Q2 2021 Hersha Hospitality Trust Earnings Call
Yes.
Good day and welcome to the Hershey.
Hospitality Trust second quarter 2021 earnings conference call on.
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I would now like to turn the conference over to Greg cost of Investor Relations. Please go ahead.
Thank you Betsy and good morning to everyone joining us today, we're at.
Come to the Herschel Hospitality Trust second quarter 2020.
Oh on conference call today's call will be based on the second quarter 2021 earnings release, which was distributed yesterday afternoon.
Before proceeding I'd like to remind everyone that todays conference call may contain forward looking statements. These forward looking statements involve known and unknown risks and uncertainties and other factors that.
At the company's actual results performance or financial positions to be considerably different from any future results performance or financial positions. These.
These factors are detailed within the company's press release as well as within the Companys filings with the SEC.
With 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 to everyone Joy.
Joining me. This morning are Jay Shah, our Chief Executive Officer, and Ashish Creek, our Chief Financial Officer.
We are pleased to kick off earning sees.
[noise] may quarter, and glad that you could all join us.
During last quarter's call in late April all indicators were setting up for a summer of strong leisure travel and it appears that expectations were appropriately set we significantly outperformed our internal forecast for the second quarter on both topline and profitability metrics.
We saw increased demand portfolio wide this quarter and are expecting this trend to incrementally build through the second half of the year.
Property level cash flow sequentially improved from $3.8 million in April to $7.7 million in June.
In June our 33 hotels generated 59.
This occupancy at an average daily rate of $220 and comparable GOP margins for the month came in at above 45%.
We are encouraged to see both ADR and GOP profitability metrics begin to approach 2019 levels well before a recovery.
<unk> and business transient and group gets underway in our gateway markets.
<unk> market occupancy will push revpar higher from here.
Achieving solid profitability and generating free cash flow a little over a year from the start of the worst crisis in this industry's history is testament to.
Personality of our hotels, the effectiveness of our cluster operating strategy and our mix of urban and resort markets.
These 3 advantages are our core pillars of growth for the early stages of this cycle.
Our operating leverage positions us for outsized growth in of stabilizing environment.
The quality.
We began the second quarter on strong footing as our portfolio Revpar in April exceeded $100 and was 10% higher than March which had been elevated due to spring break travel and stimulus spending.
Absolute revpar tick sequentially higher during the balance of the second quarter growing to 160.
Colors in may and exceeding $130 in June.
Resulting in second quarter revpar of $116 more than 50% higher than the first quarter 2021.
Rate integrity was of common concern at this time last year.
But compared to prior demand shocks.
Such as the great financial crisis revenue managers have not sacrificed rate to put heads in beds. During this recovery.
In this environment, we've been able to strategically drive rates across our portfolio.
Last quarter, our comparable portfolio ADR grew from $193 in April.
Teamed up to $220 in June.
That's just 13% below June 2019, without the core business traveler in the marketplace.
In July month to date, we're actualizing 2019 ADR levels.
Based on pricing power at our resort.
Resorts and the return of the price elastic business traveler in the fall to boost demand at our urban clusters mid week, we believe elevated ADR will prove sustainable on a portfolio wide basis through the recovery.
Let's start to dig in with with the 2 largest EBITDA producer.
April assets at our portfolio, the Cadillac Hotel and Beach club on Miami Beach, and Parrot key hotel and villas in key west.
They led the portfolio again this quarter on sustained demand to south Florida. Despite what is typically the start of reduced travel to the region.
Back in 2018, we reinvested.
Producing approximately $74 million and major upgrades of these resorts and they are now firmly on target to achieve our expected post renovation rois.
At prior peak in 2015, the Cadillac and parrot key generated $9.5 million and $7.8 million.
In EBITDA, respectively.
This past quarter, the parrot key and Cadillac generated $3.8 million and $3.2 million on EBITDA, respectively for the quarter and based on current projections. Both hotels are expected to surpassed prior peak and combined to exceed 20 million.
Best of dollars and EBITDA generation for the full year 2021.
As the lodging recovery continues to take shape across the next few years, we anticipate meaningful EBITDA contribution from these assets as they ramp towards stabilization.
The parrot key was our best performing asset during the second quarter.
<unk>, 92% occupancy on a $454 average daily rate, resulting in a $416 revpar, which surpassed second quarter 2019, revpar by more than 80%.
On the keys of seeing unprecedented demand year to date and the parrot key performance has proven.
Order Jay is 1 of the most sought after hotels in the marketplace.
Despite inclement weather from tropical storm Elsa deflecting demand of few weeks ago performance in July remains in line with our forecast at the beginning of the month.
Performance on Miami Beach was similarly, encouraging as the Cadillac.
Surpassed 80% occupancy for the quarter on a $235 ADR, which drove 39% revpar growth versus the second quarter of 2019.
Demand trends for the third quarter remained robust at our 3 beach hotels as well as our more business oriented Ritz Carlton Coconut Grove.
Growth, which is beginning to capture corporate business. This summer across a variety of industries financial services defense technology, healthcare and advertising and broke through 2019 levels with 8.7% year over year revpar growth for the quarter.
Despite August and September.
We're being traditionally slower in south, Florida, our portfolio is forecasted to meaningfully outperformed those periods in 2019 on the heels of continued price elastic leisure demand and growth from both business transient and group.
There are a number of events festivals and conventions returning.
To Miami in the near future Miami Beach Pride in September of the South Beach, food and wine Festival and our Basel later in the fall.
