Q2 2022 RLJ Lodging Trust Earnings Call
Welcome to the R. L. J lodging Trust's second quarter 2022 earnings 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 killed Bala R. L. K Senior Vice President Finance and Treasurer. Please go ahead.
Thank you operator.
Good morning, and welcome to <unk> Lodging Trust 2022 second quarter earnings call.
On today's call Navi 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 Companys financial results.
Tom Bartlett, our executive Vice President of asset management will be available for Q&A.
While were 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, Nikhil good morning, everyone and thank you for joining us today.
I hope everyone is having a great summer so far.
Our portfolio second quarter performance exceeded our expectations as fundamental solid robust acceleration with lodging demand benefiting from summer travel ramping business demand stronger citywide attendance and urban markets being fully open.
These headwinds drove lodging fundamentals to strengthen throughout the second quarter with the strong momentum continuing into July .
In addition to delivering strong operating results, we successfully completed a number of strategic initiatives, whose execution was made possible by our strong balance sheet.
Most notably we accretively recycled capital into share repurchases, we recently acquired a high quality boutique lifestyle hotel and high growth market of Nashville, we.
We successfully exited our financial covenant waivers, we materially advance our three conversions and our board of directors recently authorized a meaningful increase to our quarterly dividend, which demonstrates confidence in our portfolio's ability to generate sustainable free cash flow. The execution of these initiatives has firm.
To strengthen our relative positioning and demonstrates our ability to create tangible value for our shareholders.
Against this overall positive industry backdrop, our portfolio's recovery to 2019 was significantly better than expected throughout the quarter with June revpar, achieving 94% of 2019 levels.
Accelerating demand across all of our markets led to strong pricing power as our second quarter ADR surpassed 2019 levels sequentially, improving each month with June ADR, achieving 105% of 2019.
Our outperformance this quarter was driven by stronger than expected business travel.
Later, citywide attendance and robust leisure demand, particularly in our urban markets.
Our urban hotels, which represent two thirds of our EBITDA had the strongest growth this quarter, achieving a new high of 95% of 2019 Revpar in June .
The significant step up in urban demand allowed us to drive rate with June ADR, achieving 106% of 2019 levels.
This robust momentum carried into July which improved 207%.
Our ability to achieve new highs in ADR ahead of the full recovery of our urban markets is an indication of our run room that exists to drive rate.
Our urban markets, we're a major beneficiary of the rapid improvement in business transient demand robust short term corporate and social bookings and returning citywide which materialized in many of our markets such as Boston, Washington, D C Orlando and Miami as well as a return of leisure demand as many venues.
That were not opened last year were fully open this year.
The pace of the recovery from business transient improved significantly this quarter as the man broaden beyond Smes with return of traditional industries, such as financial services consulting and technology companies and new sources of demand emerge from the hybrid work environment.
This allowed our business transient revenues during the second quarter, two increased significantly by over 50% from the first quarter.
Which accelerated each month with June achieving 71% of 2019.
A new high watermark.
Further evidence of the strength and the recovery of business travel is a positive momentum in weekday result, which achieved 88% of 2019 revpar during the second quarter, a substantial improvement of 40% from the first quarter.
These weekday trends are driving the underlying recovery in urban markets.
Group demand also accelerated during the second quarter with group revenues, increasing materially by 50% from the first quarter.
Driven by ADR, which exceeded 2019 levels.
Group demand benefited from increasing city wise with greater attendance, but continues to be driven primarily by the growth in small and medium sized groups, which is our core segment.
Finally, as expected our leisure revenues exceeded 2019 during the second quarter driven by ADR that was 20% above 2019.
80 doors, and our key leisure markets, a key west Charleston in Miami exceeded 2019 by an average of 40%.
Notably our robust leisure demand in the second quarter was bolstered by the strengthening of urban leisure and emerging bleser demand.
If demand improves materially throughout the second quarter, we maintained tight operational controls despite current inflationary headwinds, which enabled our portfolio to achieve 91% of 2019 hotel EBITDA and EBITDA margins, which were only 60 basis points below 2019.
Now with respect to capital allocation.
We remain very active and executed on multiple internal and external objectives that are expected to enhance our overall growth profile throughout the cycle in.
In particular.
We entered the final stages of the conversions for Mandalay Beach, Charleston, and Santa Monica, What's you're on track to debut during the second half of this year.
We took advantage of the dislocation in our stock price and Accretively redeploy to $50 million of disposition proceeds into share repurchases at a meaningful discount to our underlying value.
We also expanded our footprint into Nashville, a top growth market with the acquisition of a unique boutique lifestyle hotel.
The hotel sits in a bull's eye location within downtown Nashville, a seven day, a week demand submarket.
This hotel is projected to generate revpar that is two times, our portfolio average and a stabilized NOI yield of eight to eight 5%.
With significant development underway.
We believe both Nashville, and our hotel are positioned to outperform throughout the cycle.
Additionally, we successfully exited our financial covenant waivers, which will further enhance our capital allocation flexibility.
And lastly.
Our board recently authorized the increase of our quarterly dividend to five cents per share, which reflects our confidence that our portfolio can generate sustainable free cash flow throughout all phases of this economic cycle. We continue to view dividends as an important component of the total return we seek to provide investors.
Our capital deployment, not only underscores our highly disciplined approach to capital allocation, but also demonstrates the tremendous optionality our strong balance sheet provides. Furthermore, we believe the recent increases in dividends validates our commitment to returning capital to shareholders.
Looking ahead.
We believe that lodging fundamentals should remain strong during the second half of the year, which will be driven by the recovery of urban markets.
