Q1 2022 Hersha Hospitality Trust Earnings Call
Hello, everyone and thank you for joining her show Hospitality Trust post cold till 2022 earnings conference call. This call due to begin shortly thank you for your patience.
[music].
Hello, everyone and thank you for joining the tissue hospitality Trust's first quarter 2022 earnings conference call. My name is Theres no be moderating the call today before I hand, you over to your host Andrew Damasio I would like to remind you if you'd like to ask a question during the Q&A session at the end of the Cold Peace Press Star followed by one on.
Your telephone keypad TJ Schultz will meet Yosef flow keep the flaw in your questions.
I have the pleasure handing you over to 100 Damasio P. Go ahead Andrew.
Thank you Darius and good morning, everyone. Joining us today welcome to the Hershal Hospitality Trust first quarter 2022 conference call today's call will be based on the first quarter 2022 earnings release, which was distributed yesterday evening.
Well as this mornings announcement of our definitive agreement to sell our urban select service portfolio before proceeding I would like to remind everyone that todays conference call may contain forward looking statements.
Forward looking statements involve known and unknown risks and uncertainties and other factors that may cause the company's actual results performance or financial positions to be considerably different from any future results performance or financial positions. These factors are detailed within the company's press releases as well as within the company's filings with the SEC with that it's now my pleasure to turn the call.
Over to Mr. Neil H Shah Hershal, hospitality, Trust's, President and Chief operating Officer, Neil you may begin.
Thank you Andrew and good morning, everyone. Joining me. This morning are Jay Shah, our Chief Executive Officer, and Ashish Perique, our Chief Financial Officer.
And thank you to all of you for joining today's call. We are excited to share that we have signed a definitive agreement to sell seven of our noncore urban select service properties outside of New York for gross proceeds of $505 million or approximately $360000 per key.
By divesting our noncore urban select service portfolio, we are sharpening our focus on on luxury and lifestyle portfolio, where we have been generating excellent operational and financial results as demonstrated in our first quarter.
First first quarter financial results announced today, and where we see great opportunity for growth.
Actually we are retaining our exposure to New York, which we believe is at the beginning of a very strong recovery and see tremendous unlocked value and upside in those assets.
As a result of us of our sale of either urban select service portfolio, we are improving our operational metrics significantly increasing pro forma ADR and revpar.
We intend to use the proceeds from the sale to provide liquidity for a significant corporate debt repayment. In addition to approximately $75 million of mortgage debt associated with the urban select service portfolio, we expect to reduce net debt by $460 million to $480 million, resulting in pro forma consolidated leverage.
Ratio of four nine to five one times.
And finally, we expect to recast our existing credit facility, which will eliminate debt maturities through 2024.
This will provide significant financial flexibility to continue growing our core portfolio.
Following the completion of this transaction, we will own 26 hotels in six key destination markets across the United States on a pro forma basis. The remaining portfolios total revpar based on 2019 performance will increase from $206 to $219 total ADR.
We will increase from $247 to $262 and EBITDA per key will increase from approximately $32000 to $33000.
We are very excited about this transaction and what it means for her share moving forward.
With that I'll turn to the quarter. When we last spoke in mid February all indicators pointed to a demand recovery through the spring since that time, the rapid acceleration of the recovery has surpassed our expectations, we significantly outperformed our internal forecast for the first quarter on both top line.
And profitability metrics. This accelerating demand recovery took hold across our entire portfolio and has continued into April and we expect this trend to gain further momentum throughout the year.
Property level cash flow sequentially improved from $3 $8 million in January to $12 $1 million in March our most profitable month since the onset of the patent debit.
In March our 33 hotels posted high watermarks on topline statistics since the onset of the pandemic.
Our revenue managers successfully executed our strategy of driving rate, resulting in a 10.5% ADR growth compared to the first quarter of 2019.
As the omicron Spike in January waned and demand rapidly recovered to close the quarter.
Rate integrity has remained one of the hallmarks of this recovery for the industry and is key to the recovery for lodging based on year to date performance from our resorts to our urban clusters. We believe strong 80 ours will not only prove sustainable but continue to improve throughout the year and across our high quality portfolio.
We are encouraged to see Revpar closing the gap to 2019 levels, even before a recovery in business transient and group occupancy has fully come to fruition in our gateway markets.
While we have experienced a dramatic <unk>.
Sequential improvement in urban demand in March. It's the continued demand growth we have seen so far in April coupled with our projected gateway market growth. We project for the second quarter that will push revpar higher from here the rapidly improving operating environment. We are seeing in our markets provides a clear trajectory of growth for our portfolio.
As we move into the second quarter.
Shifting focus to our market performance once again, our resort portfolio continued robust performance throughout the quarter with occupancy just shy of 70% and revpar growth of 28, 6% relative.
Relative to the first quarter of 2019, the resort portfolio generated $15 $2 million and EBITDA of 21 increased 21% increase to the prior quarter and approximately 80% growth on the first quarter of 2019.
