Q2 2022 Summit Hotel Properties Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
The conference.
Yeah.
Thank you for standing by and welcome to Summit Hotel properties second quarter fiscal year 'twenty to 'twenty two earnings conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone.
I would now like to hand, the call over to Mr. Adam Odell Senior Vice President Finance capital markets and Treasurer. Please go ahead.
Thank you Latif and good morning, I am joined today by Summit Hotel properties, President and Chief Executive Officer, John Scanner, and Executive Vice President and Chief Financial Officer Trade Conklin.
Please note that many of our comments today are considered forward looking statements as defined by federal Securities laws.
These statements are subject to risks and uncertainties, both known and unknown as described in our SEC filings.
Forward looking statements that we make today are effective only as of today August three 2022, and we undertake no duty to update them later.
Can find copies of our SEC filings and earnings release, which contain reconciliations to non-GAAP financial measures referenced on this call on our website at Www Dot SHP Reed dotcom.
Please welcome Summit Hotel properties, President and Chief Executive Officer, John Scanner.
Thanks, Adam and thank you all for joining us today for our second quarter 2022 earnings Conference call.
Our second quarter results, Mark New pandemic era highest in nearly every relevant operating metrics driven by continued strength in leisure travel and supplement it with accelerating recoveries in business transient and group demand.
As growth in our portfolio increasingly shifts midweek and through our high quality urban assets second.
Second quarter pro forma Revpar increased approximately 54% from the second quarter of last year, driven by a 12, 5% increase in occupancy and a 37% increase in ADR.
And our portfolio of 92 hotels with comparable 2019 results Revpar recapture reached 93% of 2019 levels a significant improvement from the 79% recapture we achieved in the first quarter and highlighted by June at 96% recapture rate the highest of any month since the onset of the pandemic.
Hotel EBITDA recapture in this portfolio was 89% of 2019 second quarter results as the benefits of our lean staffing model have helped to offset wage pressures being driven by a tight labor market.
We continue to benefit from meaningful pricing power throughout the portfolio as average rates increased in every segment of our business over the first quarter and now exceed 2019 levels and all but our negotiated segment.
For the quarter comparable portfolio ADR was 2% higher than the second quarter of 2019.
While resort in small town locations continue to achieve rates well in excess of 2019 levels up 16% and 11% respectively.
And our urban portfolio exceeded 2019 by over 3%, reflecting rapidly improving between corporate and group demand.
Weekday pro forma Revpar increased 26% from the first quarter and 67% from the same period last year.
Occupancy was more than 71% for the quarter with June posting a pandemic era high of nearly 74%.
Our weekend Revpar recapture rates continue to meaningfully exceed 2019 levels and encouragingly Monday through Wednesday nights are seeing the greatest improvements.
And now I'll exceed 80% recapture compared to below 70% in the first quarter.
We day rates increase in every major segment during the quarter ending June weekday rates were within 4% of regenerate.
The group's segment's recovery was particularly notable in the second quarter as group room night contribution reached 15% of our total portfolio mix essentially flat to pre pandemic levels and rates were modestly above 2019.
As expected June was our strongest month since the onset of the pandemic, achieving new highs in absolute Revpar revpar recapture and average rates, which were nearly 5% higher than June of 2019.
Pro forma gross operating profit margins also reaching a peak of just under 48%, which represented 125 basis points of margin expansion over June of last year.
Preliminary July nominal Revpar is expected to decline modestly from June consistent with historical seasonal patterns, but result in a comparable 2019 revpar recapture rate in line with what was achieved in the second quarter.
August tends to be a slightly weaker seasonal months in our portfolio, which is reflected in our current pace that is down compared to our pace for July a month ago that once again, we expect 2019 recapture rates to hold fairly steady month over month.
However, we are very encouraged by the pace trends in our portfolio in September and October , particularly within the recently acquired Newcrest image portfolio and our urban properties, which are seeing significant month over month pace increases for both weekdays and weekends.
