Q2 2021 RLJ Lodging Trust Earnings Call

August 6, 2021

[music].

Welcome to the R. L. J lodging Trust second quarter 2021 earnings Conference call. As a reminder, all participants are in a listen only mode and 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 Nick kill Abolla R. L. Jay's, Vice President and Treasurer of corporate strategy and Investor Relations. Please go ahead.

Operator.

Good morning, and welcome to origin lodging cost 2021 second quarter earnings call.

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.

But net 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-Q and other reports filed with the SEC.

The company undertakes no obligation to update forward looking statements.

Also as we discuss certain non-GAAP measures. It may be 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, Nicole good morning, everyone and thank you for joining us we hope that you're having a great summer and contributing to the surge in leisure demand like taking the opportunity to travel yourself.

Throughout the second quarter, the widely anticipated strong leisure demand not only materialized, but also surpassed our expectations while business transient and group demand also improved on a relative basis, all of which allowed our portfolio to meaningfully outperform.

While the Covid variance or a risk we are encouraged by the acceleration of demand trends so far into the third quarter. We are optimistic that pent up demand will continue to drive improvements in fundamentals.

We saw evidence of pent up demand throughout the quarter the industry achieved new highs in occupancy each month with the second quarter recovering to <unk> 87 per cent of 2019 levels.

Our portfolio achieved occupancy in line with the industry and outperformed the top 25 markets as we gained market share.

We believe we will continue to deliver strong performance relative to the industry as a return of business transient demand should benefit our urban centric portfolio.

During the second quarter, our strong topline performance enabled our entire portfolio to generate positive hotel EBITDA, which came in ahead of our expectations. Additionally, we have been very active since our last call executing on a number of initiatives to strengthen our balance sheet recycle capital and further enhance our growth profile.

We have refinanced $600 million of debt, including issuing $500 million of high yield bonds and amending our credit facilities. These transactions for the ladder, our debt maturities and extended our financing covenant waivers. We also continue to be active portfolio managers by selling a few additional non core assets, which represented less than 1%.

Of our 2019 EBITDA.

And we recycle capital by deploying disposition proceeds into a high quality asset in the growth market of Atlanta.

We have made progress towards unlocking the value from the embedded growth catalysts within our portfolio and provided color on how our initiatives will enable us to drive incremental growth throughout this cycle.

With respect to our operating results our open hotels achieved second quarter occupancy of 61%, representing the highest of any quarter since last year.

Occupancy at our hotels improved each month with April achieving $59.1 per cent may achieving 63 per cent and June achieving 63, 6% underscoring the high quality and favorable construct of our portfolio. Our hotels also gained approximately 600 basis points of market share during the second quarter, our strong perf.

<unk> was broad based with our resort properties, achieving 83% occupancy with ADR and Revpar exceeding 2019 levels, our drive to markets achieved 67% occupancy with many markets such as Austin, Charleston, and Orlando nearing 2019 occupancy levels and are all suite hotels achieved 63 per.

Rent occupancy, while gaining 9 points of market share compared to 2019.

With respect to segmentation as we expected our leisure oriented drive to markets such as Charleston in South, Florida benefited from a surge in leisure demand and drove not only robust occupancy of 86% and 83% respectively. But also achieved 2019 revpar levels during the second quarter.

Leisure demand drove our absolute weekend occupancy to 74 per cent and our ADR to $155 both of which are 87% of 2019 levels. Our weekday occupancy was 55 per cent, which improved by 13 points from the first quarter and a weekday ADR of $134 increased by 17 per.

Aided by an increase in business transient and group demand while business transient remained significantly below 2019, we were encouraged to see a quarter over quarter increase of 6.5% in revenues as more employees turned to offices.

We also saw group demand expand beyond primarily social groups to now include more corporate meetings and training sessions, which led to a nearly 50% increase in our group revenues from the first quarter, our hotels will continue to be attractive to small groups as demand improves.

The overall step up in demand during the second quarter allowed our portfolio to drive ADR to 75% of 2019 levels ADR.

For our open hotels increased by approximately 19% from the first quarter with our urban market has seen the strongest improvements.

Our ADR also improved each month with nearly 20% of our hotels exceeding 2019 levels in June.

We remain encouraged by our industry's ability to maintain rate discipline, which also has positive implications for ADR growth throughout the cycle.

Combination of strong ADR performance and our ability to manage costs, let our hotel EBITDA to grow significantly ahead of our revenues, enabling us to achieve positive cash flow sooner than most of our peers.

<unk> current trends do not wane, we expect to remain cash flow positive moving forward.

Now turning to capital allocation.

We believe that our strong balance sheet provides are all day with a competitive advantage to drive both external and internal growth.

Relative to external growth, we recently acquired the newly built Hampton Inn and suites in Midtown Atlanta for $58 million in an off market transaction.

Atlanta is expected to be 1 of the top growth markets throughout this lodging cycle.

The Midtown Atlanta, Submarket has seen significant new development activity and an influx of new companies, including Google, which is currently building a new office just 3 blocks from our hotel.

We are confident that the hotel will achieve a stabilized NOI yield of 8% to 8.5%.

This acquisition aligns with all of our objectives of owning rooms oriented high margin premium branded hotels located in the heart of demand, while generating accretive revpar and margins relative to our portfolio.