We expect a man in urban markets to continue to ramp benefiting from further improvements in business transient and group demand.
The current trends in urban markets gives us confidence that the recovery is taking hold despite the uncertainty in the macro environment.
In fact, we are seeing evidence of strong trends from the second quarter continued thus far into the third quarter as seasonality normalizes.
Typically our revpar and leisure oriented markets remained elevated in July we.
We expect leisure to remain healthy, especially since urban markets are fully open and should continue to benefit from the emergence of leisure travel.
Our July business transient revenues improved further from June we.
We expect corporate travel to continue to strengthen throughout the remainder of the year.
Our third quarter group booking pace is currently tracking at 90% of 2019 levels with recent in the quarter for the quarter booking trends, providing us with confidence that their recovery and group should continue to improve for the remainder of the year.
And finally.
We believe that the recent uptick in international demand could provide further upside in urban markets.
Overall, our portfolio remains extremely well positioned with several unique catalyst to drive incremental growth, including the post conversion ramp of our conversion hotels, the continuing ramp of our recent acquisitions for urban centric footprint, which is ideally positioned to benefit during this current phase of the recovery as growth shifts.
Urban markets.
Our portfolio's efficient footprint with fewer ftes is well positioned in this inflationary environment and finally, our strong balance sheet, which continues to provide significant optionality with respect to capital allocation.
We believe that our overall positioning will allow us to drive significant value throughout this cycle.
I will now turn the call over to Sean Sean.
Oh.
Thanks, Leslie we were pleased with our second quarter results, which exceeded our expectations significantly narrowed the remaining gap to 2019 and accelerated through June which was the strongest month since the start of the pandemic.
Pro forma numbers for our 95 hotels exclude the sale of the Springhill suites in Westminster, Colorado, which was sold during the quarter.
Additionally, our pro forma numbers have not been adjusted to reflect our recently announced acquisition in Nashville. Since this transaction closed after the end of the quarter and will be incorporated into our pro forma numbers starting in the third quarter.
Our reported corporate adjusted EBITDA and F. F. O include operating results from all sold and acquired hotels during <unk> ownership period.
Our second quarter portfolio occupancy was 74, 7%.
Which was 90% of 2019 levels.
Accelerating demand allows second quarter average daily rate of $196 to grow over 11% from the first quarter and was approximately 103% of the second quarter of 2019.
June was the strongest month of the quarter and also generated ADR of $196, which represented a 105% of 2019.
Growth was strongest in our urban markets as we benefited from pricing power throughout the quarter.
We are encouraged by the fact that Revpar was robust and our most significant urban markets and we're at or above 2019 levels, such as 105% in Austin.
8% in San Diego.
96% in Manhattan.
99% in Louisville.
And 126% in New Orleans.
And our leisure markets.
Manned and pricing power continued as these markets benefited from seasonally strong demand, allowing ADR and our key leisure markets to continue to exceed 2019.
Our second quarter Revpar was over 92% of 2019 levels.
It was stronger than we expected at the beginning of the quarter.
And accelerated from 91% of 2019 in April .
92% of 2019, and Mary and 94% of 2019 in June .
This sequential improvement was primarily driven by outperformance in our urban markets.
Turning to segmentation, our second quarter leisure remains strong as evidenced by our resorts, achieving 110% of 2019, Revpar and our group revenues significantly improved to 90% of 2019.
The increase in group demand from both city Wides and returning corporate travel allowed group pricing power during the quarter, which achieved 102% of 2019 levels.
Finally, we are increasingly encouraged by the growth of business transient.
With second quarter, BT revenues, achieving 64% of 2019 levels, which represents an 1800 basis point improvement from the first quarter.
The improving operating trends during the second quarter led our portfolio to achieve hotel EBITDA of $118 $6 million, which represented 91% of 2019 levels.
We are encouraged with our ability to drive strong operating margins of 35, 9%, which were only 60 basis points below the comparable quarter of 2019, despite revenues of approximately 92% of 2019 levels.
Our hotel EBITDA improved throughout the quarter and was $38 $5 million in April 30.
$39 $1 million in May.
$49 million in June , which represented 94% of 2019 levels and generated hotel EBITDA margins of 36, 9%, which represented the highest profitability and margin of the pandemic.
Preliminary July results are forecasted to be in line with June .
Benefiting from the continuing strength in demand and pricing power for.
For July we are forecasting occupancy of approximately 75% and ADR of approximately $190, resulting in revpar of $142, which will be at 95% of 2019 levels.
Importantly, our July ADR is expected to continue to exceed 2019 levels at 106%.
Our operating margins are expected to be in line with 2019 levels.
Turning to the bottom line, our second quarter, adjusted EBITDA was $111 million and adjusted <unk> per share was <unk> 49.
As Leslie mentioned, while demand accelerated throughout the second quarter, we remain vigilant in maintaining cost containment initiatives that are appropriate for the current environment.
Underscoring our continued focus our second quarter operating costs remained below the comparable period of 2019.
Within operating expenses wages and benefits, which represent 38% of total second quarter operating costs were approximately 10% below the comparable quarter of 2019.
On a relative basis, our portfolio remains better positioned to operate in the current labor environment. As a result of fewer ftes required in our hotels, given our lean operating model smaller footprints with limited F&B operations and longer length of stay with suites, representing 50% of our rooms inventory.
While second quarter occupancy was at approximately 90% of 2019 levels. Our hotels are operated with approximately 23% fewer ftes than we operated with pre COVID-19.