Our properties in Miami and key West once again benefited from the unprecedented demand and pricing power in the South Florida market.
Parrot key hotel and villas was our best performing asset during the first quarter from a revpar growth perspective at.
As 85, 2% occupancy and a $579 average daily rate resulted in a 494 dollar revpar, which surpassed fourth quarter 2019, as revpar by 68%.
Parrot key generated $4 $5 million of EBITDA for the quarter a record for the property and 160, 161% increase to the same period in 2019.
We have seen continued strength at the parrot key through April and expect continued outperformance throughout 2022.
The Miami Beach market turned in another great performance in the first quarter as the Cadillac had its best EBITDA producing quarter ever generating $5 $5 million, a 73% increase to first quarter 2019 the.
The Ritz Carlton Coconut Grove rounded out this record setting quarter with 19, 5% revpar growth compared to the first quarter of 2019 and generated $1 $8 million of EBITDA, its best quarter ever and a 72% increase through the first quarter of 2019.
We expect to see very strong momentum in the South Florida markets moving forward driven not only by the traditional leisure traveler, but also by the clear uptick in future business travel related to the influx of notable tech finance and crypto currency companies that have relocated two and opened new office space throughout the Miami market.
In California.
Cornea the sanctuary Beach resort continues to demonstrate the pricing power of well located high quality differentiated offerings, posting ADR of $478 for the quarter, an increase of 76% to 2019, leading to revpar growth of 36, 7% compared to 2019.
The sanctuary posted EBITDA of 641000 for the quarter, a more than three times increase to the same period in 2019.
Okay.
Turning to our urban Gateway markets, we're seeing strong demand growth, even with the return of business travel in only its early stages, which will be the next leg of recovery of demand in urban gateway markets. As we all know urban demand has been disrupted in prior quarters due to Delta and then <unk>.
But there is more momentum today than we have seen since the onset of the pandemic more companies are returning to the office more conferences are taking place in person and TSA data and airline earnings suggest Americans are traveling by air at the highest rate since 2019.
And while the sequential growth acceleration I mentioned earlier has positively impacted our entire portfolio. It has been most pronounced in our core urban markets.
While occupancy continues to recover we have maintained pricing power across the markets that were most severely impacted by omicron, our urban hotel ADR of $218. In March is only two 5% below March of 2019.
This strength was driven by Boston.
Flat to 2019 at $228 Philadelphia down just one 2% at $241.
In Manhattan, which was down only two 5% at $212.
Notable performers for March include the Rittenhouse Hotel, which closed the month with an ADR of $601 $34, 6% above 2019.
The Ritz, Carlton, Georgetown, which generated an ADR of $554, 18% higher than 2019.
The Boston envoy with an ADR of $327, an increase of 6% to 2019, and Hyatt Union square, where ADR of $324 was about 5% ahead of 2019.
The continued rate strength drove revpar for our urban portfolio up 31% in the last two weeks of March compared to the first two weeks.
All of our urban markets have experienced sequential growth.
The largest drivers, though have been Philadelphia with 39, 5% growth, Washington D C with 36% growth in Manhattan at 28, 1% growth Revpar growth has continued into the first half of April and is expected to build for the quarter.
In a similar fashion to the urban demand recovery. The return of business travel has grown incrementally after severe impact from omicron. According to S&P, 77% of U S. Travel managers reported they had more employees traveling in March than February . In addition, 96% of U S traveler travel managers said.
Their travel spend will increase in the next 12 months predicting an increase of 34% on average.
This trend matches, what we are seeing on the ground, where the majority of our business travel for Q1 occurred in March.
In New York the reduction to our on the books occupancy for both group and business transient has improved by 50% from January to mid April .
While there is still ground to make up the improvement has been clear and consistent.
We believe this rapid improvement in our urban portfolio and the continued recovery of business travel provides a clear trajectory of growth for Hershey is uniquely positioned portfolio.
Yes.
From a strategic standpoint, our public market valuation continues to be significantly discounted to private market values for our assets and our deliberately assembled portfolio.
It is our view that as performance continues to accelerate and replacement value skyrocket. This gap will close through continued EBITDA production.
That being said our cycle tested and highly skilled management team will continue to evaluate any and all opportunities to close this public to private market value gap.
While using the financial flexibility that our recent transaction offers to focus on the parts of the portfolio, where we can add the greatest value in the early stages of this recovery cycle.
With that let me turn it over to ash to discuss in more detail, our financial performance and outlook.
Great.
Thanks, Neal and good morning, everyone.
I'll be sure to leave plenty of time for questions on our recently announced transaction after my prepared remarks.
So my comments will focus on the rapid accelerating demand improvement, we witnessed across our portfolio as the first quarter progressed and its impact on our margins and cash flow before closing with an update on our balance sheet and outlook for the current quarter.
