hotel EBITDA.
We achieved these milestones for the second consecutive quarter, which highlights our ability to quickly return to profitability as fundamentals continue to improve.
The positive operating cash flow generated by our hotel allowed us to lower our fourth quarter cash burn.
Over the nine months of the pandemic, our average monthly cash burn was $23 $6 million, which was inline with the low end of our most recent guidance the magnitude of our cash flow reduction throughout the year as well as the low absolute cash burn per key continues to validate our lean operating model and are for.
Firms or ability to get back to profitability sooner.
Now looking forward, we continue to believe that the pace of the vaccine distribution and then reopening of offices will be critical for recovery of our industry.
There has been significant progress towards the rollout other vaccine since our last call.
Given this progress our confidence relative to the recovery accelerating during the back half of 2021 is incrementally more positive today.
And the current year unfolds, we were encouraged to see fundamentals in January improved sequentially from November and December.
Leisure demand in January was strong in all of our Florida markets, while our properties in D. C benefited from demand related to the presidential inauguration.
These trends led our January results to come in ahead of our expectations. We expect February to continue to see similar positive trends.
As it relates to overall segmentation trends, we expect leisure to continue to be the dominant driver of demand and anticipate incremental strength throughout the year.
We expect local and regional corporate demand to continue to see some gradual improvement and finally, we are encouraged that group leads have continued to improve during the first quarter, which could give rise to gradual improvement in small group bookings.
Based on the sequencing of these trends, we expect the first and second quarters to be similar to the back half of 2020.
However, we expect a man to gain momentum starting in the third quarter as a greater percentage of the population becomes vaccinated. We believe that if the current pay for vaccinations leads to a meaningful improvement in schools and offices reopening it could allow for step change in fundamentals during the second half of the year.
Overall, we view 'twenty 'twenty, one as a year of transition, but one that could lay the foundation for a stronger 2022.
As we demonstrated throughout 2020, our lean operating model.
Oil mix will continue to provide our old J with key advantages in the early stages of this recovery.
Our transient oriented hotels will continue to benefit from leisure demand as well as a recovery in business travel as it unfolds.
Our hotels are proving to be very attractive for small group demand that isn't continuing to emerge our hotels have smaller footprints and a less complex operationally, which will continue to allow our hotel for minimize our cash burn.
Lean operating model will allow us to achieve breakeven and profitability quicker and the efficiencies. We have achieved during the past year will enable us to return to pre pandemic EBITA sooner.
More importantly, our portfolio is poised to outperform throughout a sustained recovery given that.
Our liquidity of nearly $1 $1 billion and our lower burn rate will enable us to emerge with a healthy balance sheet, which we will use to pursue our growth strategy.
Large asset base will provide significant optionality to recycle capital without meaningfully shrinking our EBIT all base, although we do not have a liquidity need to sell assets as evidenced by our recent asset sales. We will remain active portfolio managers, and we will evaluate select dispositions that create incremental capacity for <unk>.
Growth.
Additionally, the improved long term growth profile of our portfolio will allow us to thrive throughout a sustained recovery as the business transient and group segments return.
And finally, our EBITDA growth throughout this cycle will be amplified as we unlock embedded growth catalysts.
We are currently on track to complete the repositioning conversions at Mandalay Beach, Santa Monica, and Charleston, and 'twenty 'twenty, two and we're continuing to advance the plans and the timing of the other conversion.
These catalysts position us for both internal and external growth.
With respect to external growth.
We're actively monitoring the transaction market and expect to be in a position to deploy growth capital as the recovery takes hold we expect the acquisition window to remain open for several years and we remain extremely disciplined as we underwrite acquisitions.
Finally, we cannot be more pleased with our relative positioning well.
For the road to recovery will span several years, we're confident that our industry will fully recover.
For our portfolio construct will allow us to grow revenues earlier.
Steve overall profitability quicker and position us to take advantage of growth opportunities sooner.
All of which will create significant value for shareholders throughout the cycle.
I also want to take a moment to express my sincerest gratitude to our corporate team for their tremendous efforts and unwavering commitment. During these challenging times I will now I'll turn the call over to Sean.
Sean.
Thanks, Leslie I would like to Echo Leslie his comments on the passing of Arnie <unk>.
An outstanding leader and visionary in our industry.
We were pleased to see the continued sequential improvement in our occupancy for the fourth quarter and continued improvement in the fundamentals so far this year.
Our pro forma hotel operating results include the 102 hotels that we owned as of December 31st.
Despite having seven suspended hotels throughout the fourth quarter.
Pro forma numbers exclude the residents in Sugarland, which was sold during the quarter, but include the courtyard struggling which was sold in early 2021.
Our reported corporate adjusted EBITDA and F. F. O include operating results from sold hotels during <unk> ownership period.