Overall, we are encouraged that the labor environment is improving.
We have been very active managing the balance sheet to create additional flexibility and further lower our cost of capital so far this year.
These accomplishments include.
Exhibiting the covenant waiver period on our corporate credit facilities, which will reduce our interest cost on our line of credit and term loans by over 80 basis points.
Amending our corporate credit agreements to allow share repurchases during the covenant waiver period.
[noise] repurchasing $50 million of stock under our share repurchase program.
Repaying the remaining $200 million outstanding on our corporate revolver.
And exercising the first of two one year extension options on a $200 million secured loan which extended the maturity to April 2023.
The execution of these transactions is a testament to our strong lender relationships and favorable credit profile.
Our weighted average maturity is three nine years and our weighted average interest rate is three 9%.
We are benefiting from the successful execution of our prudent balance sheet strategy to mitigate refinancing and interest rate risk.
As of the end of the second quarter, we have no debt maturities until 2023, and 100% of our debt is fixed or hedged undervalued will swap agreements, which protect us from the current rising interest rate environment.
We continue to maintain significant flexibility on our balance sheet and 81 of our 96 hotels remains unencumbered.
Turning to liquidity, we ended the quarter with approximately $511 million of unrestricted cash.
$600 million of availability on our corporate revolver.
$2 $2 billion of debt.
And no debt maturities until 2023 now.
Now turning to capital allocation, we previously announced a new $250 million share repurchase program and the amendment of our corporate credit agreements to allow share repurchases during the waiver period.
We were active under our share repurchase program during the second quarter, where we repurchased approximately $4 2 million shares for $50 million at an average price of approximately $11 93 per share. Additionally.
Additionally, as mentioned before the board recently approved an increase of the quarterly dividend from a penny to five cents per share starting with the third quarter dividend.
The combination of the share repurchases and increased dividend demonstrates the strength of our balance sheet, our confidence in the sustainability of healthy lodging fundamentals and our commitment to return capital to our shareholders.
We continue to maintain a disciplined approach to managing our balance sheet, even as fundamentals have recovered we remain focused on making prudent capital allocation decisions to position our portfolio to drive results during my entire lodging cycle.
We still estimate our O J capital expenditures will be approximately $100 million during 2022.
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.
We will continue to monitor the financing markets to identify additional opportunities to improve the lateral of our maturities.
<unk>, our weighted average cost of debt and increase our overall balance sheet flexibility.
And this concludes our prepared remarks, we will now open the line for Q&A operator.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star to try and move your question from the queue for participants using speaker equipment. It may be necessary for you to pick up your handset before pressing the star keys.
One moment, while we poll for questions.
First question comes from the line of Austin <unk> with Keybanc capital markets. You May proceed with your question.
Yeah, Hi, good morning, everybody. Thanks for taking the questions. So you guys have hit on you know sort of the right momentum that you've seen across the portfolio you talked about July hitting 106% of 2019 levels.
And and I think Leslie you suggested that you see significant rate opportunity in your urban markets. In particular, so can you just help us understand what that upside opportunity. It looks like maybe what segments. You know are really you know.
Driving that or has the most upside in and you know where where do you think we could kind of see that track through the back half of the year.
Sure Austin I think that you know obviously in general urban did relatively well from the standpoint of the acceleration in the pace and that was driven both by B T and group and obviously the return of leisure.
But when you look at the when you look at B T. A it was only at 64% of revenues for <unk> for the second quarter, where group is at 90%. So the upside is really on the BT side, both on rate and demand perspective, and keep in mind on a couple of things on the rate right. So.
We have from a from a revenue management perspective, we're smarter today, we have more courage in terms of how we are managing our.
Our inventory the consumer has been conditioned to higher rates and then lastly, you've got your lease price sensitive customer in BT coming back those are the things that give us confidence that that theres upside and the recovery of of rate and in our ability to drive rate.
Above 2019 levels in urban despite the fact that we're not fully back yet the combination of all of that is what's giving us confidence in our ability to drive incremental rate.
So just following up on that I mean think V. T was like 46% of revenue in the first quarter. You said it went to 64% this quarter I mean, how has that trended month to month and then into July specifically on that that'd be T components.
We've seen income we've seen sequential improvement throughout our portfolio and all of the segments I'm on the revenue side Oh awesome.
Okay.
Got it and then just one on the Nashville acquisition, I mean, certainly the market certainly it fits with some of the recent purchases that you've done but supply has been a talking point you know.
For Nashville, you know for some time and so I'm just curious if you could speak to kind of how you underwrote that deal what types of asset management opportunities you see and how easily do you think or how conservatively did you underwrite to get to that eight to eight 5%.
So I would say let me let me talk about your question on supply I think when you can't just look at supply you have to look at the demand side as well it's important to understand that for the last 10 years that demand has been growing at two X supply in the Nashville market. So think about that there's a ton of demand that's coming into the Nashville market.
You know Revpar has grown at 8% per annum for the last 10 years, we expect it to grow another 7% to 8%. This year alone. When you think about the multiple demand drivers that are in the Nashville market, you've got significant corporate expansion Oracle's building a campus there Amazons and the market. It is an entertainment hub as we all know and it's a regional group.
Powerhouse.
And so there's a lot of demand that is going on in the market you know Theres airport expansion, that's taking place today. The passenger volume was ahead of 2019 levels and then this particular asset you know sits in is a bulls eye location in downtown which is a seven day week demand market that has tremendous organization that's underway and that's reflected in the rate.