As compared to 2019, our January comparable store Revpar was down 31, 5% for the month.
With the resurgence of demand across our portfolio of February and March performance reduced the deficit to 13, 4% and 14, 2%, respectively. The lowest spread since the onset of the pandemic.
The strong demand at our leisure oriented properties and the recovery of demand at our urban hotels in the back half of March also allowed us to drive rate with ADR exceeding first quarter 2019 by 10, 5% for the comparable portfolio.
Due to the seasonal nature of our portfolio. The first quarter is typically the softest quarter of the year.
Coming into the year, we forecasted a corporate cash flow loss for the first quarter and we're extremely pleased with our ability to generate $23 million of property level cash flow and approximately $3 million of positive corporate cash flow during the slowest quarter of the year that was significantly impacted by the pandemic.
This cash flow generation was driven by the strength of our margins during the entirety of the quarter.
Our ability to drive ADR growth, along with our stringent cost controls and asset management initiatives resulted in GOP and EBITDA margins for the quarter of 48% and 28, 3%, respectively, roughly 370 basis points better than first quarter 2019.
Incremental growth in Occupancies in conjunction with our focus on rate integrity and expense savings initiatives resulted in margin expansion and material cash flow generation at our hotels in March as comparable GOP and EBITDA margins for the month came in at 47, 4% and 34.
7% respectively.
It's higher than March of 2019, and we are witnessing this type of margin performance in April as well.
Our south Florida cluster led the portfolio again this quarter with 45, 9% EBITDA margin highlighted by the parrot key Cadillac and Ritz Carlton coconut there.
<unk> key finished the quarter with a 59, 8% EBITDA margin of 2100 basis point increase to first quarter of 2019, while the Cadillac generated a 58, 2% EBITDA margin exceeding first quarter 2019, EBITDA margins by more than 1000 basis points.
The robust results. We're also seeing that our California drive to resort as our sanctuary Beach resort in Monterey and the hotel Milo in Santa Barbara generated EBITDA margins that were both more than 500 basis points above our 2019 margin for the same period.
As we progressed into March many of our urban luxury and lifestyle assets also begin to drive increased profitability.
Notable performers include the Ritz Carlton Georgetown, Boston envoy and Hyatt Union square, each posting EBITDA margin growth greater than 500 basis points higher than 2019.
Over the course of the pandemic our portfolio has undergone a transformation as we've traded strategically selected asset to maintain operational flexibility on a same store basis first quarter Hotel EBITDA came in just seven 7% below 2019 level.
As demand continues to recover.
We expect to reduce the spread to two.
<unk> 2019 to less than 3% in the second quarter traditionally one of our most profitable quarters of the year.
Our recent performance and outlook Fortifies, our view through this pandemic.
Based on rate integrity and cost controls, our EBITDA will recover back to 2019 levels before revpar fully recovers.
And our portfolio is clearly seeing this dynamic play out.
A few closing remarks on our balance sheet and outlook for the second quarter.
So Neil clearly presented the strategic rationale for our transaction and our ability to pay down between $460 million to $480 million of net debt is also transformative for our balance sheet and company.
We are in close contact with our bank group and anticipate refinancing our revolving credit facility and paying down the majority of our unsecured notes with the proceeds from the asset sales, we announced earlier today.
The debt Paydowns are forecasted to reduce our leverage by approximately two turns and paydowns of our unsecured notes will also significantly reduce our interest expense and improve our credit and covenant metrics.
The detailed financial rationale and impact on our leverage metrics are clearly laid out in the supplemental presentation that is now on our website.
Transitioning to the second quarter outlook month to date in April we've seen continued topline growth across our portfolio.
Revpar is expected to increase nearly 20% from March.
Although south Florida will once again produced the largest share of revenue and while our resort portfolios continue their unprecedented run.
It is our urban markets that are outperforming our forecast at the highest level.
And we're forecasting a continuation and further acceleration of these trends during the second quarter.
The largest outperformance is from London from prior months have been Manhattan, Washington, DC and Boston each is projected to surpass 70% occupancy and outpatient March revpar by 30% to 40%.
With our sights set on the recovery, which has already begun to actualize across the entire portfolio and today's transformative transaction.
We remain laser focused on operational performance of the portfolio and pursuing other accretive opportunities that become available throughout the cycle to highlight the value of the portfolio.
So with that that concludes my portion of the call and we're happy to address any questions that you may have operator.
Thank you. So if you would like to ask a question. Please press star followed by one on your telephone keypad. If you change your mind. Please press star followed by Qi <unk> to ask your questions. Please ensure your phones and Mr. <unk>.
Our first question comes from Dori Kesten. Please go ahead Terry.
Thanks, Good morning, and congratulations.
On your Q4 call you talked about marketing the Panther.
But otherwise being opportunistic on sale can you detail what happened between that in today's volatile.
Sure Dori.
<unk>.
We continue.