And Formula 1 Grand Prix next year.
Beyond tourism, there remains significant corporate relocations and transportation related infrastructure growth in the region leading to robust.
Near term and long term demand fundamentals from Miami that will be captured through this recovery.
Our drive to resorts also continued their recent outperformance during the second quarter as the group generated weighted average occupancy of 72% and ADR growth of 23% leading to weighted average.
Revpar growth of 17% compared to the second quarter of 2019 further proving that the leisure traveler is not price sensitive for high quality well located differentiated hotels.
The Sanctuary Beach resort continues to lead our resorts from a rate perspective as it is $506 ADR.
And 82% occupancy resulted in 21% revpar growth versus the second quarter of 2019.
Our hotel Milo down in Santa Barbara reported 77% occupancy at a $333 ADR and.
And the very similar 21% Revpar growth.
Prior year.
We anticipate these resorts in addition to our Ambrose in Santa Monica will continue to garner robust occupancies and rates in the third quarters as travelers flocked to the California coast.
Back East, our Annapolis waterfront hotel occupies an irreplaceable position.
Versus from the Chesapeake Bay and after a significant renovation of the hotel, we're driving rates and occupancy.
We recorded a 77% occupancy and average daily rate of $294 last quarter, which led to 7% revpar growth over the period.
Annapolis in the summer is primarily leisure.
Transient, but social and sports groups provided a strong base of business to kick off the season.
Looking further out towards the end of the third quarter the hotel of several rebooked corporate and retreat.
Retreats that are helping to drive 15% ADR growth for Q3 versus 2019.
Physician on our Marriott and Mr. Connecticut is also on pace to achieve peak summer leisure demand from weddings leisure travelers and re booked corporate and government groups during the third and fourth quarter at a better pace than was anticipated.
Across the quarter, we saw cities and states reopen.
Reopened their local economies and remove restrictions for gatherings and experiences enabling the surge that we're seeing in domestic leisure travel today.
This fall we expect to see the next the next inflection and demand growth as large employers returned to the office and encourage travel and our cities.
The host conventions and major citywide events.
Gateway urban markets have been more impacted by the pandemic than any other segment and offer the longest runway for growth as we look forward to the next several years of the cycle.
With summer travel underway demand across the portfolio continues to be heavily weighted.
Ill begin on weekends versus weekdays days, but week day stays have shown a noticeable increase compared to just 90 days ago.
To date results in July for our portfolio versus March show average weekday occupancy growth of more than 200 basis points, leading to revpar growth.
Of approximately 55%.
Removing our resort markets, our urban clusters saw weekday revpar has grown more than 100% over that same period.
Indicating our gateway cities remain attractive to all segments of the traveler.
When the higher rated business travel of returns and replaces.
<unk> leisure business, we would expect a meaningful increase in week day ADR.
During the second quarter, we began to see traditional business travelers returned to our hotels from 1 and 2 night stays to corporate groups.
At the Philadelphia, Westin, we saw transient business from many farmers.
<unk> companies in addition to Accenture and Deloitte employees.
Our west Tech related businesses are beginning to return with corporate groups from both Google and Facebook booked at our Sunnyvale hotels during the third quarter.
Mckinsey JP Morgan Goldman Sachs IBM General dynamic.
Primarily in other traditional large accounts have become more active at several of our hotels in the portfolio.
While we are seeing early stages of business travel returning in each of our urban centers and expect continued improvements through the throughout the summer.
We anticipate the next big leg up leg up in the recovery to be.
Dynamic or labor day, when schools reopen in person and employees returned to the office.
Despite our hotels being primarily transient we have seen an increase in group activity over the last few months across our portfolio.
The majority of the business has been through social groups in sports.
But as cities of.
Avon's larger events are occurring and being scheduled in our markets, resulting in increased group activity at our hotels.
Our luxury hotels of benefited from not only strong leisure business and social group, but also the first signs of corporate group small meetings and retreats.
Of the Ritz Carlton Georgetown finished.
The quarter with nearly 72% occupancy at a $456 ADR.
At the Rittenhouse Hotel in Philadelphia also turn cash flow positive this quarter as ADR reached $478 with occupancy growing by more than 2500 basis points versus the first quarter.
Many.
<unk> are located near major universities, and health systems, and the significant demand generators have mobilized and are leading to increased production and group bookings at many of our Boston, New York, Philadelphia, and Washington D. C hotels in the third quarter.
Larger events are taking place in the third and fourth quarters.
Of our hotels many of our markets highlighted by healthcare related conventions in Washington, D C Boston and Philadelphia.
OTA Con in August in Washington D C.
In the Boston, and New York City marathons in the fourth quarter.
The Javits Center in New York is slated to host a few larger.
<unk> acquired in August, including the New York Auto show, but the major events in New York will return in September the U S open for tennis.
<unk> week, and the UN General Assembly.
And for the first time sales forces Dream force event will occur across multiple cities, including New York.
Our New York City portfolio saw Occupancies incrementally build throughout the balance of the quarter.
Visitation remains primarily transient and this leisure demand should continue as Broadway reopens of this fall and more events occur.
But as noted another markets first signs of corporate travel have emerged.
<unk> across the past few months and we are encouraged by the return of our more traditional large corporate accounts in the market.
We are very well positioned with our locations in several high growth Submarkets.
We supported teams during the mayoral election rates early in the quarter at our Hilton Garden Inn, Midtown East and have since.