Our fourth quarter portfolio occupancy of $34 one per cent.
Represented a 490 basis point improvement from the third quarter.
The fourth quarter marked our highest quarterly occupancy since the start of the pandemic.
Factoring in normal seasonality in November and December our portfolio's monthly occupancy was relatively stable at.
At 37, 3% in October.
33, 2% in November.
And 31, 7% in December.
Which was stronger than we expected and provides further evidence that our portfolio is well positioned to capture demand in the current environment.
Additionally, despite several of our large urban assets in New York City, and San Francisco remaining suspended throughout the quarter.
Our portfolio generated $15 $8 million of positive G O P. During the quarter.
Our ability to continue generating positive G. O P is affirmation of how we expected our portfolio to perform during the early stages and throw out a sustainable recovery.
The fourth quarter results for our 95 open hotels for meaningfully better with occupancy of 37 five per cent and average daily rate of $111.
We were especially pleased that our open hotels generated $1 $6 million of positive EBITDA during the fourth quarter.
Representing the second consecutive quarter of positive EBITDA.
Similar to the overall portfolio our monthly open hotel occupancy was relatively stable during the quarter at 41, 2% 36, 5% and 34, 9% in October November and December respectively.
We are encouraged that demand during the first quarter has been stronger than our expectations.
During January our open hotels generated occupancy of 37, 1% in.
An ADR of approximately $111, which was ahead of our open hotels results for December.
We expect February demand to remain consistent with January which benefited from the continued strength in leisure and recent unexpected demand from responses to the tragic storms in Texas.
Turning to the bottom line, our fourth quarter Hotel, EBITDA, and adjusted EBITDA were negative $7 $3 million and negative $12 $8 million respectively.
And adjusted <unk> per share was negative 28 cents.
For the full year, we delivered adjusted EBITDA of negative $41 $1 million and adjusted <unk> per share of negative 98 cents.
As Leslie mentioned, we remain committed to monitoring operator compliance with the aggressive cost containment initiatives that we instituted at the beginning of the pandemic.
Underscoring our relentless focus on controlling costs.
Our fourth quarter total hotel operating costs declined approximately 59% versus last year.
Our team was vigilant on controlling variable costs during the quarter.
Resulting in a 64 per cent reduction in wages and benefits from 2019.
Additionally, with demand generally stable. We were also able to continue operating the hotels with minimal operating cost during the fourth quarter.
Specifically, while fourth quarter revenues increased eight 7% from the third quarter.
Our operating costs only increased approximately two 5%.
Which allowed our portfolio to increase the bottom line by approximately $4 $9 million.
Our team remains focused on cost containment initiatives to minimize cash burn in the current environment.
Turning to liquidity I would like to reemphasize that we entered the year in a strong position with approximately $900 million of cash and an undrawn line of credit.
And responding to the Covid crisis, we took the necessary steps to preserve liquidity.
Our efforts continue to be laser focused not only on ensuring that our O J continues to maintain adequate liquidity.
But also ensure that our portfolio is well positioned to take advantage of opportunities to drive outperformance during the recovery and beyond.
And while we continue minimizing capital allocation initiatives until we have more clarity on fundamentals, including certain ROI projects. We successfully completed our in flight Twenty-twenty capital projects and will continue to prioritize high value projects such as the addition of new rooms in Emeryville and Buckhead convergence.
And Santa Monica Charleston of Mandalay Beach.
As well as our less capital intensive ROI initiatives, such as parking and contract renegotiations.
We were encouraged that our fourth quarter monthly cash burn was significantly lower than expected.
Which was driven by our portfolio generating positive operating cash flow for the second consecutive quarter.
Our fourth quarter hotel level operating cash flow with approximately $10 million better than our expectations at the beginning of the quarter.
Which was primarily driven by stronger than expected revenue at our open hotels.
And the continuation of our cost containment initiatives with continued success in labor and benefits.
Overall based on our portfolio's lean operating model our hotels are expected to continue to perform substantially better than portfolios comprised of traditional full service hotels.
Our hotel fixed costs and corporate level of outflows, including dividends debt service and G&A were also approximately $10 million lower than our expectations at the beginning of the quarter.
It was primarily attributable to lower property tax payments during the quarter.
These factors enabled us to exceed our cash burn estimates again this quarter.
For the nine months of the pandemic, our average monthly cash burn was approximately $23 $6 million, which came in near the bottom end of our prior estimated range.
Based on our December 31st liquidity and continuing at our 2020 cash burn rate, we have approximately 47 months of total runway.
Since providing our initial cash burn estimates in May we actualized, a cumulative cash burn that was over $100 million below the high end of our initial estimates.
Looking forward, we expect first quarter monthly cash burn of $20 million to $24 million, which will be towards the low end of the range. If first quarter lodging demand remains at current levels and the high end of the range, if first quarter lodging demand contracts from current levels.