So we think that while there is some incremental supply coming to the market demand is significantly outstripping that and we'll continue to do that there's a lot going on in Nashville in terms of the underwriting side and when we are generally relatively conservative.
Conservative in our underwriting you know keep in mind that.
The current recent deals that we did are all ahead of their underwriting we expect or Nashville attitude to take the same trajectory because we're generally conservative and and which is why we don't compete in that it processes. Again. This was an off market transaction for us and you should expect our underwriting to reflect.
You know a conservative nature that we have.
Yeah.
Thanks for the time.
Okay.
Our next question comes from the line of Michael Bellisario with Baird. You May proceed with your question.
Thanks, Good morning, everyone.
Good morning.
Leslie just one more for you on on Nashville, maybe just can you give us some color.
Background on the deal just kind of how and when it came together given everything that's going on in the market the last <unk>.
90, plus days and then also how you got comfortable with.
The 21 C brand and if you have any optionality, there and that's kind of how you think about that brand.
Relative to the real estate value for that property.
So so I'll take the I'll take the first part and the team will jump in on on a few of these parts here as I always say in terms of the actual transaction, Mike as we've said before we focus on off market transactions and those deals take a little bit longer to curate them. This is a deal that was coming together for us at the beginning of the quarter.
And you know we had there was a prior buyer who fell out of bed and we were able to jump in and again use our balance sheet given that there was some complicated debt that was on the on the on the property that we were able to to saw and so that gave us a unique window to jump in and take advantage of the asset obviously.
So we think that the basis at which we are getting this asset is very attractive. If you look at most recent trades that have happened in the Nashville market and the yield that we're underwriting to.
As well as the fact that its accretive on our overall portfolio with a revpar being two X what our portfolio averages and clearly is expanding us into a market that we're not in today.
As it relates to the brand.
You know first of all this asset itself fits into the core of what we own and what we've been buying it as a young asset it's high quality and a growth market.
And it continues to be a room rooms oriented asset with 102004 keys the brand as a lifestyle brand 21 see is tucked within the lifestyle division of a core and so when we look at the asset we look at the market. We looked at the Submarket and we looked at our core global distribution and we looked at our asset management K.
Abilities, and we believe there's operational upside you know associated with it at this asset for those who are not familiar with what the asset kind of think about it from a standpoint that it fits between the branding fits between sort of in an autograph and attribute arterial and a tapestry and that's right within our sweetheart, you know, our wheelhouse and sweet spot of where we think about lifestyle.
So we feel very good about the combination of the global distribution of the brand and our asset management being able to drive incremental operational upside I'll, let Tom add some more color on the on the on the branding.
Yes, so good morning, Mike.
What we were really impressed with was their ability to compete in this market and if you think about Nashville were really close to the heart of the Entertainment District, and there is a significant amount of seven day demand that comes from different avenues. So when we look at this particular brand and you see what's happened on fourth Avenue between printers Alley.
<unk> Valley, it's almost a row of independents now and to lessen this point theres attribute their autograph and we know that when we look at rate opportunities. We feel very comfortable as this just started to ramp before COVID-19 as it opened in 17 and in 19. It actually won an award for U S City finalists for the asset at.
So it's in great condition, we feel very strong about not only the brand in the asset but its location as Leslie mentioned and the development that's going to happen in that area is quite significant obviously as I mentioned, the Oracle campus, the new Amazon millions of square feet, whereas the op Center of Excellence and then most importantly.
There's going to be a significant amount of development near the riverfront, that's going to be funded by the city and the commitments over 13 billion for the new Riverfront Park. So it's all coming towards US in addition to already being a great location to begin with so we're pretty high on the opportunities.
Within the brand and the asset itself, there's great square footage for group business mid week, and then obviously, we benefit from weekends, which is a high leisure market. So we're pretty pleased with where we're at in the location as well as the brand and what we think we can do with it and then Mike The last point is on the encumbrance and Optionality.
It is encumbered by a short term management contract with a core.
That that will provide us with Optionality, we where we're excited about the court relationship, but the contract itself has has optionality embedded within it.
Got it. Thank you and then just one.
One more just on northern California again, just can you maybe provide the latest update there what's changed on the ground. What are you seeing in terms of fundamentals and it really looks like rate is what's lagging there.
And we will get that turned around for your assets on a go forward basis. Thank you.
Yeah, I mean, I'll, let Tom provide some color, but overall, we are encouraged by the pace of recovery. There you know rack revpar improved by 80% quarter over quarter and stands at about 70% of 2019 levels and rates at about 82% in 2019 levels, but the improvement has been faster than what we expected and we're seeing BT ramp up in city Wides improve.
As well on the mayor is addressing taking actions to address some of the structural and social issues. There continue and before Tom Jonathan just from a rate perspective actually the rate in the market is improving every month, Mike and so we've we've gone all the way up until the market, 91% of 2019 rates within the market.
Which has improved 1000 basis points over the last.
Over the last three months or so so the trajectory of the rate, which was an issue earlier on in 2022 is really.
Accelerated.
Yes, so I think the details around what's happening on the ground. Mike is the inventory has reopened in San Francisco as we all know so there is a good sign that everybody's back and I'm talking to supply as well as demand now is starting to come more meaningful improvements actually happening from the Microsoft in Accenture is Amazon Salesforce and Chevron.
So you're starting to see national corporate be a bigger part of the mix, which is a plus when we've had citywide we've had intendance improving in fact, even dream force is now going to expect about 30000 attendees and a three day event and we know that's always a big event and more importantly than anything else that creates compression.