We continue to look as we always do we are we are very active in the acquisitions and dispositions market and.
We are.
In order to create more financial flexibility, we have been looking at asset sales now for several years, you'll remember last year, we sold six hotels.
The early part of the year.
And this towards the end of I guess in the Q4 call we spoke about.
<unk> Pacific in Seattle, We spoke about our joint venture in South Boston, We've spoken about New York hotels in the past as well.
But we felt like at this time, we were getting.
Very strong pricing on the portfolio that we announced today.
And to be able to achieve a transaction.
At close to our net asset value for those assets.
Drove the transaction today, it's not to say that there wont be additional asset sales, including ones that we've talked about in the past, but right now we felt like this was the.
The best opportunity for the company.
To reduce some debt.
Okay.
You mentioned on the call that you're close to recasting our credit facility and I was just wondering what changes should we expect beyond pushing out.
Maturity.
I think that enjoy this is ashish. So right now we are we've had a lot of conversations with the bank group clearly it will be pushing out the maturity number one we're looking for different ways to structure covenants as we still continue through this recovery.
The period, but even our current covenant.
The way our current covenant test that we are anticipating being out of our waiver period and clearing covenants by the end of the second quarter.
So I think it'll be just some more flexibility on our covenant.
And extension of maturities.
Okay. Thank you.
Our next question comes from Tyler <unk> from Oppenheimer. Please go ahead title.
Good morning, Thanks for taking my question first one for me on the asset side of things certainly while a lot of positives.
But I think one of the things that stands out is going to be the increased exposure to New York City. So can you just talk a little bit about.
Your comfort level with that exposure your conviction in terms of New York City in Manhattan in terms of the recovery and maybe just remind us.
And the differentiation of our competitive advantage you think those those assets have in the market.
Sure Tyler.
We continue to believe in the long term prospects for the New York City lodging market recovery and see a tremendous amount of unlocked value and potential upside in those assets.
We're starting to see the performance on the ground every week.
Really accelerate.
But I would say that we haven't seen the transactions market in that in New York.
Get as mature or at least has stabilized to some of the other markets. We've mentioned in prior calls that New York City market benefits from a lot of international buyers and a lot of capital. That's currently just not active.
But so it's a combination of both things, but new York for US we expect to.
Provide among the highest growth in the of all markets in the country really for the next several years. So we are pretty bullish on New York It's.
It's not to say that we won't in the future.
Our hotels in New York, but we felt like for the coming quarters. The ramp up we expect on performance is so strong that.
Today, we are very happy to be long New York.
Okay, Great and then just.
A follow up.
One of the key focuses from a lot of investors right. Now is just the sustainability of the pricing power and clearly in Q1, you've demonstrated that with a very strong rate growth. The commentary that we're hearing sounds very optimistic in terms of April and beyond but just talk a little bit more a few quote about.
Your perspective on how strong rates or how long we can remain at.
These strong ADR levels you as corporate travel comes back do you think that could be a net positive for for rate growth as we kind of move through into the summer are you seeing any indication, perhaps that's some of the strength on the leisure side of things might be slowing down a little bit.
Okay.
Yes, Tyler as far as margins go you know the way we're looking at it is we're pretty much fully staffed up at our resorts at this time, which are achieving.
Peak, Occupancies and very high rates so.
We do believe that the operational model has changed there.
And with the rate integrity that we have at these resorts, we think that those margins are sustainable.
The urban properties, we are still about 2000 basis points below on occupancy than we were in 2019.
Most of our fixed labor.
General managers.
Desk managers and others are back on the property and.
And really everything that we have to add now is going to be variable labor and housekeeping, maybe more bell men front desk attended that gets solved by easily by occupancy is coming back as you know our portfolio generally run in these urban markets anywhere from mid <unk> to 90 in occupancy and where.
Still in the seventies, which is strong but long way to go so with additional occupancy.
We believe that our pricing, which is now getting to be anywhere from 3% to 5% off on 2019 in these urban markets is going to exceed urban market Revpar ADR as from 2019, probably in Q2 or Q3, which is really going to drive margins. Even further so we feel that the March.
And they are very sustainable the margin growth is sustainable.
Going forward.
Okay, Great. That's all for me I appreciate the detail. Thank you.
Our next question comes from David Katz from Jefferies. Please go ahead David.
David Your line is now open.
Could you kindly check you don't meet it by any chance to EBIT.
Apologies.
Thanks for taking my questions I wanted to just go back and focus if I may.
On the New York.
Remaining portion of the portfolio and just talk about how you see that evolving.
Call. It one two years one from.
Is it a do you feel like it.
Well capitalized <unk>, what capital you'll be spending there.
Second we continue to hear more and more and personally we expect.
A mid week business travel recovery, that's really in the very early stages, but I'd love your thoughts on sort of how you see that portion of the remaining portfolio evolving.
Sure David.
Just on your second comment.