As a reminder, our cash burn estimates exclude R. O J funded capital expenditures, which we estimate will be between $75 million to $85 million for the full year 2021.
Turning to our solid balance sheet, we ended the quarter with approximately $9 billion of unrestricted cash.
$200 million of availability on our corporate revolver.
$2 $6 billion of debt.
And no debt maturities until 2022.
Our significant liquidity provides us with close to four years of runway based on the actual twenty-twenty monthly cash burn.
Which ranks us among the best positioned lodging Reits and provides the flexibility to take advantage of potential external growth opportunities.
We continue to maintain significant flexibility on our balance sheet.
As of the end of the quarter approximately 81% of our debt is fixed or hedged and 82 of our 101 hotels are unencumbered.
During the quarter, we further enhanced our financial flexibility and amended our corporate line of credit and term loans for a second time.
The latest amendment provided three additional quarters of financial Covenant waivers, which now I'll go through the end of 2021 and.
And also continue the reduction of certain financial covenant thresholds through mid 2023.
We continue to place great value on our lender relationships and they've remained in line with our lending partners throughout the process.
As we look ahead, despite all the uncertainty facing our industry.
Oh, J remains well positioned with a flexible balance sheet ample liquidity lean operating model and a transient oriented portfolio with many embedded catalysts.
Thank you and this concludes our prepared remarks, we will now open the lines for Q&A.
Operator.
Thank you well now be conducting a question and answer session.
Want to ask a question. Please press star one on your telephone keypad and a confirmation tone will indicate your line is from the question queue.
You mean for start to if he would like to move to your questions from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please we poll for questions.
Thank you and our first question is from the line of Austin Wonder Schmidt with Keybanc. Please proceed with your questions.
Hey, good morning, everybody, let Leslie you flagged that you guys have a tremendous amount of opportunities within your existing portfolio and your sequencing those.
Just on risk adjusted return profile. So as we start to think about the opportunities on the acquisition side are you know are those going to be more newer operating assets that just have you know kind of attractive demand generators and growth ahead or would they be more of the elk debt you know what's within the portfolio.
And requires some additional heavy heavy lifting like the conversions that you've got you know that you've been talking about now for the last several years.
Hey, Ross and good morning, and thanks for the question well I would say that it will be a combination of all of the above given the fact that we have demonstrated the ability to do deep turns he demonstrated the ability to create value in all of the assets that we purchased and we continued to.
Do that too.
Today, where we sit we have a greater amount of conviction in the types of assets that we invest in rooms oriented high margin premium branded assets and we believe that day, we've demonstrated their resiliency today, but also we believe that how they were before them in a recovery is another reason why we were focusing on those assets until like what I would say is this.
That yes, we'll be looking at younger assets, but we will also not be afraid to look at assets that require a determined because we have an in house team that has demonstrated capacity and capability to do that and we will do that also with also on our conversions that we've highlighted them that we're working on right now as well.
Got it and then Sean you outlined do you expect to spend $75 million to $85 million on our L. J funded capital expenditures. This year, how much additional maintenance spend are you anticipating and can you expand a little bit on some of the most notable projects.
From that are that are in that pipeline.
Sure So Austin.
The lion's share of the $75 million to $85 million in.
In 2021 is related to the three big conversions and Mandalay Beach Charleston.
In Santa Monica.
The incremental maintenance Capex will be in line with what it was over the last couple of years and a relatively small component.
Of that capital and so when we think about where we are deploying capital in 2021, we're focused on on these conversions, which we think are high value add as long as we mentioned we have more conviction around those today.
The fact that we believe leisure is is is likely to outperform throughout the next cycle and so positioning these assets.
The benefit from that leaves your outperformance is critical and if you step back and look at those markets and our Mandalay Beach wanted to Hilton hotels, along the California Coast line, a great box that has fantastic opportunity with which to shift.
To a curio eliminate the comp F&B drive rate remixed the hotel, we have great conviction there.
And and on that asset because of that unique location Charleston, and Santa Monica both great.
Also leisure centric locations, where we're converting from the existing brand.
One going to an independent in Santa Monica and Charleston, going to you know one of the global brands lifestyle brands both of those locations should.
It should be in great position to benefit from that uptick in leisure as well I also add debt. Those are all three of those assets during the pandemic have performed beautifully for us.
<unk> really showing the conviction that the leisure customer likes those even as it is and so it gives us even more conviction that debt.
Reposition that that the upside is there is there.
And when do you think youre going to give some additional detail on the Charleston.
Global lifestyle brand and any key money that may go along with that.
Sure. So we we've made tremendous progress on all fronts.
With respect to discussions with all our negotiations with all of our stakeholders scope setting.
Negotiation contract et cetera.