Transitioned to Jpmorgan as our top account.
Our Hyatt Union square has seen a pickup in travelers from entertainment media and technology.
<unk> discovery at Apple.
And downtown at the Hampton Seaport, and the Hilton Garden Inn Tribeca business travel has increased from major financial services.
Of knees and Jay Blackstone.
Pockets of corporate strength of taken shape across the city.
And we believe they will continue to expand after labor day, when schools fully return and more workers across all industries return to the office on a consistent schedule.
Conversations.
This is kind of a larger corporate accounts indicate that September is the month when the switch for business travel and in person office work turns on <unk>.
And with our first mover advantage of remaining open throughout the pandemic, our clustered sales effort in the marketplace should yield additional revenue opportunities.
Momentum is clearly building in New York, and our operating and data advantage can drive meaningful outperformance at supply remains significantly below pre pandemic levels.
The logic of recovery is clearly underway near term results have exceeded expectations and.
And there is a long runway of value creation ahead.
During the first half of the year, we took swift action to rightsize, our balance sheet and evenly reduced our exposure to our core markets by divesting of a lower growth hotel on each market.
With few capital expenditures on the horizon over the next few years, we can.
Focus on hotel operations to drive high absolute Revpar on industry, leading margins, resulting in significant EBITDA and free cash flow growth in the coming years.
Our results this past quarter illustrate the merits of this strategy and the growth profile of our unique portfolio.
We.
King forward 2 of continued recovery in earnings and what we anticipate to be the start of a long up cycle in logic.
With that let me turn it over to ash to discuss in more detail, our financial performance and outlook.
Okay.
Okay. Thanks, Neil and good morning, everyone. My comments will focus on the demand improvement across.
Ross our portfolio throughout the second quarter and its impact on our margins and cash flow.
Before closing with an update on our balance sheet and outlook for the current quarter.
Demand fundamentals continue to improve from March over the balance of the second quarter and ultimately led to the company achieving corporate level of cash flow for the first time.
Since the onset of the pandemic.
And what is typically our best quarter of the year with meaningful business travel group and conference demand at the beginning of peak summer leisure travel boosting result demand trends during the second quarter, we're still heavily weighted towards leisure.
Revpar and occupancy were up meaningfully from.
Quarter, but revpar was still down approximately 45% from the second quarter of 2019.
Strong demand at our leisure oriented properties and weekend demand at our urban hotels allowed us to maintain our average daily rate less than 18% below 2019, all without any meaningful.
First business travel of group demand in the marketplace.
On the weekends from March to June we were able to achieve ADR growth at our resorts approximating, 13%, while our urban portfolio captured of 46% increase in rate with Occupancies up of 1000 basis points.
Incremental growth in occupancy.
Occupancy is combined with our rate first strategy and expense savings initiatives resulted in margin expansion and material cash flow generation at our hotels throughout the quarter.
During the second quarter 24 of our 33 hotels broke even on the EBITDA line of 71% increase versus the first.
Quarter in June each of our 33 operational hotels broke even on the GOP line with 24, achieving EBITDA breakeven levels, representing 79% of open hotels, breaking even on EBITDA versus 58% in March.
We originally forecasted levels needed to breakeven at the corporate.
Couple of approximately 60% occupancy with a 40% of Revpar declined from 2019.
Results from June cemented these projections as our comparable portfolio generated 59% occupancy with a 40% of revpar decline and combined with our $7.7 million.
Corporate operating level earnings.
<unk> and 334000 of positive corporate cash flow.
The asset management initiatives, we implemented in 2020 in conjunction with our flexible operating model showed early signs that our margin improvement goal. Following the pandemic is beginning to take shape at.
As GOP.
And <unk> of 44% during the second quarter were 830 basis points higher than the first quarter and just 260 basis points below our second quarter 2019 GOP margins.
Based on current forecast, we believe our third quarter GOP margins will actualize in line to slightly.
Slightly ahead of our third quarter of 2019 GOP margin.
As revpar in out of room revenues increased in 2022 and beyond our current operating model will yield much higher levels of GOP and allow us to amortize our fixed operating expenses as well as our property taxes and insurance expense.
<unk>.
This provides us confidence in our ability to forecast post pandemic EBITDA margin growth as our ability to drive ADR in tandem with applied expense savings initiatives should allow us to generate 150 to 250 basis points of sustainable long term margin savings for the portfolio.
From a profitability perspective, our south Florida cluster led the portfolio again, this quarter with 41% EBITDA margins highlighted by our parrot key and Cadillac assets.
At the parrot key and Cadillac finished with finished the quarter with 58% and 43% EBITDA margins.
Expense, particularly.
Both exceeding second quarter of 2019, EBITDA margins by more than 2000 basis points.
Robust results were also seen at our California, and Washington, DC drive to resorts as our Sanctuary Beach resort and hotel Milo generated of 49% from 38% EBITDA margin respectively.
While outside DC of strong start to the summer travel season from a rate and occupancy perspective, coupled with proprietary operational initiatives. We have implemented since acquiring the hotel in 2018 led to a 59% EBITDA margin at the Annapolis Waterfront hotel 2.
Risk basis points higher than the second quarter of 2019.
Our asset management strategy since the onset of the pandemic focus on driving margins through aggressive cost control.
This was done primarily through the reduction in labor, but we have also utilized various technology platforms at our hotels such as mobile check.
$200 and concierge services.
<unk> energy management systems, and water reuse systems to lower utility costs and.