And to ask just touched on it as well, but that is what is so impressive and remarkable today is the mid week performance in New York as well as in several of our other urban markets, we're getting to the point now that our.
Our <unk> in April .
Mid week are looking like they weekend once you remember in weekends, we're really driving performance leisure was driving performance in these major markets. The last three four months, but we've clearly seen that turn.
<unk>.
As you get occupancy up from this kind of 50%, 60% level mid week to 70% to 80% across the next several quarters.
ADR will likely continue to grow because we're getting this without conventions without compression.
So our expectation is that urban markets, and particularly cities like New York.
We're going to be able to drive very meaningful revpar growth through the back half of this year.
Our portfolio in New York.
With that as the backdrop. It is a good time to own properties in New York performances.
Is accelerating and we're hitting.
An inflection.
As you know, our New York portfolio, even through this pandemic was relatively resilient our portfolio of purpose built hotels in New York Nonunion hotels that you can operate lean.
And drive not only great financial returns, but very high levels of guest satisfaction.
Our hotels in New York are.
In New York City, or a mix of select service and luxury and lifestyle hotels.
They are clustered for advantage and we're able to drive real advantage in this market with our nearly two decades of experience buying building <unk>.
Developing managing hotels in New York.
As we look forward.
The hotels that require additional capital in the next couple of years to drive.
Portfolio level EBITDA growth rates, there is two to three hotels that would fit that.
That.
Criteria for looking at recycling assets. So I think as we get towards the back half of the year, depending on where the market is where the pricing is how many.
Kind of international capital has come back to the marketplace, we could absolutely.
Sell two to four additional hotels in New York in.
In the future.
But today, it's a great time to own properties in New York Our portfolio in New York has shown great resiliency in today is showing really high growth.
Got it and just one quick follow up portfolio wide.
Is there any.
Any sort of deferred capex that we should contemplate.
That may need to be caught up this year next year.
Okay.
David.
We don't have any significant capex on the horizon for this year for next year, we have three to five projects, which we usually do.
The more in the seven year refresh kind of carpet vinyl things like that in a couple of.
What we would consider more extensive renovations, but I <unk>.
Think that 2023 will be more back to our normal levels of capex, whereas the last few years, we have restricted our capex primarily to life safety and <unk>.
Preventative maintenance, but we've spent so much money.
Prior to 2020 that we don't feel like anything has really been deferred or that the hotels in anyway are starving of capex.
Great sounds great. Thanks very much.
Our next question comes from Michael Bellisario from Baird. Please go ahead, Michael Your line is now open.
Thanks, and good morning, everyone.
Hi.
Just first fundamental question for you could you talk about what you saw on the expense side sort of a follow up to two questions ago.
In the first quarter, where the savings were.
Our realized and kind of what is left if anything to take out on the fixed or variable side or is it really to your point. If she is going to be the variable labor coming back as occupancy comes back.
Yeah, Michael at this point, it's really the variable component.
Does.
We ran about 60% occupancy in the portfolio Q1.
But the resorts, we're well into the 80 plus percent range, so almost into the 80% range. So yes, theres really not much Alistair.
Gail needs to come back at those properties.
Getting people and getting variable labor still remains a challenge no doubt about that and that will be a challenge through the remainder of the year, but we arent seeing.
The type of wage pressures of the wage growth that we've seen over the last couple of years and we are seeing more people applying for a position and we are seeing more people returning to the workforce. So that's on the positive side.
On the.
In the urban markets as I've mentioned, our Occupancies were still low in Q1, we continue to see large increases in occupancy post kind of mid February coming into March.
We are re staffing the hotels, but some additional.
Additional expense on breakfast bar and amenities at some of the select service asset.
We don't plan on changing housekeeping protocols for the remainder of this year at least.
So from our standpoint, it's really going to be as Occupancies continue to go up we're just going to need to bring back more people to service the rooms.
Got it and then do these pending asset sales change the outlook for how you think about us.
Other expenses property taxes utilities insurance things like that anything material from the sale going to affect sort of the growth rate and the ramp up on a pro forma basis.
Not so much now gal.
We are seeing we did see a lot of property tax reductions, which are based on assessments in operating results over the last few years, so that should not change.
I think insurance is now come to a point where it is.
Certainly has stabilized we're getting.
From a quality as we look to.
Go back to the market and renew our insurance property and casualty this summer.
So I think that there'll be growth insurance expense due to hurricanes wildfires and other.
Kind of catastrophic events that continue to hit markets, but it's not going to be at the same.
Levels that we've seen over the last three to five years.
Yeah.
Got it that's helpful and then a clarification on the <unk>.
Use of proceeds not sure I heard it correctly youre going to pay off the.
Your line of credit of two term loans, and then where do the Goldman note stand and the use of proceeds.
Sure.
Michael we are working through all of that right now are.
Our desire is to pay off all of the Goldman nodes.