Our acquisition pipeline of attractive opportunities is growing and we are confident in our team's ability to continue sourcing additional accretive acquisition targets, while maintaining price discipline.

With respect to internal growth are embedded catalysts are unique and compelling given the magnitude to which they have the potential to drive incremental EBITDA growth throughout the cycle in June we provided an update highlighting our portfolio specific initiatives, which are expected to generate incremental hotel EBITDA of $23 million to $28 million.

These initiatives are well underway and include a conversion of the Wyndham Santa Monica into an independent lifestyle hotel and a transition of the Wyndham Charleston, and the embassy suites, Mandalay Beach to Hilton's Curio collection. These 3 conversions are expected to generate $7 million to $10 million of incremental EBITDA on a stabilized basis. These.

Remain on track to be completed and relaunched in 2022.

Our initiatives also include revenue enhancement projects, such as space Reconfigurations related to guest rooms, F&B outlets and other underutilized areas, which only require small investments while generating significant returns and are expected to generate $9 million to $11 million of incremental stabilized EBITDA.

And we have margin improvement opportunities, which are primarily derived from contract amendments to reduce management fees.

[noise] amendments are expected to create 50 basis points of margin improvement or $7 million of incremental stabilize EBITDA. It is important to note that our margin opportunity of 50 basis points is in addition to any industry wide post COVID-19 margin expansion.

We believe that our ability to drive external growth and our value creation opportunities will elevate our performance throughout this cycle.

Looking ahead, although the strong momentum for the second quarter continued into July we recognize that the COVID-19 variance creates some uncertainty with respect to the near term trajectory of the lodging recovery.

While it is too early to draw firm conclusions. It is worth noting that we have not seen a meaningful impact to our portfolio.

We believe that in the absence of a pullback in demand caused by the variance the positive economic backdrop, we have with a strong consumer and healthy corporate profit should continue to lead to improving fundamentals.

As we get past labor day, taking into consideration normal seasonality, we expect that leisure demand will come off of the summer peak, but remain healthy in light of the continuing flexibility and hybrid work environment. We believe that the next leg of the lodging recovery will be driven by business transient, which we anticipate.

We will see a step change at some point post the Jewish holidays, the order of magnitude of which will be predicated on the pace of offices reopening and children returning to schools.

With respect to group, we are continuing to see relative improvement in bookings, which should gain further momentum in 2022.

Putting any uncertainty aside the dynamics of the early phase of the recovery, thus far demonstrate that when a sustained recovery takes hold it will be stronger and faster than originally expected.

Overall, we cannot be more pleased with our relative positioning, which we believe will allow our all day to outperform in each phase of the cycle.

It's a lodging recovery enters its next leg, which will be driven by an acceleration in business transient or urban centric portfolio will benefit given the appeal of our hotels to business travelers and our traditional exposure to this segment. Additionally.

Additionally, our portfolio is poised to deliver EBITDA growth that is above and beyond the growth that is derived from a recovery to pre COVID-19 levels. This will come from the deployment of our balance sheet capacity towards acquisitions in high growth markets and the incremental EBITDA generated from our embedded value creation initiatives.

Finally, our strong liquidity.

Lean operating model and our ability to generate incremental growth will drive significant free cash flow and NAV appreciation, enabling us to create meaningful shareholder value long term I will now turn the call over to Sean Sean.

Thanks Leslie.

We're pleased with our second quarter results, which accelerated throughout the quarter and have continued to improve so far during the third quarter.

Our pro forma hotel operating results include the 99 hotels that we owned as of June 30th.

Our reported corporate adjusted EBITDA and <unk> include operating results from all sold hotels during oral Jade ownership period.

Pro forma numbers for the 99 hotels exclude the residents in Indianapolis Fischer's.

And residents in Chicago Naperville, which.

Were both sold during the quarter.

Additionally, our pro forma numbers have not been adjusted to reflect the impact of the acquisition of the Hampton Inn and suites, Atlanta, Midtown or the sales of the 3 non core hotels in Hammond, Indiana. Since these transactions closed after the end of the quarter.

These transactions will be incorporated into our pro forma numbers starting in the third quarter.

Our second quarter portfolio occupancy of 57, 9% represented a 15 percentage point improvement from the first quarter.

Our portfolio occupancy was strong throughout the quarter ending at nearly 70% of 2019.

While accelerating throughout the quarter from 55, 2% in April 50.

<unk> 57, 5% in May and 68% in June.

These results were better than we expected and provide further evidence that our portfolio is well positioned to capture demand in the current environment.

Finally, as we expected our hotel portfolio outperformed as demand returned and gained approximately 600 basis points of market share during the second quarter.

The improving demand provided our hotel operators with the ability to yield rates.

Building, an average daily rate growing over 19% from $119 in the first quarter to $142 in the second quarter, including a $150 in June.

Approximately 20% of our hotels generated ADR is in excess of 2019 in June including markets with the highest demand such as key west Charleston, and Fort Lauderdale in Miami.

Our hotel pricing power throughout the quarter provides us with confidence that we will be able to continue increasing pricing as demand normalizes.

The improving operating trends during the second quarter led our entire portfolio to achieve hotel EBITDA of $49.9 million, which represented the second consecutive quarter of positive hotel EBITDA.

With respect to our 97 open hotels these properties achieved occupancy of 61%.

Average daily rate of $142 and $54.4 million of hotel EBITDA, representing the fourth consecutive quarter of positive hotel EBITDA.