And smartphone ordering systems at our food and beverage outlets.
<unk> been more nimble on this strategy at our independent hotels, which has resulted in significant margin savings versus our brand.
<unk> reentry portfolio as our independent an autograph collection hotels generated a weighted average 38% EBITDA margin for the second quarter.
Strong performance at our properties. This quarter was not limited to just increased occupancies and our ability to push rate as we also saw.
Our substantial growth in our restaurant and bars.
At our parrot key revenue generated from our outlets during the second quarter was 58% higher than the second quarter of 2019.
Meanwhile, up in Boston, our envoy and the Seaport district saw meaningful revenue generation from its lookout rooftop.
And our newly installed taqueria of pop up power on Maria.
Both of which have been well received by guests and locals alike.
The envoy both the premier rooftop and the city and its popularity helped the hotel achieved close to $2 million and revenues during in food and beverage revenues during the second quarter of 1.
Hours of which was generated in June alone.
We expect our restaurant and bars and our outlets at the envoy will remain popular during the peak summer months.
Based on strong demand at our resorts and increased travel at the urban markets from the leisure traveler, our ability to strategically in effect.
Millions of drive rate and return of more consistent business travel on the horizon.
We believe we are past the inflection point of corporate level of cash burn and expect month over month positive cash flow for the remainder of 2021.
Yeah.
A few closing remarks on our balance sheet and outlook for the third quarter.
<unk>, we ended the second quarter at $80.2 million in cash and cash equivalent end deposits as.
As of July 1, we had approximately $46 million and capacity on our $250 million senior revolving line of credit and $50 million of Undrawn credit from the unsecured notes facility replaced with affiliates.
<unk> of Goldman Sachs Merchant Bank.
Additionally, we received approximately $1 million in business interruption proceeds in the second quarter from the impact of COVID-19 at several of our hotels.
Based on discussions with our insurance providers, we do not anticipate receiving additional recoveries from business interruption.
Related to the pent up.
During the second quarter, we successfully refinanced mortgages mortgage debt on 4 hotels, the Hilton Garden Inn Tribeca Hyatt Union Square Hilton Garden Inn, 50, <unk> Street, and the courtyard la west side as.
As of June 30% to 79% of our debt is fixed or <unk>.
Swapped with our total debt weighted average interest rate of 4.4% and $3.1 years life of the mature.
We spent $2.6 million on capital projects last quarter, and we continue to limit our capex spend strictly to maintenance and life safety renovations.
During our fair.
During the first half of 2021, we spent $5.3 million on capital projects and we anticipate our full year capex load to be roughly 40% below our 2020 spend.
We project very little disruption of our capital spend for our portfolio across the next few years, which is materially beneficial from a cash flow perspective.
At the sustained surge in construction costs freight rates oil prices and the continued tightening of the supply chain remain elevated.
Month to date in July.
We have seen continued growth in our portfolio occupancy and revenues with the majority of our portfolio in line to slightly ahead of our internal <unk>.
Forecast.
The largest outperformance month to date in July has been our New York portfolio, which is currently trending up approximately 20% from June on occupancy growth both on weekdays and weekends.
Month to date in July we're up over 1000 basis points in occupancy in our Manhattan portfolio.
And our New York City.
City Metro, which includes at the borrows White plains, and mystic are running close to 80% occupancy.
With our sights set on the recovery, which has already commenced we remain laser focused on operational performance of the portfolio and accretive opportunities that become available throughout the cycle.
So this concludes my portion of the call. We're happy to address any questions. At you may have at this time operator.
We will now begin the question and answer session.
Ask a question you May press Star then 1 on your Touchtone phone.
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At this time, we will pause momentarily to assemble our roster.
And the first question comes from Dori Kinston with Wells Fargo. Please go ahead.
Uh huh.
Hi, Thanks, Good morning, guys.
I'm keen to see.
What do you need to see in September to consider the return of business transient and group demand on track versus your expectations.
Okay.
What do we need to see.
<unk> 2.
See as just midweek occupancy to start to tick up we think that September at.
It's going to be the second half of September we do have a few kind of well.
Have the Jewish holidays, and the first part of the month.
In New York in particular at is the back half of the.
Months at some of the other major events start to take place in the city and that could lead to some compression, but it is simply midweek occupancy that were.
We're looking for or what we'll see on a lagging basis as we look forward at just companies.
<unk> 2.
Go back according.
According to plan right now we've seen the only company.
And this was on the West coast that we've seen have a delay in their return to work plan.
Was apple in Silicon Valley moving it from September October to being more flexible I think through the end of the year in New York City.
Most.
Of the large employers continue to be on track for post labor day.
On a return to work and so that's that's the that's where we're basing our expectation on and so I guess any change in that would have an impact on our expectations.
Okay.
And so typically.
After labor day, and there was a falloff in leisure demand.
If you look back historically would you would you expect that same falloff or do you expect there to be elevated leisure demand.
In your markets.
And going into the end of September.
At September October.
We think.
<unk> continued to be strong and maybe even long weekends, we've seen even across the last few months that thursday's have been.
Stronger than than other weekdays as people take kind of longer weekends on Fridays of Ben at strongest Saturdays. So you could see leisure continuing to.
The wheat to be strong I think on weekends.
We also think that there are some things that not everyone has kids and so there will be leisure travel.
Post Labor day people will want to go back end for the sake of New York City. It's just.
Broadway has been on hold for a year and of half the tickets are flying on.