September Revpar is pacing, 14% ahead of August and our pro forma portfolio, which positions us to achieve recapture rates to 2019 that are in line or potentially above the highs we experienced in June .
Combined with our healthy recovery in July and expectations for August we expect third quarter recapture in our comparable portfolio to be generally in line with the second quarter.
But it's still very early in our booking window, our optimism for the fall is further supported by our October pace, which is 12% ahead of September and has historically been one of the strongest months in our portfolio.
Our strong operating results and the continued progress we've made enhancing our balance sheet have positioned us to reinstate our quarterly common dividend yes.
Yesterday, our board of directors declared a <unk> <unk> per share quarterly common dividend, which equates to <unk> 16 per share on an annualized basis, and roughly a 2% annualized dividend yield.
We've been prudent decides the dividend so that it can be meaningfully increased overtime. If the current fundamental recovery in our business continues uninterrupted, but also to be sustainable if we experience a reduction in demand from our baseline expectations.
Prior to the pandemic, we had a strong track record of paying common dividend, which grew over 60% from the time of the IPO equating to a 5% dividend CAGR over that 10 year period.
We've remained active on the transaction front and during the second quarter, we closed on two previously announced transactions.
We closed on the sale of the 169, Guestroom Hilton Garden Inn, San Francisco Airport North Hotel.
Previously owned and our joint venture with GIC for $75 million and we realized a net gain of $25 million in less than three full years of ownership.
The sale price reflects a trailing 12 month NOI cap rate of approximately 1% as of March 31.
As a reminder, the sale also allowed us to forgo a $7 million renovation that was scheduled to begin later this year.
In June we successfully closed on the equity purchase option to acquire a 90% interest in the newly constructed 264, Guestroom AC element dual branded hotel in downtown Miami, Brooklyn neighborhood at a valuation of $89 million or $337000 per key.
The hotel features Rosa Scott recently named as one of Miami's best rooftop bars, which has generated on average nearly $500000 of revenue in each month since its opening.
The hotels have ramped incredibly quickly since our December 2021 openings generating year to date revpar of approximately $170 despite being in the slower summer season in Miami.
For the full year 2022, we anticipate the hotels will generate a combined hotel EBITDA yield on our auction price between 8% and 9% effectively in their first 12 months of operations. Our 31 recently acquired hotels continue to perform very well as forecasted EBITDA is trending to finished nearly 10% above 2020 to underwrite.
Despite the delayed opening of the canopy New Orleans down.
We remain particularly bullish on the longer term outlook for the Newcrest image portfolio as we expect to begin to realize the benefits of recently implemented asset and revenue management strategies as early as the second half of this year and continue to believe the concentration of assets in high growth Sunbelt markets are poised to outperform over the next several years.
Our other recent acquisitions continue to vastly exceed expectations as the residence in steamboat the embassy suites, Tucson, and the dual brand AC element Brickell, Miami are collectively pacing more than 40% above our underwritten in 2022 hotel EBITDA levels.
Combined for the 31 hotels acquired since June 30 of last year, we expect our blended 2022 EBITDA yield to be approximately 7%.
As a reminder, nearly half of the hotels, we acquired have opened within the past four years, implying there is still considerable upside in many of these assets.
With that I'll turn the call over to our CFO trade conflicts.
Thanks, John and good morning, everyone on a pro forma basis, we experienced continued revpar growth across our portfolio in the second quarter generating our highest nominal revpar of the pandemic era.
The trend of sequential quarter over quarter improvement.
From a segment perspective, so Thats 42 hotel urban portfolio produced a second quarter revpar of $125 by far the highest quarterly revpar for our urban portfolio since the onset of the pandemic.
This surpassed first quarter 2022, urban revpar by approximately $34 or 38%.
Sequential quarter over quarter urban Revpar growth was driven by strength in both occupancy and ADR, which increased 22% and 13% respectively.