This will be part and parcel of the negotiation and kind of working our corporate credit facility, but we would anticipate at a minimum at least.
A majority of the Goldman note to pay down with these proceeds.
The other sort of potential uses of the capital that we'll have to see at year end Howie.
There is a big capital gain on this transaction, we do have some net operating losses that we can offset those while we may be in a position to potentially pay a special dividend.
Got it and then.
Last one for me.
Probably early but as you think about next steps obviously, there's you've hinted at maybe.
Second wave of dispositions at some point later this year early next year.
Where do you see yourself going on the capital allocation front, maybe six to 12 months from now does this put you in position to start looking at acquisitions or is that still.
Further down the road after the second wave of dispositions might be completed.
Okay.
Yes.
No.
Mike This is Neil.
We're going to continue to try to close the gap.
With where we're trading versus NAV and if that.
If that means.
Asset sales at different points across this year or next year.
That will we will execute on that if we.
See very attractive acquisition opportunities that would also drive that.
<unk> for the company then we would we would definitely look at that as well.
But right now we're very focused on driving EBITDA from our core portfolio.
And staying very close to the marketplace to know when we can.
Transact on assets at private market values and.
And drive growth from our existing assets, which we still have a great leg of a recovery ahead.
Mike you know the world just very volatile so we're increasing our financial flexibility. So that we have the ability to grow our portfolio.
As well as continue to take advantage of opportunities to close the gap.
Understood. Thank you.
Our next question comes from Bill Crow from Raymond James.
Go ahead.
Hey, good morning, guys.
Obviously, we've all seen this debt bullets coming at Us I'm just wondering.
Two quick questions.
And then some details but.
What are their paths did you go down over the last six months to prepare for.
For this liquidity.
Need and then.
Was the was the portfolio sold unencumbered by debt.
Management contracts.
Yes, Bill let me start with the financing on that so we did go down looking at the MBS market.
And refinancing all of our debt utilizing those market.
We looked at it on another few kind of refi options.
This was more of a inbound inquiries that led to a very quick transaction.
That in addition to sort of this volatility in those markets made a clear choice that we wanted to pursue these transactions.
So we have been working on this and in addition to just working with our bank group over the last six months as well those conversations have been very fruitful. So we continue to continue to look at various options. We felt like this was the best one to pursue.
Ashish, where there are other portfolios that were shopped alongside the urban.
Noncore.
We.
We've been we've been having active dialogue the last six to eight months on lots of hotels built like we spent a lot of time on some New York hotels in New York portfolios, we didn't see pricing, where we felt.
It made sense yet.
We continue to spend time on our.
South Boston joint venture.
And and hope, we'll be able to execute on that at some point across this year.
And we continue to look at some single assets, even but.
But I think this started as kind of an inbound around Alice.
And and then across the last two to three months there was a pretty it.
It was a quiet, but a pretty thorough process.
With all of the <unk>.
Major players in the space.
That could execute on a transaction in this kind of environment.
The hotels are sold unencumbered, that's one of the great values of our portfolio.
And.
And.
Our board and all of US here on the management team are just very committed to acting in.
Making decisions and executing in a way to close this gap that we've been talking about for several years.
Yes.
There is a there is a big difference between private market values, and where public market lodging is trading or at least our portfolio is trading and.
We will continue to to make decisions to close that gap.
Yes no.
No.
Congratulations on the operation of the deal for sure if.
If I could just ask two details real quick are there any pre penalty.
There are prepayment penalties.
You're going to have to deal with.
As you put these proceeds to work and then.
Number two is there an opportunity to reduce G&A I mean, you cut the size of the company dramatically over the last three years I think youre still between.
Cash G&A in restricted stock your stock conserves Youre still up in that same range. We're in 2019.
Really takes away.
Any flow through to <unk>.
<unk>, if we shrink the company without shrinking G&A.
Sure Let me take the first part of that Bill. So there are no prepayment penalties on any of the debt.
That we had a portfolio level, we do anticipate the ones. He MBS loan would be assumed.
By the buyer, so nothing there and no prepayment penalties or any kind of cost of any kind on the management termination fee there.
So from that side of it.
And bill on the G&A side, yes.
In the short term the pro forma we will have moderately increased G&A as a percentage of EV.
As our existing G&A will stay with this remaining business.
But over time, we will we'll be able to rightsize G&A either.
Through.
The growth of our enterprise value.
And where we're trading.
As well as through.
Other ways.
To share costs with.
And just to optimize the business, you'll I think you'll remember we cut about 20% to 25% of our G&A across the pandemic. So I'm not sure. If it's at the same level as 2019, it doesn't seem to that wouldn't make sense. So I think we're I think we will be at very similar levels frankly.
But it does depend on where our enterprise value is marked.
But we are sensitive to it and focused on it but we don't think it's going to be.
An outlier.
Alright, thanks for the time.
Okay.
Our next question comes from Ali claims from Pasha. Please go ahead Barry.