When we look at the 2023 calendar were much more robust in regards to what's going to happen from a citywide standpoint. So we got a positive future. When we think about where we're going and even in the last three weeks when I look at urban leisure San Francisco you know, we're in the mid eighties, and occupancy, which is only about 5% to 10% below 99.
<unk> levels and ADR is at around the 90% of 19 level. So we're seeing continued movement.
We're looking at CBD, and then even Silicon Valley, which is growing faster, it's primarily because of project corporate business, you know companies like Facebook and the different.
Companies in Tech companies are starting to travel again, and our extended stay assets are picking up that project business Lastly, when I think about San Francisco its international Mike and what we've been watching as the deployments in northern Cal and when we look at today year to date. This is only through may worried about 49% year to date of international.
Claimants on passenger volume, but most recently in May it was a 62% so you're starting to see some growth and we know that at the end of the day, there's about 35% when I look back at 19 levels of total deployment international. So if we can start to see that uptick go back into the fall. We think that there is positive demand with all the things we just mentioned.
And the other thing I would just remind you Mike is we only have two assets that are in the CBD. The balance of our assets are outside of and the assets that are not in the CBD are growing at recovering at a faster rate kind of five to six points ahead of us.
Okay.
Helpful. Thank you all.
Our next question comes from the line of Dori Kesten with Wells Fargo. You May proceed with your question.
Oh, Thanks, good morning.
And your last few acquisitions have been a bit more boutique upscale the hand in urban markets and should we expect incremental recycling out of the remaining very few lower in Las Vegas, and our hotels you have.
You know what I would say.
Dori is is that you know we're going to continue to be active portfolio managers and that our dispositions on a forward basis as we said before we'll be more opportunistic.
And.
When you have 90 596 asset you're always going to have a lower end of your portfolio by default.
And then we will continue to sort of prune that appropriately but.
But we're not programmatically selling anything as we sit here today, we expect to be net neutral on sort of the buy sell side this year.
Okay.
Has anything changed in your underwriting of late I'm, just given current market continues to recover and operations to date and your urban markets and just general uncertainty in the economy.
Yes, so we always underwrite dory to sort of long term.
Weighted average cost of capital and so when we think about the short term swings that doesn't influence our long term underwriting and so we obviously SaaS as part of our our hurdle rates, whether this is something that would be more permanent that would require an adjustment but.
We were not given ourselves the benefit of the low interest rate environment historically, as we thought about our hurdle rates and so this is just.
We're we're returning back to what long term averages we're gonna be.
Okay. Thank you.
Our next question comes from the line of Neil Malkin with capital. One you May proceed with your question.
Okay.
Thanks, everyone. Good morning.
I think I was I'm not sure if I hear you said about the sounds like you said acquisitions dispositions kind of neutral this year and if I misheard you.
Apologize, but the question I had about that is.
Yep.
Do you expect to see.
Additional opportunities present itself on the acquisition side towards the end of this year and into next year.
As you kind of think about a more difficult financing landscape and a lot of brands are going to probably start.
Reimposing pitch and a lot of owners who might be cash.
Cash flow strapped.
And especially given your very advantageous cash position do you feel like you know.
We're kind of entering at a time when you guys can go on offense and are you seeing more opportunities to kind of hit.
Hey, you're underwriting teams desk.
Thanks.
So I would say two things Neil one we are constructive on on.
Acquisitions, because we do think that the.
Current debt capital markets environment is creating advantages for all cash buyers against the backdrop, where fundamentals are remaining healthy and positive.
We you know whether or not the volume of transactions picks up because of the things that you described in terms of refinancing capabilities or brand initiatives. We do think opportunities will come out of that you know, but it's a matter of how much volume comes out of that is to be determined I think what we've seen thus far is that deals that were awarded.
Fire to interest rates really moving some of those transactions have not gotten done and they've come back and its different forms and we remain disciplined around those assets and so we've seen something around that but.
Let me just helicopter up a little bit on capital allocation just in general right. You know we were very active this quarter on a number of fronts and you saw us demonstrate the the ability to leverage the optionality that our balance sheet provides we showed that we could find windows to take advantage of the different tools that we have and derive.
Value creation, we accretively recycle capital into stock buybacks, we found an attractive asset in a unique growth market.
We've advanced our that are of value creation internally and then we raised our dividend all the tools. We have available have benefits you know so we're gonna be thoughtful and balanced and find the right windows to deploy those tools.
We acknowledge that buybacks continue to be attractive at these current levels, but we want to do that on a on a leverage neutral basis like we did in the second quarter.
And as I said before we're still constructive on on acquisitions, just given the advantages that we think they will have being a cash buyer against this backdrop, but at the end of the day all roads lead back to having a very strong balance sheet that gives us optionality, we have very little debt, that's maturing in 2023, and so our asset sales can be.
<unk> redeployed for growth and not having to.
Bring down leverage on our balance sheet we.
We do think that when we think about the transaction market that there is a spectrum.
Relative to what's happening at the asset by asset market by market.
One end of the spectrum, you have high end and high quality assets in growth markets that are but you know you can finance them better although better is all relative in this market on the other than the spectrum you have sort of markets that are lagging or capital intensive assets. We've.
We've seen assets that are on the high quality growth spectrum continue to move forward.
We're already in the market and assets that are on the other end those were pause but.
You know, we expect a lot of capital that's on the sideline that needs to find homes and.
So we'll look at sort of a post labor day environment to sort of see how how the transaction market unfolds.
We recognize that rising interest rate environment is going to have some level of impact on values.