We are encouraged that this momentum has continued in the third quarter started off stronger than our expectations.

In July our portfolio is expected to generate occupancy of approximately 66% and ADR of approximately $163.

Representing a 17, 5% increase in Revpar from June.

Turning to the bottom line, our second quarter, adjusted EBITDA was $43.6 million and adjusted <unk> per share was <unk> we.

We were pleased that our portfolio was able to generate positive <unk> <unk> per share for the first time since the start of the pandemic, which affirmed our assertion that our all day would be 1 of the earliest to return to profitability due to our lean operating model and portfolio construct.

As low as we mentioned while demand accelerated throughout the second quarter, we remain vigilant in monitoring operator compliance with the appropriate cost containment initiatives for the current demand environment.

Underscoring our continued focus on controlling costs, our second quarter total operating costs remained approximately 40% below the comparable period of 2019.

Our team also remain vigilant in controlling variable costs during the quarter.

Including operating with 47% lower wages and benefits compared to the second quarter of 2019.

The value of our cost control measures are also evident in our quarter over quarter performance.

Our second quarter revenues increased 67% from the first quarter.

Our operating costs only increased approximately 34%, which allowed our portfolio to increase the bottom line by approximately $39 million.

But all that being said we are closely monitoring the industry wide challenges to attract and retain associates.

We continue to focus on implementing best practices to remain competitive in our local markets.

On a relative basis, our portfolio is better positioned to operate in the current environment as a result of fewer ftes required in our hotels, given our lean operating model.

<unk> physical footprints and limited F&B operations.

We do expect the labor issues to begin to wane as the market begins to normalize during the fourth quarter.

We've been very active managing the balance sheet to create additional flexibility and further improve our cost of capital.

These activities include completed a 5 year high yield bond offering that was oversubscribed and upsized to $500 million with an annual coupon of 375%.

Representing the tightest pricing ever for a non investment grade lodging REIT.

Extended the maturity date of a $100 million term loan from January 2022 to June 2024.

And completed new amendments to our corporate credit agreements to extend covenant waivers through the first quarter of 2022.

Increase our acquisition capacity to $300 million and add flexibility to retain certain proceeds for general corporate purposes.

These transactions are a testament to our strong lender relationships and favorable credit profile.

We have achieved our 2021 financing strategic objectives, which included addressing 2022 and 2023 debt maturities.

Diversifying our debt sources, extending maturities and increasing flexibility on our corporate credit agreements.

Turning to liquidity.

We ended the quarter with approximately $658 million of unrestricted cash.

$400 million of availability on our corporate revolver.

$2.4 billion of debt.

And no debt maturities until 2023.

We continue to maintain significant flexibility on our balance sheet current.

Currently a 100% of our debt is fixed or hedged and 83 of our 97 hotels are unencumbered.

We were encouraged that our second quarter monthly cash burn was significantly lower than expected, which was driven by the portfolio's profitability throughout the quarter.

Our second quarter average monthly cash burn was approximately $2 million, which was materially below the low end of our prior estimated range.

Normalizing for the $14 million semiannual interest payment on our <unk> senior notes our portfolio generated positive corporate cash flow during the second quarter.

On an annualized basis, our second quarter hotel EBITDA of $49.9 million is sufficient to generate positive corporate cash flow achieving a critical milestone in our recovery.

Looking ahead, assuming the current trends in lodging fundamentals continue.

We expect to generate positive corporate cash flow for both the third and fourth quarters of 2021.

Even as fundamentals are improving our efforts continue to be focused on maintaining adequate liquidity, while making prudent capital allocation decisions to position our portfolio to drive outperformance during the recovery and beyond.

We remain among the best positioned lodging Reits to take advantage of ROI investments and external growth opportunities, which we demonstrated through the acquisition of the Hampton Inn and suites Midtown Atlanta.

Additionally, we are continuing to prioritize less capital intensive high value revenue enhancement and margin expansion initiatives, such as space Reconfigurations parking and contract renegotiations. In addition to executing on our $3.2022 conversions.

Finally, we continue to estimate our O J funded capital expenditures will be between 75 and $85 million during 2021.

In closing our O J remains well positioned with a flexible balance sheet ample liquidity lean operating model and a transient oriented portfolio with many embedded catalysts.

For the remainder of 2021, we will continue to monitor the financing markets to identify additional opportunities to improve the ladder of our maturities.

Reduce our weighted average cost of debt and increase our overall balance sheet flexibility.

Thank you and this concludes our prepared remarks, we will now open up the line for Q&A operator.

Thank you ladies and gentlemen at this time, we will be conducting a question and answer session. If you'd like to ask a question you May press star 1 on your telephone keypad, a confirmation tone will indicate your line is in the question to you May Press Star 2 if you would like to remove your question from the Q4 participants using speaker equipment, it may be necessary to pick up.

Your handset before pressing the star key our first question comes from the line of Austin <unk> with Keybanc capital markets. Please proceed with your question.

Great Good morning, everybody.

Sean I was wondering if you could share how the $163 ADR in July that you mentioned, how that stacks up versus the same period in 2019, and then given some of the confidence.

You highlighted about being able to increase pricing as demand continues to improve coupled with the expense savings you highlighted.

Versus 2019, do you expect margins could reach or even exceed 2019 level in the back half of this year.