From BMO.
Yes.
Maybe going back to that to that transaction.
And the process can you talk about how the value of those properties may have changed over over the last three or six months or so.
Okay.
On one hand.
<unk> cash flow has increased pretty significantly across the last six months their values.
Have definitely.
Increased across the last year.
Because we've moved from markets that had very little cash flow to now actually producing on a forward basis.
Some very attractive cash flow so that's helped pricing.
Since.
Late last year, the debt markets have been much more volatile and post.
Russia invasion.
And.
And just some of the inflation print and then the interest rate discussion just taking center.
Kind of peaking kind of peer around interest rates has definitely widened the credit market, so credit that part of it.
Theres just less of it around into a little more expensive today, except for.
Folks that have the flexibility to transact and then put that on in the future, which there are many large asset managers that can do that these days.
So it is kind of mixed but net net definitely significantly higher than six months ago.
Just because we're just in a different place in the recovery profile.
Is that does that answer your question.
Yes, I guess, maybe as a follow up to that has the buyer pool in any way given what we see going on with trade and inflation more broadly.
Yeah.
Uh huh.
I don't think so really I mean, it's I mean, I think it will it's going to slow the number of transactions in the first and second quarter than we might have had before.
Because it impacts pricing and debt availability and there are fewer folks that can take down something without debt financing.
But on the other hand, we've gotten to a whole different place in the recovery.
Where theres just many more participants and much more cash flow so.
So I think we have definitely gone through.
Tough time in the transaction market. The last 30 to 45 days or 60 days, but.
But I think most expect this transaction market to continue to accelerate as cash flow accelerates across this year.
Okay.
Got it and then it seems like Theres a lot of optimism on the on New York.
The transaction market doesn't necessarily reflect that right now and I presume that's part of the reason for the sales of the hotels outside of New York City.
And as far as getting.
<unk> back to pre Covid levels do you think it's in China.
The recovery, playing out and proving out or just something else that you could change to really get those evaluations.
Where you want them to be.
I do think it is just simply the recovery playing out really you know.
The macro environment, the volatility in debt markets and stuff definitely makes it a little bit choppy here, but the micro fundamentals of the market are better than they've ever been or better than they've been in the last three years to four years, there's much less supply the supply pipeline is much lower.
And demand is growing.
Pretty significantly so we would expect across the next several quarters.
To see more and more transactions in New York, and and once pricing gets to a level youre not seeing like these kind of hotels like we have a purpose built high quality newly built assets trading in the marketplace because the sellers.
Not many sellers at today's price it's not.
So much about buyers, it's just where they are not meeting of minds, but you are seeing transactions on the lower quality assets bigger age.
<unk> <unk>.
Boxes that there is real obsolescence risk, where sellers are willing to take a 50% discount on value.
In order to stop the bleeding.
But the kinds of hotels, we own in New York There is they're.
They are not bleeding.
So.
Youre, just not seeing those trade until the.
Transaction market really gets there and I think thats.
Probably towards the end of this year, but for sure across the next couple of years, we will we do expect that we will get.
We'll get back to prior peak kind of transaction values in New York and very likely it will be higher.
Bye bye, probably a significant margin just from where we are seeing rate or ADR and where we're seeing the supply picture develop in New York.
Yes.
Got it that's all for me thanks.
The next question is from Chris World Cup from Deutsche Bank. Please go ahead, Chris Your line is now open.
Yes.
Good morning, guys.
My question is kind of a follow up to Bill's question, which is.
With the asset sales you've announced today.
Totally get strategic rationale the pricing makes sense obviously.
The thing is it does it takes some EBITDA away.
From your base.
You've talked about potentially selling more assets.
At some point in the future so.
So just kind of use.
Is there how confident are you that you can.
Refill the EBITDA bucket to kind of.
At some point you are.
Getting back to closing that gap to perceived NAV is somewhat about maybe market cap and trading liquidity and EBITDA levels and such so how do you how do you.
Thank you can possibly solve that puzzle.
Mhm.
Chris.
It's definitely a good question, but it's a it's something that we just don't feel like we need to.
So all of that puzzle just yet we just take one step at a time, we're trying to close the gap with AAV. So if we can sell assets.
Close to NAV.
And there are assets that strategically.
Makes sense and when I say strategically in terms of their growth rate profile relative to the rest of our portfolio the capital required to achieve their business plans across several years and.
Supply demand fundamentals in those markets.
It makes sense.
We'll see where acquisition opportunities look.
It looked like and we will continue to look at disposition opportunities, where we're just committed to driving shareholder value here and.
And with this transaction, we will have the flexibility and the time.
To make.
The right decisions we believe.
Okay.
Fair enough and then.
Tommy.
The employee side are you guys seeing as U.
Jeff back up and particularly in the urban markets are you seeing any increased turnover.
Folks that.
It may have come in.
Maybe getting bid away as other your some of your competing hotels are also looking to.