For our urban hotels with comparable 2019 data second quarter, ADR surpassed 2019 levels by approximately 3%.
Strengthening corporate and group travel were instrumental to improving urban fundamentals in markets, such as New Orleans, Austin, Tampa, Nashville, Charlotte Boston Downtown Chicago.
Most notably urban weekday revpar increased sequentially throughout the quarter as each month generated a new pandemic era hi.
This culminated with June posting a weekday revpar of approximately $125 nearly double that of June 2021, and resulting in an 86% recapture to 2019 as urban portfolio weekday results.
Second quarter Revpar for our non urban hotels was $119 an increase of over 13% relative to first quarter 2022 at a 33% increase to the second quarter of 2021.
Strengthen our non urban portfolio was driven heavily by our hotels in airport and suburban locations.
Hotels in resort markets, such as Fort Lauderdale, Tucson, and Phoenix, and our seasonally slower periods. Despite the seasonality right strength among our resort properties with comparable 2019 results continued to accelerate in relation to 2019 with ADR recapture of 116.
In the second quarter versus 108% in the first quarter of this year.
Furthermore, our airport suburban and small town hotels demonstrated exceptional strength with Q2, revpar, increasing by 33% over the first quarter to $117.
Booking windows in the quarter continued to expand most notably same day bookings declined from 19% to 15% of total bookings a new pin debit parallel and relatively in line with pre pandemic norms. Furthermore, bookings in the week for the week declined by 17% while bookings.
Per stage more than 30 days out increased by nearly 40% during the quarter.
In addition bookings per stage 15 to 30 days out historically the window in which corporate travelers typically book increased by approximately 10% during the second quarter.
From a channel mix perspective, we continue to see strong bookings coming from the less expensive channels as approximately 70% of our stays in the second quarter came from direct bookings and central reservation systems.
<unk> contribution declined 90 basis points from the first quarter to comprise approximately 16% of our total bookings as corporate group and business transient demand continued to accelerate.
On a same store basis operating cost per occupied rooms in the second quarter declined compared to the first quarter of 2012 of 2022, resulting in second quarter gross operating profit margin of <unk>.
Over 49%, which is approximately 100 basis points below the second quarter of 2019, despite current labor market dynamics.
Same store hotel EBITDA flow through remained strong at 54% compared to the second quarter of last year.
Pro forma hotel EBITDA for the second quarter was $70 7 million.
94% increase from the second quarter of 2021, which resulted in a 38% margin the highest quarterly hotel EBITDA margin during the pandemic era and more than 600 basis points higher than the second quarter of 2021 <unk>.
Adjusted EBITDA increased to $54 6 million in the second quarter, which was more than double for the year ago.
Adjusted <unk> in the second quarter was $32 $6 million or <unk> 27, a share an increase of $24 2 million for the second quarter of 2021 and $12 $5 million for the first quarter of 2022 amid an improving fundamental backdrop.
<unk> and our adjusted <unk> was it higher than normal income tax expense for the second quarter, driven by the $25 million gain from the sale of the Hilton Garden in San Francisco.
When adjusting for the tax related to the gain on sale adjusted <unk> was $36 1 million or <unk> 30 per share for the second quarter for the full year, we estimate income tax expense of approximately $3 $5 million.
During the second quarter on a consolidated basis, we invested approximately $15 million in our portfolio, bringing our year to date total to approximately $25 million.
Second quarter spend was primarily driven by transformative renovations at our Hilton Garden Inn, Houston Energy Corridor Hyatt place Orlando Universal Studios, and Springhill Suites Nashville Metro Center. In addition to typical maintenance capital and purchasing for near term renovation projects.
Including the year to date spend we expect to spend $60 million to $80 million on a consolidated basis or 50% to $70 million on a pro rata basis and total capital expenditures for 2022.
Finally, turning to the balance sheet, our overall liquidity position remains robust and more and more than $480 million. We continue to maintain ample liquidity to repay all maturing debt through 2024, when considering available extension options from an interest rate risk management perspective.