Great. So I'll start with the with the July ADR. So we're within our July ADR was within about 9% of 2019 levels.

And so we were.

Obviously, we're happy with that result, and see our ability to drive rate specifically.

Down a little bit in Nevada, our weekend was actually at over 100% of.

Of rate for free.

In July as well so.

Further bolstering.

The strong leisure demand out there on the margin side, we would expect margins to continue to improve throughout the year I mean for example.

In July specifically.

We're expecting our margins to be around.

A little under ours are approaching 200 basis points below 2019 levels in July which is a <unk>.

Terrific result in light of the fact that total revenues are projected to be around 30% below 2019, and so our ability to to cost contained and managed and manage those costs and get close to that level.

Adjusted EBITDA margins as it is impressive we also saw.

Strong results there on the second quarter as well, where we saw our departmental.

Profit margins actually exceed 2019 levels in <unk>.

In the second quarter as well so our ability to take cost contained in an appropriate manner for this environment.

Particularly around around wages and benefits.

As a strong testament to the asset management team.

That's very helpful. And then just switching gears either Leslie Sean we've seen many of the lodging Reits active under their Atms recently and you guys have certainly been ramping various investment initiatives. So while completely understand you have significant liquidity today, just curious about your thoughts whether you view your common.

It would need to be attractive to you and would you consider utilizing the ATM if other acquisition.

Acquisition or other investment opportunities emerge.

Sure.

First and foremost we actually don't have an ATM program at all day, so, but it's a theoretical question by they get it at a good cost of capital question. The capital allocation question specifically.

I think with our liquidity and sort of the way we see.

Our acquisition pipeline building relative to other alternatives that we have which using existing capacity will be first and foremost.

We don't believe there's any near term need for us not to be able.

To use existing capacity for acquisitions under our line of credit we have $300 million of acquisitions that can be allowed under you know just with existing capacity, we think our balance sheet today provides us plenty.

Plenty of liquidity to be able to fund the <unk>.

Fund that level, which is the existing cash and so.

We think that.

When we think about capital allocation, obviously, when when the stock price at the level that is above NAV as capital Allocators, you would expect us.

To want to use that currency, but at current levels and I'd.

Card acquisition expectations, that's not something on our on our near term horizon.

Great I appreciate all the thoughts.

Okay.

Our next question comes from the line of Michael Bellisario with Robert W. Baird. Please proceed with your question.

Thanks, Good morning, everyone.

Let me just first question on the Atlanta transaction.

How long does a deal like this take to get across the finish line. When did you guys lock in pricing and then kind of how do you think about pricing today versus estimated replacement cost.

Yes.

First of all I do want to just give kudos to our acquisition team who has been working hard too.

Advance our discussions on a number of off market transactions and so you know as we've talked about before off market transactions take a little while to germinate and so we've had discussions on this asset since sort of late first quarter.

And we were able to.

Move forward on that transaction throughout the quarter and I would say that in general we feel pretty comfortable on how the how the pricing for this asset is advance even in net short period of time realm.

Relative to where we locked it in.

Mike what was the second half of your question.

About replacement cost yes.

Yes.

We are very confident.

And the value of this asset being below replacement costs low.

Land value has significantly improved.

Increased rather.

Given the scarcity in the day in the Midtown Atlanta, and given the amount of construction that's going on there.

This particular seller had been amassing land 2007. So you can imagine that that obviously land values have improved increased dramatically since that period of time. Additionally, we all know that construction costs and labor has moved dramatically as well in the last couple of years and particularly since this transaction broke ground.

So we're very confident.

In the fact that we were able to.

Get this asset below replacement costs, we think the $88.5 yield on this asset speaks to the high quality of the asset and speaks to our underwriting and our ability to get this on an off market transaction. We also believe that this asset is accretive on all of our metrics Revpar margin.

And.

Keep in mind too that we recycled capital.

Out of the suburbs suburbs of Chicago into a high growth market of Atlanta.

Net.

That's helpful detail and then 1 per ton maybe can you help us understand or just give us any detail on what youre seeing on beachy bookings for the fall and have you seen any change in the booking window in terms of extending at all at this point yet.

Yes, good morning, Mike, Yes, so as far as the booking window I'll start with that.

What we're saying is.

If you recall, we were at a zero to 3 for a long time and what we've been enjoying now as everything is moving out to 7 to 14 days, which is giving us more confidence in our pricing first and foremost in regards to the booking window because people are putting their toe in the water and getting out and traveling.

And then when we look at BT in General we have continued to see a step up in the amount of companies that are traveling even.

Even before offices completely coming back which is encouraging because we are seeing companies that are national accounts, we enjoyed regional and local travel, but now we're seeing more of the national accounts, which were seeing on Tuesday Wednesday, the occupancy start to grow because of that type of travel prior to offices completely coming back and reopening.

In the late fall timeframe. So I would say that BT is stepping up even though it's continuing to be below 19 levels. The real opportunity for us is when that does come back right typically comes back with it at the same amount when the volume starts to improve.

That gives you a little bit of color on what's happening in the <unk> from.

Yes.

Helpful. Thank you.

Yeah.

Our next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.

Hi, good morning.

Just a question on your conversion announcements that you've made in June I'm. Just curious if you have revised your ROI expectations on those given the strong leisure demand we've seen in all 3 of the relevant markets.

No I mean I have to.

Obviously, we launched this update.

Where we put numbers in.