Off the shelf I think they are.
Opened it up limited seating or limited kind of set of tickets last week. They went immediately there'll be more coming but so I think that there is a lot of pent up.
<unk> demand that will continue to see in the cities in the fall, but our expectations are.
Our.
Moderated.
<unk>.
June normal seasonality and what we've seen prior to the pandemic.
So the big drivers still as the corporate side, but we do expect leisure to continue on the weekends and we'll probably get the benefit of it through the weekdays.
As more and more things open up in the cities.
And just last question are you noted.
Buying on.
On last month, any sort of impact from the <unk>.
Maybe focus on your Florida markets.
We really have not dori.
We're obviously looking carefully keeping our ears open sales teams are out there still booking things without without much of an.
Of note issue.
In Seattle, we did hear about a group being delayed at at the Pan Pacific, but it was a single.
Kind of issue.
But in South, Florida, and the northeast we have not seen any impact.
And even in the California kind.
At least the coastal locations, we have not seen any impact to date.
And frankly, even at the La courtyard, we haven't to date, where we're monitoring it very carefully but have not seen an impact.
Okay. Thanks, so much.
Okay.
The next question comes from Michael Bellisario.
Issue of Baird. Please go ahead.
Good morning, everyone.
Good morning, Good morning, Mike.
Just first on the margin front can you talk about what youre doing to keep expenses in check and then maybe what pressures youre seeing that might cause flow sort of moderates as you have to bring back more.
With ease at the property level.
Okay.
Sure Mike.
First of all of US we still have occupancies that are far below where we would traditionally run which at this time of year would be in the mid eighties, and we're sort of approaching 60% of little bit above 60. So we are.
Our FTE counts are still at around a 50% level to where they would have been pre pandemic I think from our standpoint, we could imagine at getting back to peak occupancy.
But the FTE count probably still staying in the 75% to 80% range of what we had at.
A lot of that is just that we've had.
<unk> zero based budget closed hotels, and we've learned how to do more with less.
Protocols of also changed from a housekeeping standpoint breakfast bar and some other things.
And we just don't see the same number of Ftes in these buildings post pandemic.
Probably first and foremost we've done some more things around using technology for for our sales group debt limit some of the salespeople that we need.
And we can cross utilize some of those personnel.
So as we see occupancy is coming back we absolutely are going to need to bring more.
More people back into the buildings.
We think that labor shortages will persist through the year, but we will get better as we get past labor day as we get past some of the return to schools for the children that will allow parents to go back to work the unemployment benefits easing the way. So we think of lot of.
<unk> east, but we don't imagine net the labor shortage situation completely goes away.
By Labor day.
Got it understood and then just switching gears to the balance sheet is there any proactive work that can be done today.
Given the continued improvement that's occurred.
Those price your capital markets recently.
Yes, I mean, we continue to monitor the market, it's very encouraging to see debt.
Debt capital markets for lodging.
Are probably better from a standpoint of what you've seen some of the preferred offerings hitting record lows.
The debt markets.
And of our available and open.
So we are very in tune with debt, we think we have tremendous.
Tremendous access to capital if we needed it.
Right now at this time, we arent in a position, where we really need the capital.
We have the Goldman Sachs notes coming up in February.
We.
Imagine that we will either renegotiate those with them or that we would do something in the capital markets to pay those off at a very accretive with a very accretive transaction. So.
We continue to monitor the markets. We we think that we have the access necessary.
At this time, we're not really seeing the need to do anything.
Got it thank you.
The next question comes from David Katz with Jefferies. Please go ahead.
Good morning, everyone. Thanks for taking my questions you've already covered.
But at copious amount of detail.
I wanted to just throw 1 other issue, which is that we are all focused so much on the cost of labor.
Can you just talk about that.
Tom.
Couple of other costs within the business.
No.
But it will be going down or up.
Exit from Covid.
Else is sort of in the path to be started on the cost side.
Yeah.
Sure David I think 2 things that come to mind right now are our property taxes.
We think debt for the short term.
<unk> are likely to go down right now we received our New York City property tax bills and they are down about 20% for the for the next year. So a lot of that is just due to reduced assessments at the hotels because of the impact of Covid.
At the city could increase tax rate so that this.
Term transitory, but right now we are looking at reductions in New York.
Washington, DC came out with about 10% of reductions in assessments, we should see some benefits from that California, Massachusetts are usually more fourth quarter type of assessment for next year.
This could be followed at the same trend line, we are not expecting increases.
We're not forecasting decreases, but we are hoping that they followed the same trend line.
So I think we could get some property tax relief we already have.
For the next year, plus I think on the flip side insurance expenses.
So expect it to continue to go up, especially in coastal market and in California.
With Hurricanes floods fires continues to be additional pressure directors and officers of insurance.
General liability all are expecting increases so.
Obviously, a little bit of a wash there.
I wouldn't say a wash because of our property tax bills are 3 to 4 times, what our insurance bills are so I think we should still see of benefit, but the offset to taxes going down is definitely insurance.
Perfect very helpful. Thanks.
Yeah.
The next question is from Bryan Maher with B Riley Securities. Please go ahead.
Good morning, guys couple of questions on.
Kind of the consumer trend here.
What are your thoughts on these elevated ADR, particularly at the leisure properties to borrow word from that debt.
Fed being kind of transitory and kind of post labor day and post.
<unk>.
The incentives of stimulus payment does got to come back down to Earth. How are you thinking about that.
Brian.
We do think that.