Our balance sheet is well positioned including an average pro rata interest rate of three 8% and nearly 70% of our current outstanding pro rata debt fixed after consideration of interest rate swaps.
In addition to address the impending maturity of $200 million in notional swaps. We recently entered into two 100 million dollar interest rate swap agreements that will that will fix one month's a sofa and carry fixed rates of two 6% and 256%.
These new swaps will mature in January 2027, and January 2029.
This extends the average duration of our swap portfolio for less than two years to over four years. The swaps will become effective in January of 2023, after the $200 million of existing interest rate swaps expire.
The new swap transactions will result in the company, maintaining approximately 70% fixed rate debt.
In the second quarter of 2022, we exited the waivers on certain financial covenants related to our primary corporate credit facility and amended the credit agreement for our $400 million senior revolver revolving credit facility and two senior term loans totaling $425 million to.
Extend the available loan term and enhance overall flexibility.
The amendments on the $600 million senior credit facility include additional expects extension options that allow us to extend the maturity date to March 2025 towards the $400 million revolving credit facility and to April 2025 for the $200 million term loan facility pricing remains unchanged.
For both loans. Additionally.
Additionally, the company has retained complete capital allocation flexibility regarding future potential acquisitions dispositions capital expenditures and dividends.
Included in our press release last evening, we provided 2022 guidance on certain nonoperational items, including cash corporate G&A interest expense preferred dividends and capital expenditures, both on a consolidated and pro rata basis.
We expect the midpoint of consolidated cash corporate G&A to be $21 5 billion.
Interest expense, excluding the amortization of deferred financing costs to be $59 million.
Series G and series F preferred dividends to be $15 $9 million series Z preferred distributions to be $2 3 million and pro rata capital expenditures to be $60 million.
That we will open the call to your questions.
Thank you.
As a reminder to ask a question you will need to press star one one on your telephone please.
Please standby, while we compile the Q&A roster.
And our first question comes from the line of Neil Malkin with capital one.
Okay.
Good morning, guys.
Good morning Kim.
Congrats on the dividend and getting out of waivers and everything so.
Go ahead Sir.
So wait after shoulders.
One.
Is on.
The ADR.
Hum.
Business Traveler, you mentioned that.
The pickup in mid week urban hotels being indicative of an accelerating.
The corporate environment and travel cadence.
Just so we can understand how the dynamics would work in terms of Adi overall can you can.
Can you talk about what a typical premium and.
ADR that business or a corporate.
Business.
Good.
Get or would achieve versus a typical leisure guest I think it's important that you know a lot of the luxury peers.
As business comes back those those people are paying below what the leisure.
Ours are but I think for your portfolio. It's actually flipped. So can you just help.
Help quantify that and B.
Can you talk about how that would help the portfolio in terms of ADR lift as we go.
Through the rest of the year and into 'twenty three.
Yes, sure Thanks, Neal and good morning.
You highlighted it correctly I think if you look back historically at our portfolio, particularly pre pandemic.
Certainly run higher rates and our negotiated channel than we have in some of our leisure channel that has flipped today and where we are certainly running at a much higher percentage of our room night mix through the retail segment than we would on a normalized basis I still think as you start to see and again you saw a lot of that as you alluded to in the quarter, particularly in the month of June as we can.
Starting to see some of this BT business come back its still at rates lower than it was in 2019 negotiating stellar only channel where.
Rates are lower than they were pre pandemic, but we do think that there is an enormous amount of upside as that business starts to come back. We do think that the remixing of our business overall is going to be positive from a rate perspective, as we start to see <unk> come back into just better better demand broadly in urban markets.
Okay. Thanks, and then the other one for me is.
Bigger picture.
The stock.
I mean, it's kind of been an underperformer.
Kind of lagging.
Reuben having a.
Sort of disparate multiple and so I'm just wondering if you could or hoping you could maybe give a couple.
Points or catalyst that would that you think would help.