In June and so we've taken into consideration.

We take into consideration the leisure centric cycle that we're seeing realm.

Relative to our returns as we sort of updated our our underwriting what I would say here, though just we've been foreshadowing the value creation within our within our portfolio and we've now put numbers to this.

Difficult numbers in $23 million to $28 million of incremental EBITDA. We think this is real and tangible value that we can point to where it's coming from the work is underway.

And some of it's already complete this is going to provide above cycle recovery growth for us and we have confidence in our ability to achieve the EBITDA numbers that we provided within the 3 buckets you know on the conversion side to your point. These are in very strong high demand markets with great locations.

You know the markets are demonstrating that they can see very high.

Right and our assets are underpenetrated relative to currently where they are operating so we've got the right brand program. We've got a strong renovation program, we put together and we're going to be able to re rate the customer.

On that side on the revenue enhancement side, we feel very good about the space Reconfigurations that we've instituted we've done them in markets with strong.

With strong demand dynamics for example, adding meeting space in the high growth market of Atlanta, and then the on the margin side, we already have locked in 30 basis points of that pick up by the contract by the contracts are already being negotiated with and we have a clear line of sight.

On the incremental 20 basis points. This is just 1 channel of growth that we have within our L. J I. In addition to obviously the internal growth that we've articulated clearly you've seen us start executing on the excellent growth as well and our performance has been in the top quartile. So we feel very good about all of those components, allowing us to be in a position to outperform.

Throughout the cycle, but we feel very strong about our ability to achieve EBITDA not only the conversions, but all of the value creation that we are we are articulated.

Got it.

Talk about additional conversion opportunities I think in a slide you said 20 percentage of portfolio could be converted.

We've seen pretty strong independent.

Performance in somebody's leisure markets I'm curious could you.

Convert more of your branded properties to independents at some of these.

Strong leisure markets that you have.

Yes, I mean look we evaluate each asset and each market on a case by case basis, our general investment thesis centered on having premium brands and we by and large believe in that pretty strongly.

You've seen that with the acquisition of Atlanta, we are converting Santa Monica to an independent, but that's a unique market in a unique asset where it sits.

32 keys.

And so we think that that asset can punch above its weight and not have a rate ceiling and that it deserves to be an independent but by and large we think that brands are the right direction ago.

Alright, thank you.

Our next question comes from the line of Dori Kesten with Wells Fargo. Please proceed with your question.

Thanks, Good morning, everyone.

John can you compare leisure and business transient demand versus 19 as you moved from April to July please.

Sure Dara so.

What we've seen on.

The continued obviously pick up on on all segments from.

From the first quarter the second quarter.

On a sequential month on month growth.

You've seen on the <unk> side.

Our revenues increased 65% from the first quarter.

With.

Volume up 40% and ADR up 18%.

So on a month on month basis, what you've seen is every single month got better and better.

On the BT side, I will say that.

I think the big.

Just trying to do though we're happy with the quarter on quarter growth. We are still sub 30% of 2019 levels and we really view for our portfolio that is the upside potential.

For us as we look at our urban centric portfolio has a lot of room to run.

On the growth side, and so thats the biggest trying to on a on the group side. Once again group increased a little under 50% from the first quarter.

And that's what that was up 37% higher volume and ADR up about about 7%.

<unk>.

Similar to the business transient or group is only at about 25% of 2019 levels.

You would expect.

That to be another avenue of growth for us within our portfolio interestingly enough.

Our booking activity was strong during.

During the quarter, we booked.

For 2022 for example, our average rate was north of $200 for the call. It 100.

$15 million roughly of revenue that was booked.

In the quarter for the quarter for next year.

Our our 2022 bookings com.

Comp to where they would've been in 19, leading into 'twenty is at about 2 thirds of the level of bookings. So we have.

We are beginning to pick up but theres still a lot of room to go there, but what's encouraging to us is that the rates that we're booking that business up is that big premiums to where we are.

Where we are today and really gives us confidence about the trajectory of the recovery.

So sorry, so you said between group is 25% to 30% of 19 levels and where do you stay leisure was.

Leisure.

About a little under 70% of 2019 levels.

Okay. Thanks.

Our next question comes from the line of Gregory Miller with Suntrust. Please proceed with your question.

Thanks, Good morning, all actually true Securities These days.

For our company.

My first question is also on the Atlanta acquisition, we have investors, who are trying to understand the relevancy of our Hampton Inn flag versus a Hampton Inn and suites flag.

Specialty relating to your headline purchase price could.

Could you provide some perspective on the materiality of this branding difference.

Sure. Let me just say you know that the Hampton Inn in Hampton Inn, and suites is a top Hilton brand. It's a category killer and this asset is in a great location and I'll, let Tom price provide some color on your question.

Good morning, Greg So the Hampton Inn, <unk> suites, typically punches about $15 above the Hampton Inn, when you look at it on a totality.

When you think about how you compare Hampton into Hampton Inn suites, and the reason for that is you get a premium for the suites and quite honestly many of them were more new builds as we look at how hamptons evolved throughout the years. This particular asset what we're most excited about this as a 20 storey building in Midtown Atlanta, which is a.

Thriving market with office building construction at about 17 projects that Leslie mentioned earlier with Google being literally toe to toe 19 stories 3 blocks. It out. So we're excited about not only the brand being a Hampton Inn and suites, because we think it's a 7 day.