We look forward to be in a position sometime this year to provide more clarity around scope, our return expectations capital et cetera, but that's something that we're gonna roll out.
Later this year.
But we acknowledge that debt.
Is that the market is excited about getting that information and we're excited to present. It because we think these are going to be really compelling ROI opportunities for us.
Great. Thanks for taking the questions.
Yeah.
Yes.
Our next question is from the line of Michael Bellisario with Baird. Please proceed with your questions.
Good morning, everyone.
Good morning.
But secondly, just as you're evaluating the growth opportunities that you referenced.
Big picture, what signals data points macro indicators are you looking for.
In order for you to say, yes lets put more money to work or or now is the time to move faster.
So Mike as we've said before you know one other key things for us was to be able to have visibility to be able to underwrite and assets at least break even so that we werent taking on assets that were bringing incremental cash. Additionally, we wanted to make sure that we had.
<unk> in our underwriting them based on the way that fundamentals have continued to show positive signs early on in this year, we feel that where we sit today, we have a greater amount of of of confidence in our ability to.
For underwrite an asset getting back to pre Covid levels. Now we may be you know off a little bit on the initial ramp here or there, but our confidence in the ability of the assets have returned to pre COVID-19 levels and something we feel greater confidence today. Additionally, given how our portfolio has performed and achieving breakeven in our open hotels, we feel that we can also under.
Alright that as well and so we are entering that zone of comfort in terms of being able to move on external growth.
Got it that's very helpful. There and then just one more for me on your closed hotels in New York, Chicago, San Francisco, how far away do you think we are on the fundamental front from getting to a point, where those hotels, maybe can reopen or at least you start to think more seriously about reopening them.
But you know we're we're encouraged by some of the news about restrictions being lifted in both of those markets. I think most recently in New York talked about opening movies and while that's not a big demand driver for us, but it does tell us about the psychology of what's going on in the broader market look we developed a framework that allowed us to.
<unk> hotels in a low occupancy environment, we will apply that same framework to these assets and as we see the demand appropriate demand arriving are emerging rather than within those markets will open. These assets I mean, obviously, you know San Francisco and New York are higher cost structure.
Structure of markets, which therefore requires.
Incremental demand relative to other markets, but as we see that emerging we will open those assets and we were incrementally positive today relative to the restrictions being lifted.
Thank you.
Okay.
Our next question comes from the line of Neil Malkin with capital. One. Please proceed with your questions.
Hey, good morning, everyone.
Good quarter.
Can you elaborate on.
<unk> had very good expense controls like you said far better than you expected.
Maybe could you elaborate on.
How you think about for example, you know ftes.
You know in the current environment, and particularly as demand normalizes.
And how are you kind of look at that that labor structure.
Given that you've had a lot of success.
Running at lower Occupancies than maybe rethought, the FTE versus maybe more flexible variable part time structure.
Okay.
Yes, good morning, Neil.
This is Tom.
I would say as we've been as Leslie spoke earlier really monitoring the model and taking control of how many ftes are allowed at each asset and we have the luxury of benchmarking because of the amount of assets, we have to be able to understand what that model should look like no matter, where it is in the country. So first and for.
Most we kind of looked at.
The first quarter as the threshold to compare to as we looked at the pre there.
Quarters, two three and four and 2020 to be able to understand what we came from and where we are today and then we looked at what we are actually doing at the property level from food and beverage clothing outlets too.
Breakfast in a in a in an environment, that's no buffets and so youre drastically reduced ftes in the food and beverage area.
When we think about rooms, and protocol and housekeeping. We also really identified the productivity opportunities related to the fact that no longer your cleaning.
Every state over you are actually cleaning on checkout. So we also looked at ftes, knowing that productivity would improve in those areas, even though we had to do more cleaning in the housekeeping area in the lobby areas, but what at the end of the day, we think when we come out of the recovery, we will be at less ftes than we were when we started in quarter one 2020.
So as we gradually increase and ramp up in occupancy. We also have a model in regards to when to put those ftes back. So the biggest relationship will be when food and beverage starts to open outlets and sales and marketing comes back with regards to group business in BT. When we start to look at the management payroll, but on the.
Actual associate payroll, we feel very good about where we're at running similar levels in Q1 than we did in Q4, and then we will gradually ramp up as occupancy ramps up knowing that we don't want to get back to the ultimate level. We started in Q1 2020. So when you want to add to that yeah Neal to provide some data points around that so for the fourth quarter.
Our cost per occupied room at the room's departmental level was down.
Roughly 24%, which was split roughly two thirds of that was was wages and benefits savings per occupied room and the other a third of that was it was around commissions and other costs.
Other product if I'd room. So we think that not only have we successfully limited the cost of the business, but when you look at it on a per occupied room basis, which is which is a proxy for for getting more efficient. That's helpful. In addition on the F&B side.