Bridge that.
That discount.
And kind of get this stock moving in the right direction. So you can really turn on the.
The external growth engine.
Just a couple of things you could you could talk about and that would be great.
Sure.
Neil I think.
The way the stocks traded has been frustrating it's been disappointing I'm sure. It has been for most of our peers as well I don't think the stock today reflects the quality of the portfolio the quality of the platform the nature of the transactions that.
We've been able to complete through the balance of the year and really since the onset of the pandemic.
Some of it I think is attributable to the operating performance just the nature of the portfolio. This is where our select service portfolio. That's recovered sooner, but we have less suburban exposure, we have less small town exposure, which was which recovered faster and we just have a higher concentration in urban markets.
Fewer peer play a resort leisure oriented assets, which had been the outperformer as year to date on what we do have is a really really high quality.
<unk> focused portfolio, which I think positions us very well, where we see kind of the next leg of growth and again, we've talked a lot about that in our prepared remarks, where we're seeing better growth with midweek and better growth in urban markets. We do think we are really really well positioned again as we continue to see growth in that mix in particular, and specifically as we start to folks.
More on this business on a year over year growth and less on an index relative to 19.
I'm really proud of the transaction activity that we've completed since the onset of the pandemic and I don't think that value that has been created and will be created as reflected in the stock price. If you look at the acquisitions and we again we mentioned this in our prepared remarks were 10% ahead of our underwriting year one.
And everything that we've acquired about $1 billion worth of assets that we've acquired since the beginning of the pandemic. The Brickell trade has been a homerun, we're probably $25 million to $30 million in the money on that trade from our option price day, one and it's yielding eight or 9% San Francisco trade I think was a homerun. We're already ahead of our.
And the NCI portfolio and I think most of that upside is yet to be realized a lot of the heavy lifting that has been done has been done over the last six months, whether it's getting.
Sales clusters organized the right resources in place, though and we think a lot of it is particularly as we get into the stronger season and some of these sunbelt markets. We think a lot of the upside in that portfolio will be realized in the back half of the year this year and into the next coming years, given the growth profile of those assets.
We reinstated our dividend, which we think reflects our conviction of one the cash strong cash flow profile of the business into the confidence that we have in our business going forward I am proud of the work that we've done on the balance sheet. So I think the business is really well positioned on a go forward basis and I think if we continue to do thoughtful.
Transactions and continue to execute on our operating plan and ultimately that's going to show up in earnings will be and will be realized in the share price over time.
Yeah, that's great. Thank you John and thanks, everyone.
Thanks Neil.
Thank you.
Our next question comes from the line of Chris Rock.
Rocco with Deutsche Bank.
Hey, good morning, guys.
I appreciate all the color on the segments in the markets.
Question is.
As you are seeing this nice urban rebound.
Do you think do you think resort markets suburban markets are still.
Kind of winning two where do you think this is just a more of a transfer from strength in resort in small town markets to urban in other words same travel or just going to a different place for perhaps for business instead of pleasure.
I think theres, a little bit of that Chris, but I think look I think leisure is still really strong.
Our resort markets again, we don't have a ton of pure resorts. We do have a number of leisure oriented markets. They are still leading the pack there still the furthest ahead of 2019, we have a couple of markets that are actually down slightly year over year in June , but still way up to 2019 and I think some of that is reflective of what you've seen <unk>.
<unk> have other preferences I think over the summer you saw some leisure travel get reallocated to urban markets and we saw the greatest strength in urban markets and markets that have great leisure attractions markets like Austin, and New Orleans, Miami, even Tampa, but even if you if you go and look at the performance through.
June more and more of this performance is driven by what I would call more BT orange markets at least in our portfolio of markets like Charlotte, we were up almost 6% over 19 in a market like shortly up 13% in June that's really BT driven Pittsburgh is another market that was up 8%, 9% both for.
In the quarter and for the month of June we were up in the loop in Chicago over 3%.