Demand traveler that's attracted to this you will get the benefits of <unk> during the week, because it's a strong Hilton brand and Hilton honors members and then on weekends because of you have a variety of different type of business not only education film <unk> crude production and then the Midtown area is really an evolving market, where it's a <unk>.

Population growth and the and compared to the city of Atlanta itself. So you've got professional tech science in various different types of companies moving into that area. So we think at this particular location with a Hampton Inn and suites with a 'twenty story Sky lobby rooftop bar. This thing is going to really perform comparatively because of the premium.

It's over Hampton, but from a predominantly in the location. We're at we think it's going to be very attractive.

Yes.

Great. Thanks, very much 1 other question just may be quite ignorant.

But I'll ask anyways.

How material is Canadian inbound demand to your hotels in normal times and I'm thinking you as the borders reopen what.

What the implications might be from your portfolio.

Yeah.

Yes.

What we find and I'll give you an example of where we see a significant amount of travel.

And it's predominantly down in the South, Florida, and West Coast of Florida, where we see significant Canadians, who travel and no surprise during the wintertime, they like to come down and get a little bit warmer weather. So first and foremost, it's a pretty significant driver of business.

Again based on what's happened this year with domestic leisure, obviously, we've been able to fill in with rates even higher in 2019 throughout South Florida. As an example of our beach locations and where people will travel I would also say that they do come across on the northern side. When you think about Boston.

New York Theres, a significant amount of Canadian travelers that will visit those bigger cities for a variety of events, obviously professional baseball teams travel as well as the fans that come across and we do see a fair amount of Canadian travel in those locations. We don't have too much out west that would be the other location that I would say Greg out in Seattle, as well as Portland, where.

You get significant Canadian travelers, but those are the areas that I would say are having the most influx.

Do think though in 2022 there'll be pent up demand for Canadian travelers to come down again to South, Florida, Enel add to our first quarter, which quite honestly, we had a second season in Florida. This year.

Just on the pent up demand with leisure and then the vaccination rates and the restrictions being loosened down there.

Thanks, I appreciate all that.

Small cells.

Our next question comes from the line of Chris <unk> with Deutsche Bank. Please proceed with your question.

Hey, good morning, everyone.

Wanted to go back to the acquisition.

<unk>.

The Hampton it it makes a lot of sense to me, but is this a lot of your competitors are running kind of 2 resort markets and generally full service is this kind of a view on your part that in certain markets select service is going to be competitive with full service and I guess the question being what do you do this acquisition.

If it was a full service hotel with similar economics, and the same exact market.

Chris We don't do traditional full service hotels I mean this asset represents you know.

What we focus on I mean, we have great conviction in our traditional invest.

Investment thesis here, we like premium branded assets.

Where revenue comes from you know 80, 580% of our revenue comes from rooms. It has a limited amount of F&B F&B, a small amount of meeting space and has high margins and a strong transient.

Distribution within the within the hotel so.

The characteristics of what you just described doesn't even fit within our box of what we would focus on.

Think about our investment thesis as long term, there's nothing about the pandemic that has changed our view on what we want to buy you know we're not focused on themes, we think that buying an asset that in a market that has multiple demand drivers you know Atlanta has a strong business component business travel component.

<unk> is the art and culture center of of Atlanta, and obviously, it's well known for its sports within Atlanta, and it's got a.

<unk> Convention center. So all of the legs of demand are in are in Atlanta, and that's what we focus on legs of demand.

High margin assets rooms oriented premium brand assets, that's what we focus on even we can also look at lifestyle brands, there's a wide spectrum of lifestyle brands in terms of how they execute it but we generally like what lifestyle brands that have a thoughtful F&B meet.

Meeting space, it's less than 10000 square feet, but still fits in with a sort of a select service profile. If you will so that's what we that's what we look forward those are the characteristics.

Okay I appreciate all the color Thanks, Leslie and then.

On the on the ROI projects that Youre working on I know a lot of them are already underway or even almost complete but several more to go is there any risk there on construction costs and labor costs and how you've underwritten the projected returns.

Yes, so Chris we factored in.

The current environment for.

Both materials cost, but as well as as construction costs labor et cetera, so the non.

We published that was happening real time, and so that was factored into.

In our numbers.

Okay, Great I appreciate it thanks.

Our next question comes from the line of Neil Malkin with capital 1 Securities. Please proceed with your question.

Yeah.

Hey, everyone. Good morning.

First question on acquisitions overall.

Yeah.

Happy to see delighted to see you guys talk about.

That is another growth lever for your company given the.

Pretty enviable cash cash position you have with your 19 sales.

You talked about your pipeline and you talked about Luckily.

Pursuing growth market and I think we can all agree that you know growth market just look at what's going on in the cycle are you know.

The Sun belt.

Can you just maybe talk about.

Some color into the pipeline, what kind of deals youre going after and maybe you know or are they more.

Are you casting a wider net from.

You know away from the coast and including some of the.

The higher growth Sunbelt markets, where you're seeing tremendous amount of in migration and corporate relocation.

So so from what I would say just sort of piggybacking off of Chris's previous question I think Atlanta represents.

An example of the type of asset and the type of market that we you know that we want to focus on right. Obviously markets that are showing strong growth at multiple legs.

And we want assets that are located within that market.

<unk> demand and not.