There has been a benefit in certain segments of of the industry from stimulus payments.
I think that some of the our most notable kind of ADR performance Revpar performance has been in.
In pretty high end resort market.
With pretty high ADR of <unk> and high Revpar is now there clearly performed better than prior years even.
But I think that's less a function of unemployment benefits, but it is a function of just fewer alternatives for travel not having other international destinations on having cruise lines.
And the like.
<unk>.
As in the coming years, I think the the U S. Domestic consumer will have other alternatives that could moderate.
Rates to a certain extent, but on the other hand, the markets that we operate in our resort markets, which are kind of California coast Miami outside of Washington, The northeast.
At these these will also be big beneficiaries of the next kind of leg of demand in international as International comes back end as Theres just more events, we think that that can kind of continue to give us some pricing power in the resorts.
Where we see overall as.
At our portfolio, we will be driving more growth.
From the urban market. So on a portfolio wide level, I think our confidence and conviction on ADR and Revpar is continuing to increase is driven by occupancy growth in the cities and midweek ADR growth in the cities.
That will offset the kind of moderation, we might see in some of our resort markets across the next year or 2.
Right and kind of following on with that at and then maybe tagging on to <unk> question.
We continue to hear a lot about yes, corporate travel will come back post labor day, but.
As we looked at at that Chief financial officers have been ecstatic about that expense line being down so much in being a little bit more sensitive to kind of Uber discretionary travel what are you hearing from your corporate or just in the marketplace as to the level at which.
But I'll ask couple of travel will come back and when.
Well from a reservation standpoint, not really an actuality standpoint might you start to see that kind of mid September picked up in midweek demand.
Mhm.
On the midweek demand it just I'm going to start at the second 1 day.
Not sure I think I think we will start seeing at in the star data for.
For a lot of markets, even like the weeks in these like late August early September it depends on like when schools or <unk>.
Which that certain areas.
In New York, We think it's that the.
The week after labor day that we should hopefully see some buildup in it but all of this I guess September it's it's a lot of a lot of pressure to put on September but that is when it will get started I think we believe that October.
November and December is where you'll really continue to see this trend line developed.
But.
But I'm not sure if we can answer any more in terms of specificity for what to look for in that in that rebound or.
I think that's right I think Brian the booking window.
Still remain very short as well.
So it's still sort of.
2 weeks out or so we are seeing bookings in September.
We hear from all of our colleagues as well look at so much trial of.
Starting in September.
We're.
Expecting this september to be anywhere near September of 2019.
And I think that that may be a stretch right. When you think about usually September and October of 2 of our best travel months of the year, we still think it's a pickup but when you look at.
When we think about our.
Occupancy is sort of mid week in June weekday travel it was around 55%.
That mid day travel, we would anticipate and what we're already seeing to be sort of at 3% plus range to probably be more like 70% of 75% in September.
Okay, and then your thoughts on the corporate travel comeback in general with Cfos kind of.
Being a little bit more sticky as to when and where people go.
Yes, I think Thats very company specific we have been talking to the sales teams about kind of what they're hearing from.
Like many of our leading accounts.
And for and it's really up and down across the board, but with consulting for example, like with firms like Accenture and Deloitte and the like as of June most of them were permitted to travel, but had still significant kind of.
Approval.
<unk> requirements in September they get back to the office and.
Those travel kind of hoops that they have to go through.
Lesson very significantly as what we're hearing from a lot of the consulting firms.
Similar with the banking banking groups, there's folks like.
Amazon's not back in the office, but they are driving a lot of business in a lot of our markets across the country and I think these companies like some of these technology businesses that have morphed into.
Media businesses and content producers, there are industries and sectors.
Sectors that really we're only starting to emerge pre pandemic and had such solid growth during the pandemic that we're seeing kind of a new class of travelers. They do fly under these kind of big company names at times.
But they are a different kind of traveler within those groups. So we are seeing that.
That.
The kind of end.
In.
Some of the industrial kind of companies and aviation related businesses have picked up as youre seeing from the airline industry. They are growing and adding capacity and so we are seeing some business from there already.
So really it's too hard.
Of your an indication on that we have heard some employers say that we're going to be at.
We'll be at back to 80% of travel within 6 to 12 months.
We've heard others say that it's going to require more hoops and we'll see when they open up but.
Can't give you too much guidance there more than you read.
Reading the newspapers the sales teams are finding that our confidence about the fall and that gives us our confidence but.
But but it is a mixed bag of across different companies and different geographies frankly.
Okay. Thank you for that.
The next question comes from Ari Klein with BMO capital markets. Please go ahead.
Yes.
Hey, good morning.
Just following up on the urban markets can you give us a sense of where where revpar is currently relative to.
At 2019.
And then it sounds like Youre relatively optimistic.
In New York City Post post labor day, but any of the other urban markets, where maybe things are.
Looking at a little bit slower or youre at.
Less optimistic.
Yeah, maybe I'll just start from a standpoint of what we're seeing post labor day into the third quarter.
Quarter right now the markets that give us.
On what we're seeing trend wise more confidence there.
New York City and Boston.
I think that.
We have a little less confident in the DC market right now just because we don't know what the government protocols are going to be both.
Certainly are seeing improvement in that market as well.
<unk>.
I think that.
From a growth perspective.
Our urban markets in the West Coast, we remain confident in those.
Philadelphia, we're seeing.
Feeling.
Good.
At good uptick and then as you would imagine in South, Florida with leisure tailing off usually.