For the quarter and June over 2019 levels. So some of this is just being driven by more beauty. There is no question that I think we've seen some urban shifts out of pure play leisure resort destination to more urban markets, though.
Okay.
Thanks, Sean and then.
It was interesting yesterday I think we heard from Marriott.
They are starting to see more conversions on the select serve side into their brands, which was a little surprising to hear are you guys seeing any of that in your markets or is there any concern that.
New units become a little bit may be tougher to get done on AR.
Timely schedule that did you get any pressure from some of these marriott's, new Marriott select serve conversion product.
Not particular, Chris I mean, I think that the brands are clearly going to need to focus on conversion activity look I think the math depends a lot of new development remains incredibly challenging and I think one of the silver linings of the pandemic and some of the uncertainty that exists today in the broader macroeconomic environment is just.
It's really hard to pencil new developments. So we think we're going to be in for an extended period of time, where there is very low below historical norms supply growth. So certainly understand that that's going to be a push on their side, but generally I think the supply dynamic is very favorable for us going forward.
Okay very good I appreciate it thanks, Sean.
Thanks, Craig.
Okay.
Thank you.
Our next question comes from the line of Austin, where Schmidt with Keybanc capital markets.
Hey, good morning, everybody.
John You mentioned.
The pace gains for September and October and I'm. Just curious if you have any breakdown of detail between sort of occupancy versus versus ADR and then.
So if you specifically have any of the you know.
Pace trends for sort of that urban midweek piece of business that youre able to share.
Yes.
We can follow up with specifics what I would say is that the.
Pes gains are both in rate and occupancy. So we're seeing good traction there I would say, we're seeing much more significant growth in the urban portfolio into pace gains are largely attributable to the urban portfolio, particularly the newcrest portfolio as we get into in the Sunbelt markets Dallas in particular, Youre getting out of the peak summer slow season here.
Where it's been pretty hot for the for most of the summer in Texas, we get into the fall we get into much better convention citywide activities and some of these markets. So I would say that our paces is definitely skewed higher in some of these markets and again, particularly in the Newcrest portfolio.
That's helpful. And then you discuss recent investments are trending ahead of underwriting and I'm curious if you roll up.
All of the new investment activities you've completed.
Over the last few years kind of taking the stabilized yields on those and then marry that with the legacy assets.
Where do you think.
Stabilized hotel EBITDA could could shake out.
Certainly won't won't hold you to a timeframe, but just curious if you have sort of a range in mind.
Yes, what we've said publicly about the acquisition portfolio has been roughly a 7% EBITDA yield in 2022. We are ahead of our underwriting we're about 10.
Percent ahead our.
Our expectation was that these would all these would all stabilize north of 8% I think frankly, we're probably ahead of expectation.
The point that we've continued to reinforce is a lot of the upside, particularly in the new craft portfolio is still to be realized I think that the 2023 and 2024, where we really feel like it's going to take for those to stabilize <unk>.
Number of those properties are brand new a lot of them have never been through a traditional RFP season.
Many of them were just now implementing a lot of the asset and revenue management tactics that we think are going to drive a lot of value on a go forward basis. So the non newcrest portfolio acquisitions are way way ahead. When you look at steamboat and you look at Tucson, and Silverthorne you look at some of those acquisitions, they're far ahead of our initial underwriting but I do.
Think a lot of the upside of the portfolio, particularly in some of these urban markets are to come in the next.
Beginning in the back half of this year, but particularly as we get into next year.
Okay. Thanks for the thoughts.
Thanks Austin.
Thank you and.
And our next question comes from the line of Michael Bellisario with Baird.
Thanks, Good morning, everyone.
Good morning, Mike John just a follow up on Newcrest. There can you maybe digging a little deeper just on all the heavy lifting that you guys have done kind of behind the scenes in the portfolio. During the first six months of your ownership and then kind of I know you mentioned 22, and 'twenty three but like when might we start to see the topline and bottomline.