Not compression type locations assets in markets that have characteristics that we would be interested in I think Austin is an example of that Phoenix and in parts of Denver would be other examples of kind of where we would see the opportunity to get similar characteristics of what we get what we saw in Atlanta.

Sure.

Makes a lot of things.

And then in terms of just.

The the Delta Varian and the sort of delays, we're seeing now and returned to work from some of the largest companies.

You know in the country.

I'm just talking about maybe just with that with that framework looking at your California, particularly Northern California, Chicago and New York.

You know assets or portfolios.

Are you you know I guess what is the commentary from.

The property managers people on the ground.

You know in terms of maybe just seeing potential booking windows or the amount of demand, maybe become less than or not materialize or potential cancellations.

How much of a worry as the potential for re <unk>.

Re implementation of restrictions, especially again in those markets I just talked about given the.

Once a day for the leaders in that in those cities to do so.

Yes.

Obviously, you know we acknowledged that the variant is a risk in any incremental restrictions that are put on any market. You know in addition to the ones that you named would have some level of potential level of impact.

On demand, but what I would say is that in the near term we haven't seen any evidence of that the most recent data that we have today is July with Sean mentioned came in at 65 per cent of occupancy and if you look at the last week of July our occupancy for open hotels is actually 70% occupancy so in.

And keep in mind, that's what we're achieving that while the news about the variant is out there.

Our booking window is as Tom mentioned you know.

Still relatively short, although it's expanding about 65 per cent of our demand comes in sort of zero to 7 days and so we're not really kind of in that window, where we're sort of seeing it drop off right. Now we expect leisure to continue to be strong through through August and then seasonality to kick in or I'm, sorry, not through August mid August and we expect season.

<unk> to drop off in the latter part of August and through through Labor day.

To occur so what I would say is that we're not seeing any evidence in the short run I think people are taking sort of a wait and see approach I would also say that you know on the group side that we really haven't seen any cancellations. There at all we have seen some delays.

But we arent seeing any evidence of day that suggests that the news on the variance is dampening demand, but we recognize that it is is a risk. The reality of it is is that we expect to see some level of a pickup in business transient demand assuming the trends.

Continuing from the second quarter.

But it is highly predicated on the momentum that we're seeing in offices reopening.

So there's a correlation there and I think it's too early to make a prediction of what that application is going to be the last thing that I would add Neil because I know you mentioned Chicago in California as examples just lift past weekend, even though it was an outdoor event 1 of the major festivals, we did about 100% occupancy for 3 consecutive.

<unk> as an example, so even in the face of the Delta variant people are going to get out and travel is just going to have the opportunity to wear a mask indoors and be able to travel differently and the same thing when I looked at.

California.

We have 12 events that are actually going to be at the convention center will have to see how attendance.

Picks up but the events at the convention centers and group bookings are going to continue. The question is how will they drive attendance and we'll monitor that obviously as this thing evolves, but we're encouraged at this early time that we haven't seen because of the booking window as I mentioned, a significant drop off in pace outside of the seasonality of the last couple of weeks.

Of August and the Jewish holidays in September. This you mentioned and then the last thing just.

To reaffirm sort of lesser Lee's comments within the script is that you know the traveler has been extremely resilient.

Thus far during the pandemic and although that Delta Varian, obviously is another risk.

Behavior, we've seen from the travelers has been extremely resilient in the face of just continuous pivots. If you will on the outside.

Yes.

Appreciate that if I could just get clarification on 1 topic you talked about Austin, you talked about a margin potentially.

Creasing as we go on in the year I'm talking about B T Post labor day in Jewish holidays.

But then you know, but then also you have that sort of I guess, maybe pick up in especially in the coastal markets, where they're still getting the unemployment.

<unk> benefits.

The tick up in Ftes and.

Various other things that come with the core customer returning and so to me that that incremental growth in FTE, what would imply from a relative pressure.

In margins just because of the again added added Labor force are you, saying because you think margins are going to continue to go up that you're closer to your long term run rate.

Sort of FTE staffing model per hotel is that what that what you're implying or maybe if you can comment on that.

Understand where you guys are in terms of the operating.

Staffing model going forward.

Yes.

I'll start with high level margins have been Tom can give some sort of color around specifics around around wages and benefits are our confidence around the ability to drive incremental margins from where we are today as is.

Around the fact that we expect rate to continue along the current trends, which is the which is the increase throughout the year, which is.

Which is as the as the Remixing of the hotel's happened its remixing with higher rated customers.

As we mentioned earlier.

We're still significantly below both business transient and group, which are our traditionally higher rated customers and so we would expect as.

We're able to continue driving rate.

Throughout.

As the year progresses, we would expect that to drive margin and what you've seen each month.

Our our rates continue to improve revenues go up as the recovery unfolds and margins get better the other factor on margins is that.

A bigger percentage of our total revenues just coming out of the rooms today, which is our highest.

Rated business relative to both F&B as well as other so.

That as that business continues to progress.

We're seeing margins are strong I know F&B.

Specifically.

Margins and F&B were 750 basis points higher on a third of the revenues in the second quarter, which is a function of.

The reinvention of the F&B model.

Within within our portfolio.

And so that all of those factors give us confidence alternative.

Let me adjusted the other part of your question around kind of on the on the labor front.

Currently running at about 50, 50, now low fifty's of of labor relative to our 2019 levels from a 60% occupancy.