By September October there was a very weak months in south Florida at with the pick up really being kind of post Thanksgiving.
Got it got it and then and then just on some of those markets.
<unk> of hotels are still closed you know I imagine they'll start to open.
As business travel starts to return what kind of impact you think that has.
Maybe rates with it.
Still kind of well below normalized levels.
Yes, it was.
<unk> really New York was the most noticeable in terms of the amount of closures in debt.
At certain times during the pandemic.
As early as I think last quarter, there was about 25% of the inventory that was closed in and non operating.
Currently it's about 20%. So there has been 5% of of those closed hotels reopened.
We do think that there will be of permanent.
Reduction.
In some of the existing inventory, that's going to be partially offset by.
New developer.
Development, that's already in the ground today.
We've talked on prior calls about our confidence in the kind of pipeline of new starts clearly being lower than its been in nearly a decade decade, but.
But there are some hotels in the ground that will open and deliver.
And.
And there are some hotels that are closed that will reopen but net net we believe that is a reduction in total supply.
And and overall the.
I think the reopening trend in the amount of kind of new business that will.
That we expect to start to pick.
At fall and into 2022 will lead to more hotels kind of reopening, but it's it's a.
There were a lot of hotels pre pandemic that were not profitable pre pandemic.
And this kind of.
Shock to the system has led many to.
To seek alternative uses and in New York City. Some of the alternative uses are coming back on our realizing capital end.
A lot of.
Potential buildings are going for residential use some are going for government use end and in certain locations even office use so.
We think it's a better.
And that's been the fundamentals are better for New York in the early part of this recovery than they were at the back half of the last cycle.
And we'll we'll continue to make headway, but.
It's a.
Yes, why don't I just leave at there.
Or if there's anything else.
Of environments are about that.
No that's perfect. Thank you.
And the next question comes from Danny Assad with Bank of America. Please go ahead.
Hey, good morning, guys.
Neil you mentioned in your prepared remarks that whats different this time around compared to prior downs.
In terms of his ability to hold rate.
So as corporate starts to like corporate demand starts to accelerate here.
How do you think that rate dynamic plays out going forward.
I mean in some ways Danny it's.
On the consumer.
There was.
We're.
We can at this great leisure demand growth, we're seeing great pricing power on the leisure markets because there was pent up demand for leisure travel.
And to the consumer balance sheet was in pretty good order and was actually coming out of it with more savings more.
Investable income.
We're seeing are more end.
And so they've been spending than they've been.
Had the pent up demand and they have the capital on the balance sheet to support it we think on the corporate side, it's going to be somewhat similar.
We think there is pent up demand for business travel.
Sales forces.
Client relationship.
Training.
If if we are moving to a more decentralized corporate organizational structure that leads to a lot of travel for the setting up of these kind of ancillary nodes as well as coming back to the mothership.
So we think that Theres a lot of pent up demand.
And second corporations and many of the largest kind of travelers in America of those companies are in very good financial shape.
Unlike the financial crisis, the financial services institutions are healthier than they've been in years.
Or a big.
<unk>.
Technology media infrastructure.
And the federal government.
We can't forget that we came through.
Many years of very little federal.
Employment in new contracting and we're going to be entering a period of a lot more of that.
And so in some ways at similar to the consumer story of the leisure story, we think we can see.
On some significant pent up demand as well as <unk>.
Most of these companies are in very good financial health and can invest in.
Developing new business.
Got it and.
Just my follow up so.
For Q2 lets say just looking at your like your comparable metrics right.
10% below.
2019 levels on EBITDA margin, but we were $45, 46% below on Revpar.
I mean.
That obviously like it feels like on the bottom line.
Then the margin profile is a lot more robust than just kind of how that dynamic should of really played out with these numbers.
So just how do we think about.
Your margin profile or youre flow throughs.
As more urban hotel will start to like or corporate demand starts to add that incremental EBITDA.
Comes from that piece of the equation rate, how do we think about the margin profile.
That trend.
Going forward.
Yeah, So Dan as we think about the urban hotels, and what we're going to see.
It is going to be at from this point on we think that rate growth is.
Still going.
He there, but its an occupancy story in many of these urban markets.
Where you can we've been able to drive 90%.
Type of flow throughs, because it's purely rate at these resorts.
Really already doing similar type of Occupancies.
Wouldn't anticipate that type of flow.
Moving to <unk>.
But we would anticipate.
Pretty healthy flows at least in the 60% to 70% range as we have different staffing models at these properties.
Sure. Thank you very much.
The next question comes from.
Battery with James Please go ahead.
Hi, Good morning. This is Jonathan on for Tyler Thanks for taking our questions..1 quick 1 from me when you look out at the dichotomy between some of the markets like Miami, New York City does that change your strategy at all in terms of what markets might be attractive.
Tyler of future acquisitions or dispositions.
Near medium long term and how are you thinking about balancing those opportunities.
Absolutely influences influences us end.
And.
And but I think I would be.
Sure.
We don't want to make long term decisions based on on short term trends on 1 hand. So we just are very thoughtful about it we've been growing our resort portfolio outside of major metro markets for the.
The last 5 years 7 years, and we're able to do so in a cost effective manner and in a way that we could create value over time.
With reinvestment in and the work we've done on those hotels.
We will continue to look at a lot of those markets for future opportunities South, Florida, even other parts of the state of <unk>.
Yeah.