I was we were super proud of this quarter.
Our revenue on the F&B side was down 90%, but we actually still made a profit at the F&B departmental level, which was an incredible accomplishment for our team in the sense that we were able to manage those costs and so we feel good.
That we're able to demonstrate that as we look forward.
We do believe that there will be synergies that come out of this which is a which is an underlying question.
Around right around the overall cost structure.
And and and and labor is going to be a big part of that but Leslie.
No no I think Sean you know put a bow on the very end there in the sense that we've been operating this low occupancy environment for over nine months.
And we have a greater amount of confidence in our ability to have some of these cost.
Efficiencies sustained past the recovery.
And you heard Tom talk about food and beverage and housekeeping and we also believe that the conversations we've had with brands on above property costs relative to shared services. We also think that we've been operating within some of these costs as we've always done clustering.
And in assets that were close proximity, but we've expanded the clustering to include assets that are further away assets that are with other owners and we think that there's an opportunity for some of those cost savings to sustain themselves past recovery as well. So I think overall, we are incrementally positive on the ability to see some benefits there.
Sure.
Interesting well, yeah, I think that's already working so look forward to seeing how that plays out.
Second one for me you talked about you sold some assets in Houston. It looked like they were needed from Capex, which I imagine drove the sale but.
Just curious on your overall view of cash.
Capital allocation in this coming cycle.
Are there.
The markets that you feel like.
You maybe want to lighten up on in the form of acquisitions and other places you mentioned you expect leisure to outperform the cycle and just given that I think a lot of paradigms have changed.
For a lot of coastal markets in a post COVID-19 in terms of people, leaving.
Work et cetera.
How does that go into your calculus of of how to move the portfolio of forward over the next say five years.
Yeah. So.
So I think you have it you got a couple of questions embedded in there.
Neil on the you know on the disposition side I think that you know there's really no I'm you know a little Kid was happy with our overall portfolio given the amount of dispositions. We did in 2019, we did a lot of heavy lifting them there and so that will continue to be.
Active portfolio managers and look at deals Opportunistically, but theres no theres no markets that we're looking to exit at this time.
We sort of think about how the recovery will unfold and look at acquisitions. We're gonna to rely on you know are our traditional lens, we've always looked at.
At markets that are going to be a you know outperform or half catalyst for higher growth relative to the overall industry. We look for markets that are fit well within our existing footprint and our accretive that way and where we don't have enough exposure. We feel we also look.
Look at how we think the recovery is going to unfold with leisure being the dominant demand driver throughout this cycle and obviously would be T. I'm coming back in a staggered way and group I'm coming on the heels of that so we want to make sure that the types of assets that we look at have the ability to draw.
Multiple segments of demand, we don't want to build the churches for Easter Sunday.
You need to have all three legs of demand come back in order to have a full recovery, we want to make sure that we have assets that can not only drive weakened demand, but also that midweek demand as well and so we will continue to look at multiple assets that have multiple demand drivers in markets that are accretive to our overall footprint.
Alright, Thank you guys.
Thank you.
Our next question is from the line of Tyler <unk> with Janney Capital markets. Please proceed with your question.
Oh, Hey, good morning, Thanks for taking my questions I apologize. If this was already addressed but I wanted to go back to the capital allocation discussion and interested as youre looking at things, how does paying down debt or looking at something creative potentially with the preferred how does that for them.
I'm curious if you think about those those as options to create value.
Great. Thanks.
Good question around capital allocation, there I think from our perspective today, we think the most valuable.
Capital allocation returns, we're going to get are around.
Combination of both internal growth within our portfolio conversions being up there.
The biggest driver there as well as acquisitions as a subset of that for FERC external growth on on debt and deleveraging.
We think that our our leverage levels that we entered into are appropriate.
I understand that this was a.
Once in a 1000 year flood or whatever.
And we think that our balance sheet actually was able to allow us to thrive on a relative basis.
During this pandemic and so I think that that actually validates our view around around where where our leverage levels were and so.
I think our from a balance sheet perspective, our priorities are around you.
Thinking through.
Our our debt maturity thankfully, we don't have anything from 2022, but you know the markets are accommodating so we're looking at proactive and opportunistic.
Financing opportunities, but that's going to be around.
You know the opportunities in the marketplace today.
Specifically around our around the preferreds under our credit agreements were not allowed to.
For buyback preferred even if we even if we want to.
And so I think the you know what.
On a relative basis.
So really not an option for us today, historically pre COVID-19 day of ore they always traded.
At a premium to par.
And so that made the math difficult around that even if that was something that we want to pursue.
Okay very helpful and just as a follow up question on your revenue management sales strategies can you talk a little bit more about what youre doing right now, but I'm also interested how those strategies might evolve over the next several months here of some demand starts coming in and then also interested if you have an idea of.