Whether it's 1% to 5% three to seven you know who knows but what I do know is is that urban select service and resorts are going to be on the lower end of any price degradation because of the green shoots of the recovery that we're seeing and obviously the consumer trends that are happening there. So.
So we think theres opportunity for us because of our balance sheet.
And we're going to continue to be thoughtful on acquisition.
I appreciate the.
Wholesome answer thank you.
One.
Maybe just kind of going back to the <unk>.
T R. I think overall remaining recovery side it seems like this quarter.
There's a sort of inflection or thought in terms of you know.
Group recovering ahead of BT.
And.
Obviously, you guys are much more.
Transient business transient.
Focused portfolio.
I think often asked you about how.
Btu is accelerating.
I don't know if you have numbers.
It made me and I want to share, but you know do.
Do you feel like there is a.
That we don't actually get back to a 100%.
In terms of BT demand.
In the near term in other words, you know potentially.
Permanently impaired slightly or somewhat.
Or do you have confidence that the.
The BT.
However, it comes we will get back to two.
2019 levels over.
Over the next you know.
One to two quarters.
Yeah, I mean, I'd say, Neil yes, we have we have confidence that we're going to get back to 2019.
I wasn't actually pushed beyond.
That I think when we look at the data we look at the pace of how BT is ramping we think about the broad nature of it.
BT is expanding beyond Smes and our traditional as I said in my prepared remarks additional companies are starting to travel I think the other thing that you have to keep in mind that a lot of companies up until more recently still had restrictions on their internal travel.
Already and Thats all been lifted so people are not having to seek approval to be able to travel. These days and so when we look at our transient pace, recognizing and acknowledging that our booking window remains sure. It's still is positive and we feel very very very good about that and we're seeing a lot of strong production out of our on our group side.
We look at the third quarter, we're at 95% of 2019 levels from a pace perspective and are in the quarter for the year average has been strong at about 30%. So when you take that what we expect to book in the quarter relative to what we already have in the books, we feel pretty bullish on the group side and.
While group is continuing to benefit from citywide attendants, improving the reality of it is is that small and medium sized group right now is still driving group and that's right within our wheelhouse, but the key thing to keep in mind is that the person who is traveling for group is also my BT customer.
And so you know that is overlap there and that gives us confidence that BT is going to get back. We think there's pent up demand relative to that I think we acknowledge that there is a key inflection point will be post labor day.
We generally expect that.
You know the back half of the year, we will continue to remain strong we acknowledged that seasonality.
Will materialize on an absolute basis, but when we think about it as a percent or two out 2019 levels, we expect to see a sequential improvement.
So so overall we're very.
Confident that BT will get back to 2019 levels and when we look at all the data.
We're encouraged by that and I'll, let Tom add some other nuggets, yeah. So the only thing I would add to that Leslie would be when I look at the current environment and you know the booking window as short as we've always said nail, but when I think about August compared to July I see that the booking window is actually increasing where we have a better starting point in August versus let them when we.
In July for BT, when I look at September . It's the same story. So your sequential improvement when you look at our portfolio and what's on the books going into that months 60 days out and then when I think about October what we've been monitoring as compared to 19, Neil we can look at travel click data and already in the 90 days prior to the October .
Its outpacing 2019 btu. So it gives us the leading indicators that BT is coming back so the national corporates consumer.
Consumer goods and services life Sciences, and Tech even government services is starting to travel at a little bit higher clip and so that's encouraging as we go into the fall as well.
And lastly to just sort of just Buck you asked for a couple of data points around group.
As long as he mentioned our group was at 90% or 19 levels in the second quarter, we expect it to be at 95% of 19 levels in the third quarter, just we have 98% of that of our third quarter books already definite on the books and so we booked the same amount we will significantly exceed that.
In the quarter for the quarter and so you know.
From a standpoint of our confidence around our ability to hit our group forecast.
In light of our booking trends it's been it.
Second in our normal pre Covid year, we would book a little over $70 million or in the year for the year. So far this year, we've booked now we've already booked $68 million through the first half of the year and so our short term trends continue to be strong on group, which is leading the recovery there. So.
To summarize P T.
Our confidence and the group trends are are significantly quicker to recover than we would've expected.
Even even even six months ago.
Yeah I appreciate all the all the commentary thank you.
Our next question comes from the line of Bill Crow with Raymond James You May proceed with your question.
Yeah. Thanks, good morning.
Well, obviously, you noted that you've seen some acquisition opportunities reemerge after maybe being tied up by another party. Thank you said Nashville was one of those.
Pacing changed from when you first.
Looked at it until you get that second opportunity.
Yeah Yeah.
Nashville was a broken deal bill.
Bill, but it was it was before the trends that I sort of mutually mentioned having.
Having said that.
You should trust and believe that we.
Did our due diligence and use our due diligence opportunity to make sure that the pricing was right.
I'll leave it at that on that deal I would say the other deals we're maintaining our discipline.
And.
We topped out long before the other buyers.
And so when we say it's come back immediately back in the market.
But we're going to continue to be disciplined around around whether or not we will jump back in.
Okay.
If I could just push you one more question the Nashville acquisition because to market.
It sounds like a great asset.
What do you think the valuation differences between buying something within the core brand, which does not have the does not have the loyalty program, let's say at Marriott Hilton Hyatt might have but that seems to be a market, which given the leisure.
Again sort of environment there.
It really drives loyalty.
Well T guests.
Utilization of points is there material or should there be a material difference in the pricing for those sorts of assets.
Yes, it's a great question, but I think the way we thought about it in light of the location of the asset and as well as its a rooms only 124 keys.