We you know we recognize that you know, there's a labor issue, which is well documented and that we're gonna have to put some labor back in as occupancy continues to rise, but we do have some level of confidence that we're not going to need to go back to all the way back in 2019 levels of occupancy you know a good example of that is is that.

US in a number of our peers have articulated and we have a number of properties, particularly in the leisure and sunbelt markets that are running occupancies in the 80 to 95 per cent and for example for US South Florida. Our portfolio. There is running 80 to 95 per cent, but we're only have 75 per cent of our 2019 labor now we recognize that we have to put some.

Of that back, but we're pretty confident based on play that we're operating today and the Occupancies that were running in efficiencies that we've learned that we will not have to go back to 2019 levels of labor.

No I got you. Thank you I appreciate that.

Yeah.

Our next question comes from the line of Bill Crow with Raymond James. Please proceed with your question.

Hey, good morning.

I'm going to follow that path that you just went down.

Gonna go a different direction, but.

No.

We've seen some down cycles from downturns and every time, we emerge from it we find new efficiencies and we do things differently and we get better but.

Yeah.

The people good at running hotels, where we overstuffed, where we fat and happy and <unk>.

2019 that we can cut that much labor.

It just it just seems like we get back into the same old traps every time.

Yeah, I would say you know.

No.

Bill with any industry, you evolve over time and little things get added and little things get added called brand creep.

And you know and so there is an opportunity to sort of pull back on some of that and I think there are kind of 3 areas in which we have a general confidence in around on the expense side and you know the first category is on F&B.

And the branches have provided thought leadership around this area. So they're engaged around this and so we think that whether it's hours of operations or the food offering or the labor model related to F&B all of that's going to improve and what I would say, though relative to our portfolio the ability for the stickiness around the cost savings on the labor side of things.

We think that in a model where you have a fixed.

Service model like in the embassy suites, and the residence Inn, it's easier to control the labor model, the offering and the al and the hours of operation relative to your traditional full service hotels that have a you know a menu of variety and the customers expect something differently. The other area on housekeeping, which is obviously it has.

Gotten a lot of commentary around it.

I don't think that we're going to go back to the old model, we are moving into an opt in structure, which you obviously have heard Hilton come out and publicly state.

And and clearly that's going to be predicated on the take rate. So we and that's still evolving you know over time, particularly as the BT customer comes back, but even if we move to a light clean structure, which taking out trash refreshing towels et cetera. That's still allows the housekeeper clean almost to ask more than 2 X what he was.

Cleaning before.

And so there is opportunity there and what I would say relative to our portfolio to housekeeping, we have a high exposure to Hilton.

A little over 40% in our portfolio segmentation in which we play and it has a higher ability to stick.

To this housekeeping model relative to when you move up to see the segmentation chain the higher end and additionally, the length of stay of our portfolio given the extended stay of our portfolio also AIDS us in being able to maintain sort of this housekeeping savings.

Third area that we have confidence in is on the clustering side.

Yeah, we've always clustered within our portfolio, but what we've learned in during this pandemic is that we can cluster across a wider spectrum of assets, meaning greater distance between the assets because we always generally clustered close proximity and then we can close to deeper within the organization, which we hadn't done before and again, if you sort of think about the footprint and average size of our assets.

The number of assets, we have in our portfolio, which gives us greater opportunity to do that those are the things that I have the greatest amount of confidence in and I think that brands are supporting you know the ability to maintain that and we think that our portfolio construct it gives us greater confidence in the ability to achieve that.

Benefits of that.

Alright, I appreciate that.

If I could just follow up with a question on cancellations.

He changed and the cancellation rate.

Based on your discussions with Hilton and other brands.

We killed a lot of brain sales trying to change cancellation policies in 18, and 19 and all that kind of went out the window.

When do we bring back stricter cancellation policies.

Yes, good morning, Bill what I would say is first and foremost when I looked at how we're collecting on cancellation rates I started there before we get into the policy change in what we're doing we're actually collecting at similar levels to 2019, even in the face of the flexibility that the travelers, having and what is critical.

The beginning processes the shelf space for advanced purchase so for instance, with people trying to travel in the booking window that we talked about you are having the opportunity to now to book in advance and people are you know obviously with the pent up demand trying to get in early for some of these locations. So that's assisting on the cancellation because they are booking in advance.

That theyre tying up they have to go if theyre going to book the second thing, which is your question in regards to the policy.

Firmly believe the moment, we have the opportunity to be able to have that yielding on mid week is where the cancellation policy will shift as Leslie mentioned in July for the last 3 weeks, we've seen Tuesday Wednesday start to get into the mid Sixty's and occupancy and which is chasing the 7 days on the weekends, that's going to be the driver of that.

Cancellation, because you want to protect those 2 nights, where your highest demand and compression dates exist. So I truly believe the brands will come through and make that change and go back to where we were which will help us but again because we are collecting at similar levels I'm not as concerned as maybe you are with your question in regards to what's going on on the ground.

As far as the ability to collect.

Great. Thanks for the insights I appreciate it.

That's all the time, we have for questions I'd like to turn it back to Leslie Hale for closing remarks.

Thank you everybody for joining us a day, we hope that you enjoy the rest of your summer and as I said at the beginning I hope that you are contributing to the surge in leisure traveling yourself with your family. Please stay safe and we look forward to senior non eco hearing you on our next call. Thanks.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.

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