Potentially roughly how many hotels and some of your markets from your competitors. How many are are still closed.
Instances, where properties have reopened recently what that is.
He's doing to market trends.
Yeah, I'll start with our revenue management question.
Miller and what I would say is we're still in a you know.
Heads in beds philosophy today, and the reason that is is going into the quarter of fourth quarter. We still had predominantly when we look at segmentation leisure was the dominant player as Leslie stated when we look at group. It was still in the 7% 8% level in quarter for what's interesting now is you're starting to see them.
Mix shift just to touch them as we get out of the gate in quarter, One where group for the first times up to almost 11%. So we're starting to see some of what Leslie mentioned about earlier, which is social weddings sports groups and things like that we're still hopeful that BT will start to show its head, but we're still around 12% on corporate <unk>.
In regards to what's happening and that's mostly medical pharma.
Insurance and project related group and government business, that's coming in in that category. So what I would say to you from a revenue management standpoint is where restrictions are being lifted we are automatically seeing opportunities to raise rates in those markets for instance, warm weather climates like key west South, Florida, where we see that the dimmed.
And is there we are having an opportunity to mix a little bit more on the average rate side than we were let's say if we're at 30 or 40%. So as demand starts to book in the paste starts to pick up we're seeing.
Opportunities to start to get a little bit more average rate, but when we're still in the 30 or 40% occupancy is mid week. We're really just trying to fill with that last minute demand that's coming zero to three days, which hasnt changed in some of those markets. We are encouraged though that the group we're seeing more leads as lenders Leslie mentioned and we're seeing more bookings for instance, as an example.
Simple in the month of March we are you know think about last year at the same time all of the pro seasons canceled the second week of March we now have bookings for the NBA All star game and in Atlanta, We have some bookings in the NCAA tournament, and then Indianapolis because they are allowing some of the folks to go back into the into the stadiums and law.
Lastly, I would say spring training so as we start to see more group and start to see the opportunity of the mixed manage where there's where theres occupancy increases will continue to press the accelerator on average rate and change the mix of that wave and.
In regards to open hotels closed hotels for the most part when we think about our select service assets in most of our markets. Almost all hotels are open the last to open are still the large convention center hotels and some of the urban markets that we talked about earlier, which was primarily in New York and San Francisco, but if you look at star Theres very few hotels that arent.
And that are in the select service World and compact full service similar to us. So it's really market, that's driving that which is the high cost models that Leslie referred to earlier.
Okay very good that's that's all from me I appreciate the detail very helpful.
Thank you.
Next question is from the line of Chris Shrunken with Deutsche Bank. Please proceed with your questions.
Hey, good morning, everyone.
I think you mentioned that youre going to be going ahead on on working on three of the Wyndham conversions and repositioning. This year later this year.
Is there any appetite to begin working on more than three given that youre still going to be running kind of below peak occupancy probably for most of the year are you able to accelerate some of those even if you don't have the the final brand decision made yet.
Yeah, Chris Great question, there I think for the first of all it's just a.
It's actually only two of the three our Wyndham side or the other is the embassy suites Mandalay they were converting to a curio.
We think our.
That from a sequencing standpoint, we want to sequence the relaunch of all these hotels to coincide with.
With the with the updraft in fundamentals and so we think the see the sequencing of Santa Monica Charleston.
As long as Mandalay Beach coming out in 2022 is we'll be positioned to benefit from it from the App to App I think from a saying from a standpoint of sequencing.
These are incredibly complicated projects to make sure that as we're relaunching and converting.
You know from from Windows, which have performed beautifully by the way as you can see by the numbers in the supplemental during during the pandemic, but you know as we as we remix these hotels.
It takes a lot of work to get the design right to get the rebranding etcetera and so.
No we don't want to frankly rush that.
That that process and so what we did from a prioritization standpoint is Charleston in Santa Monica, where the two that we prioritize because we believe that those hotels. The the opportunity was more short term and the ability to sort of capture that immediately was there we would expect.
To sequence. These in a way where we would have a couple of other the following year in a couple of the following year after that and so we think a couple per year is the right level, where we're able to devote the right attention and sequence the day the rollouts in a way where we're it's going to provide not only a short term catalyst for O J, which is important but also yes.
Sequence as we as we rollout these new ones.
These incremental conversions, but that provides a lift to our fundamentals in the out years as well and so we want to make sure that we provide.
We provide that.
Okay I appreciate that and then.
I think we've heard day.
Trend coming out of Covid could be less less office space in certain urban areas and more.
But the need for more meetings and in areas close to those cities and you guys don't own properties, there and I'm, specifically thinking about maybe the embassies.
Don't know what kind of a meeting space situation is and a lot of those right now, but do you think there's an opportunity to capture if this happens if this kind of.