We wouldn't frankly expect to see a significant difference in valuation because we underwrote the ability for that hotel in that location.
To be able to sort of capture incremental.
Sure and so I wouldn't see a huge difference I think the way that we underwrote it and thought about the upside was as much the location in the market as long as we mentioned, but also our ability for our asset management team to come in.
And really.
<unk> put in place some of our best.
Best in class practices around.
Particularly around revenue management and.
And and driving share within the market, but also cost structure as well as some ancillary revenues. There. So we think that we are special sauce on the asset management side is going to also allow is allowing us to create value on the deal.
And then finally for me.
Sorry, if I missed this but.
Can you tell us of your.
<unk> existing portfolio, how many more assets might fit into the core bucket.
Yeah, I would say, it's less than 5% of our EBITDA.
Bill.
And we.
We feel pretty good about the fact that we did a tremendous amount of heavy lifting in 2019.
And we have done some more noncore as last year and a little bit earlier. This year. So we have little down, but again as I mentioned before we have 96 assets youre always by definition.
Have a bottom end of your portfolio.
And so but for us to answer your questions about less than 5%.
Great. That's it for me thank you.
Our next question comes from the line of Chris Ronco with Deutsche Bank. You May proceed with your question.
Hey, good morning, everyone.
Leslie I think you noted earlier youre seeing some some improvements on the on the labor front could you maybe give us a little more detail as to what what is that on the hours worked or as an hourly wages or something else because it's.
We got a pretty interesting employment report this morning.
Suggesting things are still pretty tight out there so any color on that would be great.
Yeah, I mean, I you know obviously keep in mind that given the nature of our portfolio and a small footprint of it that we're at a relative advantage on that but I'll, let Tom give some comments about what he's seen boots on the ground.
Yes, so Chris what I would say from a high level standpoint, before I get into the numbers as hiring has absolutely improved.
We have less open positions than we did in first quarter in quarter, two and turnover is down so we track retention and retaining employees I think wages basically have been now in line to hire and compete and retain and we saw that as a positive movement towards those three items.
Items that I mentioned earlier.
In regards to productivity I think minutes per occupied room are in line in regards to what we thought it would be.
When I look at hours per occupied room were down about 30, <unk> compared to 19 levels and then wage rates, which are higher than 19 three years later as we expected our.
Contributing to the overall <unk>.
Packed on that but as Shawn mentioned earlier in his prepared remarks, we're at 77% of Ftes at 90% occupancy level. So we have a lot of scrutiny around the synergies that we're having.
At each property, whether its proximity or various locations and different departments as well as the productivity that we're thinking about whether it's F&B housekeeping and all of the items that we talked about earlier around shared services with the brands. So.
All in all we think it is an improving environment still a very tight labor market and we do have to use contract labor more than wed like but were productivity wise, whereas we monitor that we think thats going to help us at the end of the day and to make sure that our margins are protected.
Yeah. Thanks, Thanks, Tom maybe just to follow up on that is I think we heard that in July and Marriott.
Some of the service level requirements. So you guys have.
Some exposure to kind of a full service Marriott side is there any noticeable change from.
What they implemented.
Yes, you're right about the.
The implementation and we do have about 40% of our portfolio is Marriott products, but at the all the also you have to look within the details Chris full service versus select service and what the what they're asking us to do and we do think it's a consistent methodology that theyre trying to adhere to when the consumer comes in so they know what they expect and so.
For instance, at our select service properties, they were asking us to do light stays and ask the customer again, if they want to have cleaning or not and what what's most interesting I think in our world are consumers kind of training. If you will and the take rate is more about 25% when I think about it more weekends than we.
They cause the customer many times, we'll put a DND sign on their door. So it hasnt impacted productivity to this point and then on full service or asking you to do it every day.
In regards to that type of claim we have less full service hotels within the Marriott brand than we do on the select service side, where we have a lot of courtyard and residence Inn is as you know.
Great great. Thanks.
Just as a last one you guys have three three conversions that are wrapping up which means you're presumably going to start. The next the next few is there any change in scope of plans or budgets or anything like that based on increasing costs.
Maybe potential disruption at the assets in a very strong demand and pricing environment.
Yeah, I mean look forward. We're excited about the fact that we were entering the final stages of.
There are three conversions and that we are going to re launch in the fall.
And as we said before we expected due to conversions for per year, we're on pace for that and we look forward to giving more color on that on our next call.
In terms of scope.
What I would say is that in general we're holding scope, we recognize that obviously.
Cost of inputs have gone up but the returns that we were generating on these on these conversions.
Can more than absorbed the incremental costs related from supply chain et cetera.
And so no we haven't had to change the scope of what we are doing on those projects and what I would say is that.
Of the three conversions that we will be launching in the fall have a significant leisure bend and so the backdrop in which they're launching is very strong. We do believe that the leisure customer has structurally changed from a pricing perspective, and so we expect.
These <unk> do better than what we actually underwrote and clearly.
If you're if you're renovating and therefore have disruption and rates are higher than what you. Originally planned for by definition Youre disruptions, a little bit higher but again, that's all temporary and we would get the benefit on the back side of that when he asked that comes out of our out of renovation.
Chris The one thing I would I would just add that the reason why we sequence there right. The conversion is the way we did over several years is to is to mitigate the risk of having excess disruption in any one year and so we were we were very thoughtful in how we wanted to rollout a couple per year to allow.
US to have ramping assets at the same time.
That we were having at our assets under the knife.
Converting and so I think.
That strategic thinking early on is allowing us to mitigate the risk that you articulated as well.