Two.
Staff up.
Okay.
Hey, Chris.
I think we are seeing a little more stabilization actually most of the hotels that we compete with or are open now I mean, it is still a very very competitive market for employees and we continue to.
You spend a lot of time and resources in recruiting people into our hotel so I.
Everybody's effectively playing the same game right now, but we are actually seeing less turnover and a longer duration of employee retention at this time.
Okay.
Good thanks, guys.
Okay. Thanks, Chris.
Our next question is from Anthony Powell from Barclays. Please go ahead Anthony.
Hi, good morning, you've talked about how you're seeing business travel or churn across most of your urban markets.
Most of your hotels are selling our business travel weighted so I'm curious what do you think your pro forma customer mix now is a business versus leisure relative to where it was pre pandemic and where do you want to take that going forward.
Okay.
I think pre pandemic, we used to describe it as 60 40.
Between business trends and and and leisure.
During the pandemic, obviously leisure was what was working so it was probably 80% of our.
Income during the during 2021.
As we go into 'twenty two.
We are selling our urban select.
Non New York hotels, which are highly business transient focused but we continue to have.
And continue to believe in the long term strength of these urban gateway markets and.
In Boston, we will have the envoy hotel in the box are really expecting to drive really significant performance on the back of both business and leisure and that's what we're seeing now is.
The Ritz Carlton Georgetown in April we're going to hit.
Hit a whole new record on an ADR will probably be well above $600 on ADR.
And that's with.
The mid week also being in that same neighborhood, which is all driven by business transient.
Just that higher priced business transient customers coming back.
We do a lot of small group meetings at our luxury and lifestyle hotels in.
In Philadelphia at the Rittenhouse hotel or.
In Washington, and Boston, New York, So the urban side of the business is still alive and well I think it will.
Net net maybe post 'twenty next year, if we if the portfolio Didnt change at all from here to there maybe we would be 40 60.
Business transient, maybe 35% business transient and <unk>.
$60 it really.
Hard to give you a number just yet it really depends on how this recovery plays out in the coming.
Months ahead, but.
But during the week, our luxury and lifestyle hotels in urban markets are business oriented traveler and that's what's coming back and it just during the pandemic the business traveler wasn't the high priced customer they werent the price taker and was the leisure customer that will likely switch across the coming year.
And and then some of that business that we're driving in our urban markets.
We will become a little more business oriented.
So to be clear it was 60 40 business leisure prepaying that makes you think becomes.
40, 60 kind of 46 dry <unk>.
40 60.
Leisure and 2023 business leisure, yes, yes.
So you're correct.
To quote that just because I don't know.
You can take the rich coconut Grove, let's take that as an example, you know like right now we're doing we had been doing a lot of leisure, but it is a.
Business hotel and a lot of ways and so across the coming year that hotel will become much more business driven.
And so it's going to reduce a little bit of leisure segment, even in a market like south, Florida, So thats why its.
We're a little bit.
Alright, Okay hesitant to give an exact number but I would say like 35% to 40% business transient in the future versus pre pandemic, 60%.
Why do you think I'm asking myself, yes go ahead.
No I was just asking Jay Nash, if thats, how they think about until like it's.
Yes, I mean, I think it's really kind of driven by the fact that we still have very significant urban exposure and the urban exposure is going to benefit from business travel business transient recovery I mean, we're at.
Plotted out across the next couple of years through stabilization is difficult.
There's going to be some.
There'll be some displacement happening, but the good news is that the rate is sort of consistent across leisure and BT. So.
As that happens, we don't expect there to be rate disruption.
But it's hard to know exactly where it will stabilize I think neil's point is probably by the time, we get to 'twenty three we're going to see more BD, but it is not going to be where we're going to stabilize longer term.
I'm asking because it you know.
Every widely read says that they see BT coming back, but almost none is seeking to increase their <unk>.
So I'm curious as you refill your portfolio over the long run argued to be looking at BT oriented hotels are more leisure like everyone else Tonight.
Okay.
Yes.
It's hard to say it really depends on pricing, but we are not we don't believe that.
That you need to be 100% resorts in order to drive great.
Hotel returns.
And very likely the opportunity set.
And our capabilities will likely.
Lead us to more urban opportunities, but you just never know I'm not sure.
It depends on pricing and we're very disciplined about pricing and value creation and we're not as.
We've never been.
Follow the herd kind of folks, we're really looking at what drives value and where we can create value.
Okay got it thank you.
Okay.
It appears theres no further questions I'm going to hand, it back to the management team for final remarks.
Yes.
Well, thank you everyone.
With no more questions, we'll just say thanks again, and let you all know that we're all available for questions throughout the day today and any time, obviously, but but we're all standing by for any follow ups that anyone has thank you very much for your time.
This concludes today's call. Thank you for joining and have a lovely day and you can disconnect your lines now.
Yeah.
Okay.
Right.