Regional smaller meetings you are are you able to capture that or would that require some reconfiguration.
Yeah, I would say.
That you know what you're describing is sort of some other puts and takes right as.
If people work from home more you know their need to visit the home office increases our team offices increase and I would tell you that our product type and our overall portfolio.
That type of meeting is right in our sweet spot.
You know group historically has only represented 20% of our contribution but small meetings have represented 65 per cent of our demand and so that's what you were describing is right in our sweet spot and as we think about 2021.
The trend that is emerging is as small group meetings most of it's smurf related social related but they're also saw some team training and and as we see them be tee up ticking on the back half of the year, we would expect to be able to capture a meaningful portion of that.
Okay, great very helpful. Thanks.
Thank you.
Next question comes from the line of Gregory Miller with Trust Securities. Please proceed with your questions.
Thank you very much good morning.
I'd like to follow up on one of my favorite topics because in many mornings that ive spend at the breakfast buffet lines at brands, such as embassy suites and residence Inn.
Last quarter I believe we heard from Tom that you were having conversations with the brands on revised F&B standards.
Update us on that timing given that customers may become more demanding for normal buffets.
As we emerge from the pandemic.
So first of all I just wanted to say that Tom was did I bet at him that this question will come up and I'll, let him answer.
Greg is there isn't a boardwalk for somebody like me I've got it.
We will see you again I'll, just let you know when and how.
[laughter] for.
First and foremost as you know everybody whether you are a full service hotel select service hotel is really modified the breakfast experience because that was the first thing to go to.
So as you think about the current environment that we're in and this is an update in regards to what the brands are thinking about after we all kind of start to move past lets say 30, 40, 50% occupancy is kind of a threshold to make a change but the first current environment that we're in is still doing.
Our bottled water or yogurt, maybe a breakfast sandwich just to be able to say here's something for you. If you gave free breakfast in the past the.
The ramp up is all being looked at as the second phase because we're still not to hotel profitability. As you all know until you start to get into the 40%, 50% occupancy range, where you start to feel like you can put services back and the customer actually the consumer is changing too as long as he mentioned earlier it's significantly.
As your customer and your core customer BT and group has not come back to the great degree that we want it to be so what the ramp is going to do is now start to move towards more of a what I would call. A served breakfast. So Greg in the past you would go and you would have that buffet opportunity to millender around and decide what you.
Wanted to grab and go now you have to go and actually haven't served primarily because of sanitation and.
The safety protocols that we have in place. We also believe though that's a good thing long term because it's going to remove waste and it's also going to change the amount of labor that you're going to have by having people go to have it served to you versus having it be a free for all what I would think is going to happen over the next 60 to 90 days.
Is what's that future gonna look like after the ramp.
That's where the brands are spending time and energy right now and I can tell you that it's not going to be what it was it will be less than what it was so for instance evening reception for an embassy suites, what we're talking about is the potential of having an hour and a half with a two drink maximum and having the opportunity to upsell at our bars that are opened for.
People to purchase alcohol. So I think it's evolving the brands are really taking it seriously because they know not only the hours of operations that Leslie spoke to in regards to when to open and how long, but the actual deliverable that happen, but I do think Greg it won't be what it was and we adjust at the end of the day in regards to how that gets to that.
Final phase when we get to the back for the 70% 80 per cent Occupancies is important for portfolio used to operator.
I appreciate all that insight and I hope it contribute too much to labor costs and I wanted to get a chance to get that's traveling again.
My second question is a variant of Neal's first question.
We have received questions from investors recently.
Margin investors relating to the differences in post Covid margin expansion opportunities at compact full service hotels versus select service hotels.
And while I recognize that your portfolio has a broad geography with labor and operating models that are not uniform across markets or city centers versus suburbs.
Could you provide some high level thoughts on if you anticipate more long term margin expansion opportunities from you.
For contact full service hotels or from your select service hotels.
Yeah, Let me, let me start Gregg and then I'll turn it over to Ted.
Tom on that I mean, so so net net we don't see a really material difference between the performance of a select service hotel or compact full service I mean, that's the beauty of the compact full service model is that we run them with lean operating model as an example for select service from a from a from a cost structure standpoint.
But with respect to where we expect cost to be long term are.
We do believe as long as we indicated in our prepared remarks that we believe that there's an opportunity for the EBITDA.
To get back.
Pre pre COVID-19 levels in advance of revenue getting back, which naturally imply some level of margin expansion.
We have not quantified and won't quantify what we think that is because it's you know it's too many years in advance and we just think that theres a lot of moving parts there, but we do have confidence that there is costs that are going to be taken out of the model.
Post COVID-19 than pre Covid.
From a from what you know what kind of buckets. They fall into the F&B question that Tom just addressed.
<unk> is one of them labor.