Okay, great. Thanks.
Our next question comes from the line of Tyler Battery with Oppenheimer and co. You May proceed with your question.
Hi, Good morning, Thanks for taking my question just one for me here on the capital allocation topic nice to see the dividend increase I understand that's a board decision, but what's your updated view on the right payout level and your perspective on what you might need to see to grow the dividend in the future.
Thanks, Tyler I think I appreciate the commentary around the increase the dividend I think just to frame the increase for us where we wanted to set it at a level that we thought was sustainable.
Through all phases of an economic cycle and also showed our confidence in our ability of the portfolio to generate free cash flow.
But to your point would allow for room for future increases as the recovery.
Unfolds, recognizing that it's a board decision.
Our views around the future dividends is going to be about.
Whereas the outlook for lodging fundamentals whats the forecast of taxable income, which which influences our dividend pay out and then finally, what our market expectations for dividend payout. So all of those things will influence.
Our dividend payout I think the thought around what percentage of about five fall and things like that is usually a byproduct of all three of those variables as opposed to be driving factor of the decision.
In setting long term dividend.
Practice, the only thing I would add to that is is that you think about the nature of our portfolio. The high margin profile I think the path forward.
Ford as the macro trends and lodging trends unfold the path forward for our dividend raises is pretty clear.
Okay, Great I'll leave it there. Thank you for the detail I appreciate it.
Our next question comes from the line of Gregory Miller with True Securities. You May proceed with your question.
Thanks, Good morning.
Just a couple of quick ones on the 20th Okay.
Do you anticipate that this hotel has hurt the margins.
Stabilization above similar or below your portfolio average.
Greg we under wrote that.
That it was that the margins were going to be generally in line with our with our portfolio margins.
For the asset just because of the nature of the service levels offered for <unk>.
Boutique lifestyle hotel.
You know are going to be a little higher than say, a select service hotels, but that'll be offset by the fact that.
Right.
We can capture that market is going to be higher so net net we would expect margins to be in line.
Yes.
Okay, and then a follow up on the same Nashville Hotel.
Do you anticipate that this one will require a warrant.
Suitably more time from your asset managers.
The other three post pandemic.
Acquisitions.
No.
Keep in mind as I said before.
Our general view is that this this lifestyle assets sort of fits within sort of the curio tapestry kind of framework.
The two hotels that we're converting.
Conversions are we're converting those curios of of nine that Santa Monica is an independent hotel.
So no I think it fits within the framework.
But we do think again.
That there is operational upside that our experienced asset management team can bring to bear to this to this hotel, but not incremental time beyond any other asset that we have and Greg during our due diligence process.
We really identified a lot of that through just good dialog conversation understanding where the upside is and so you know.
Looking at the asset there's 6300 dedicated square footage of meeting space. There is about 1600 square feet of specialty sweetener outdoor terrace overlooking the city. There is a lot of high ceilings and and premium rooms that we typically when you think about best practices of what we do as a and asset management.
Division, that's where we dig in and we dive into that and then we just hold people accountable to where we think there group mixes transient mix in all of the details that would go along with a 124 keys you can get your arms around it pretty quick in this type of market specifically, because there is high demand and so now it's picking and choosing what business you want.
And deciding where you wanna be positioning wise compared to the other independent lifestyle brands.
Okay. Thank you all.
Our next question comes from the line of Anthony Powell with Barclays. You May proceed with your question.
Hi, Good morning, just one for me so all four of <unk>.
And then the Goodman urban which is different than the other public data.
Intentionally.
And would you consider adding more resorts like you had in Q S, California, Hawaii.
So it was more of an urban exports.
So I think.
It's about the seven day a week demand.
A market component and really being able to look at demand throughout the week Anthony is the way I would think about it.
I'll remind you that.
R R.
Our split was 80% <unk> at 20% group on segmentation side of the transient.
We were 50% BT and so 55% between 45% leisure.
Time that will probably move to 50 50, just based on the way that consumer trends are evolving and how leisure is manifesting itself, but we're getting our fair share of leisure exposure in these markets Nashville is a perfect example of that it's got very strong weekend trends.
And as the Cherry Creek etcetera.
And so we are looking at making sure that we got multiple demand drivers and again as I mentioned, a seven day a week demand on that.
And if you think about what we're doing from a conversion perspective on mills house, as well as Santa Monica and and.
Mandalay.
Obviously those are leisure assets that were that were converting and branding and well as well. So I think that when you look at the overall portfolio.
We are adding leisure, but we're very focused on making sure. We have seven day, a week demand as our core tenant of our investment thesis.
Anthony I would say that the last thing I would add to that is these are all thriving markets they're growing markets.
Think about where are we.
Purchased assets in Midtown Atlanta, Theres, a significant amount of growth for corporate as well as entertainment there Boston, It's life Sciences in the Seaport area in downtown and then Moxie Cherry Creek is just an irreplaceable.
Irreplaceable location in a very high end market were worthy we're the new Kid on the block if you will compared to all the lifestyle hotels that are existing there. So we have aspirational opportunities with average rate because it's a growing market with continued in Ohio retailer because going there. So it's just that's another component that we really focus on is thriving and growing.
Markets as well.
Thank you.
Okay.
Ladies and gentlemen, we have reached the end of today's question and answer session I would like to turn this call back over to MS. Leslie Hale for closing remarks.
Thank you everybody for joining us we hope that the remainder of your summer is is excellent that everybody is traveling we look forward to seeing you guys on the other day on the side of Labor day have a great weekend everybody.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation or the rest of your day.
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