We will continue to look at coastal resorts in on the West coast as well we've had good success with these kind of regional drive to resorts near the major metros like Annapolis and.
And we think that there's other opportunities for that.
But on the other hand.
There's also these major cities are aware there was the most pain felt.
And we do think that there will be a big rebound in those markets as well.
And so we're we're not of the mind today to make a wholesale shift of hour.
Florida of our portfolio contribution from these kinds of markets.
Pre pandemic, we were maybe 70%, 75% urban gateway and then about 25% in the resorts nearby the regional resort destinations nearby.
Right now it's going to read as if it's a much bigger resort population.
On the resort contribution because we're performing so much better on that side.
Over time could we tend towards a more balanced mix, it's possible, but it is a function of what opportunities are out there and how they are priced.
We're not I don't think we have the confidence that.
Relationship some of the.
Sunbelt markets can kind of grow to the moon.
And we've had a great year or 2 in them.
And so it just moderates our expectations on opportunities in those areas.
Sure.
We're very opportunistic as you've known in the past, but we're also very focused.
Based on strategy and capability and true advantage.
And where we invest and so our existing kind of cluster strategy is very important.
To how we look at deals and look at opportunities and so we probably do favor our existing markets.
At that said, we continue to look at new markets and other opportunities, but but really think of it.
Would be hasty to act too quickly based on the last 6 to 12 months of performance and make a wholesale shift.
In portfolio composition.
Okay, Great I appreciate.
Right all of that detail.
And then wanted to follow up on the labor side, if I could.
What's sort of guest feedback are you hearing and do you think youll need to add labor or more of these.
To meet guest needs.
Do you think you are still providing ample services in this.
Turning lower demand environment.
Over time, we absolutely will need to add back certain services I think.
It's not going to be everything that we used to do at at these hotels, but there will be demand from business travelers for.
Certain of food and beverage offerings and room service and certain things that we will.
Bring back in locations, where customers are demanding it and can pay for it.
And it's.
And that's how we've approached at so far as well in our resort markets. We have reopened most of our restaurants and bars. So that we can push not only profits from those departments.
<unk>, but also get higher room rates.
And kind of meet guest demand. It's in these urban markets, where there just hasnt been enough guest demand too to.
Adjusted Phi adding back a lot of those.
Amenities and services I think across the next.
Several quarters, we'll we'll bring it back but we're going to be very careful to bring it back in cases, where it actually is incrementally beneficial to our bottom line.
Consumers have been understanding to date, I would say, but as rates get continue to get higher there also.
Demanding more.
But the consumer is pretty dynamic end and I think we have seen a bit of a change in expectations.
The this what what they've learned from short term rentals is that there are.
There are some services that.
That they are willing to pay for and others they'd like the Optionality and and so we are we're still.
We think that there is an opportunity for a change in kind of consumer behavior, and what we offer them but.
But it's something that will incrementally add back, but we're using the real.
So we're being careful on how we do at.
Okay, great. Thank you for all of the color that's all from me.
As a reminder, if you have a question. Please press star then 1 to be joined to the queue.
The next question.
Is from Chris <unk> from Deutsche.
<unk> Bank. Please go ahead.
Hey, good morning, guys.
Just another kind of follow up question on the or deeper question on the on the labor.
Is it possible to kind of roundly quantify how much you saved or think you saved.
Perhaps the second quarter of year to date.
From not doing the <unk>.
Stay over housekeeping.
We think that's a huge.
The huge individual line item is there any do you guys track of that as a way to put a number on that.
Of course, I wish I wish I could tell you that we have a quantifiable.
First tentage of labor that we saved.
That.
Because.
Although at the protocols out there as you know people kind of opt in.
Can request it and we do do that.
At our at our hotels so.
It's tough to quantify I can tell you that.
Net.
Hilton has come out and said that this will be protocol of it going forward that's likely at the same.
It will continue to be a margin benefit.
For our industry for a long time.
And.
Imagine that at.
Sure.
Yes.
Our.
The ability for our FTE counts to be at 50% and maybe at peak to be at 75 to 80.
At least 10 of 20% of that is the housekeeping protocols.
Okay. Yeah, that's helpful and then.
Also of kind of circling back to <unk>.
At let's say South Florida.
Southern California, and obviously this idea that you get some moderation there with with pent up leisure demand when you cycle that next year.
Is there any way to get a little sharper on that in terms of how many of these folks that stayed with you in the first half of this year you know how many of them were people who had never seen before.
Florida.
Maybe they were going to go to Europe, or the Caribbean or wherever.
Any way to kind of add more more color to that just just so we can think about it and maybe.
Get a little sharper on on what that effect will be when you cycle of next year.
Unfortunately, Chris I don't think we can.
I think we.
You can look at.
At least what we're seeing at least for the next couple of quarters is that a lot of the search.
Kind of Google search and other Internet search kind of on.
<unk> still.
<unk>, great demand and a lot of these markets.
That may be that may have been prior years really had a seasonal drop off so at least on the shorter term in the next couple of quarters that gives us a little bit more confidence in.
Outperforming prior year's performance at some of these resort markets because there is still of lot of search and a lot.
Sure.
And bookings.
Looking forward, particularly in South Florida for example.
But but looking into next year, we don't really have a great metric for you.
Okay Fair enough I appreciate all of the details guys. Thanks.
Okay.
A lot of.
This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks.
No I think that will be at with no more questions. We'd like to thank you for your time and if we can answer any further questions Jay Ash and I are available all day.
For any follow ups.
Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.