It's certainly going to be a driving force there I mean, if you recall leading into Covid labor cost pressures. We're you know we're a several year phenomena within our portfolio and industry wide and and so we expect to have some level of stability there.
In addition, the complex thing that Leslie mentioned and they'd be able to expand the scope and just the number of hotels as well as how deep that goes in the portfolio.
Sorry for any individual hotel it used to be just a GM or an engineer and now we can complex deeper into their into the hotel.
It is also one other drivers in the last driver from my from potential cost synergies is going to be around some of the corporate allocations from the brands, which historically.
We're less.
Yes.
Which accounts are sort of.
Pay for play.
What we didn't know is that we think that the model going forward is going to be youre going to choose to opt in for those as opposed to opt out and then the last on it on a subset of labors around housekeeping and I'll turn I'll, let Tom or allegedly started talk specifically about housekeeping around synergies there.
Yeah. So I would just add one more thing and that is when.
When we looked at labor throughout 2020, you know, 60% is rooms about 15% of R&M and 12 food and beverage. So when you think about the labor side rooms, as your predominant player and what Leslie mentioned earlier, which I think is worth repeating is the take rate and the way the consumer acted in the past as they went to the desk and we are.
To ask them. If we if you didn't want your room clean now its role reversal with regards to you need to ask if you want your room claim so that productivity is really the driver no matter your compact full service or you're a select service hotel and so I just think if you pinpoint where the most opportunity is it's probably in that category and we'll have to see when <unk>.
He comes back as well as group, because theyre going to be a different consumer paying a higher average rate and probably have a preference potentially would that take rate might go up. So I think that's what we're going to monitor and evaluate as we go forward Greg Yeah, I think the things that we have identified that give us incremental confidence in the ability for the efficiencies.
To sustain past the recovery our universal to all hotels. They are not specific to full service or limited service. So the housekeeping the F&B above property costs. The clustering that is agnostic to the type of hotel.
Great. Thanks, everyone I appreciate all the excellent insight.
Yeah.
Thank you.
Our next question is coming from the line of Anthony Powell with Barclays. Please proceed with your questions.
Hi, Hello, everyone.
Question on Capex and the renovations I was modeling a bit higher for Capex. This year. So I was wondering if the scope of the Wyndham in and also the other mainly beach renovations has been changed at all and looking past 'twenty 'twenty, one what kind of annual just absolute capex should we be expecting for you guys as you.
Renovate the property.
Yeah Anthony the.
<unk> around around those renovations has not changed I mean, we think that we continue per.
Our branding choices haven't changed based on what sort of our baseline it so we.
We feel.
We don't have a comment we don't we don't know what you modeled so but from our internal perspective.
They have not from a normal run rate.
We've historically and total capital has been around $100 million for a portfolio our size I think from a long term modeling perspective, that's probably as good a baseline as your cash.
Yeah.
You can model that being said when we.
There are years, where we've accelerated capital in markets that we thought.
We should position the hotel for for outperformance there I know we could we could.
You know do that in the future as we think about the sequencing of the capital but over a long term run rate for $100 million is a.
A fair proxy.
Got it okay and a balance sheet question I guess before the pandemic you were you were planning to maybe refinance your are.
Your 6% notes due 2025.
During the pandemic pricing didn't what didn't make that.
I guess, that's a smart transaction, but we've seen some of your peers do converts at a very low coupons. So could that be an option for you to maybe do a convert in and take out that.
Those notes at good pricing.
Yeah, Yeah, I think that's one of the options in front of US I mean, I think from a from a financing perspective.
For 'twenty 'twenty two.
Maturities are sort of first on our hit list with respect to debt.
Opportunities in addition.
The incremental capital that we raised we believe is today is more valuable on the internal.
Catalyst conversion et cetera, as well as as well as acquisitions, but relative.
Relative to the to the El Corte debt that is that as you know on a relative basis at 6%.
Among our highest cost of debt but.
<unk>.
We are going to we would look at that Opportunistically I think youre right, you know the high yield and convert markets or both.
Been very receptive this year and so we would never say never to that but it is not it is.
Is not as.
It's high up on the priority list as it would've been last year last year's opportunity there was going to be around bank debt.
And in the arbitrage between the 6% and new bank debt, which was we were modeling roughly.
We can borrow at 3% that that isn't back there, yet and particularly on our bank debt, but that's something that we will continue to monitor around right.
Alright opportunities you you should expect us to be active and opportunistic around all elements from our capital structure.
Alright, thank you.
Thank you at this time, we've reached the end of our time for today I'll turn the floor back to Leslie.
To me Leslie Hale for closing remarks.
Well. Thank you everybody for joining us we hope that that all of you are able to get your vaccine soon as we sort of move into the remainder of the year and then everybody sort of stay safe and healthy and thank you again for joining us.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and we thank you for your participation.