To pick up and when will all that heavy lifting start to show up in the numbers.
Yes, I think you've highlighted something we spent a lot of time working through internally.
Heavy lift to get a deal closed the real work started when we closed the deal and so our team and I'm incredibly proud of the work that the team has done has been very very focused particularly on getting some sales clusters organized in markets like Dallas and Frisco in Oklahoma City.
We are in slow season.
A lot of those markets today, and we're again as I alluded to in the on the last question. We're just now getting the right resources in place we will go through our the first RFP season for many of these assets I think generally when you look at the quality of these assets. These are the highest quality select service assets in their given markets and.
They just haven't had a chance to ramp up and stabilize and so I think we're very bullish on the dynamics in the market, particularly starting in the fall. So I think we'll start to see some of the benefits in the fall, but we've always felt like stabilization in this portfolio into 2023 or 2024 event. We're ahead of where we thought we'd be at this time, but I do think it's going to take.
Some quarters for us to really get fully stabilized in that portfolio.
Got it that's helpful. And then just switching gears just on the transaction front could you maybe talk about what you've seen over the last 90 days in terms of.
Changes in pricing or buyer seller expectations and then if you have any interest in providing seller financing to prospective buyers to get deals across the finish line today.
We haven't seen a lot of trades, Mike I think that that was kind of what we talked about on the last call that the environment that we're in and particularly that we've been in over the last 60 or 90 days hasnt been conducive to transactions operating performance is better.
Outlook all of the hard data that you can point to from an outlet perspective, whether its pace trends or group trends convention trends. They all still are very positive and thats clearly offset by being in a higher interest rate environment. The credit markets are tighter than they were in there through some recession fears that are clearly looming in an overhang, particularly in.
The public markets and so.
Generally asset prices have trended lower not meaningfully lower but probably marginally lower probably 5% to 10% lower than we were at the beginning of the year I still think there's a pretty deep buyer pool for assets and I think particularly for the type of assets that we own.
Any decline in value is probably at the lower end of that range again, just given how much capital is still chasing these type of high quality deals from a seller financing perspective, we look at it we've done it in the past it is not our preferred method of execution, but if a facilitate the trade and the economics makes sense, it's certainly something we would evaluate.
<unk>.
Got it helpful. Thank you.
Thanks, Mike.
Thank you and our next question comes from the line of Bill Crow with Raymond James.
Hey, good morning, guys.
I appreciate your comments on the on the margins I think we're all trying to grapple with stabilized margins that.
Kind of a lag.
Between what we're seeing in occupancy and rate recovery and what we're seeing there.
FTE sort of recoveries for our U.
If you look at it per occupied room or per available room basis.
<unk> 22 versus <unk> 19.
T E basis.
Hey, Bill how are you good morning, I would say if you look on our costs.
Cost per occupied room.
In Q2 relative to Q2 2022 relative to Q2 2019 were probably up about three 8%.
From that perspective, a lot of that is driven by the mix of labor our ftes today stand at about 24, Ftes. If you remember prepaid debit that was probably 35, we don't think that we're going to get back to 35%.
As we move forward here, but it certainly needs to be something higher than 24, and part of what's impacting that.
That kind of Delta in terms of an increase in cost for oxide room as the contract labor, which frankly is a little bit less productive to where we'd like it to be and so there continues to be an evolution as we as we kind of navigate this labor market of bringing back additional ftes and offsetting that contract labor, which I think is what will close the remainder of the gap from a from a <unk>.
Margin perspective.
I think one thing yes.
Alright, I will just jump in and say add one thing and that I still think we've talked a lot about stabilized margins being 100 200 basis points higher than they were on the same revenue mix pre pandemic I still think we feel good about that number I think where we are where we shifted the narrative slightly has been more of that just going to be driven by your mixes.
<unk> higher from a rate perspective, and it is occupancy and as trade alluded to we're we're still running about 70% of our pre pandemic FTE count the reliance on contract Labor has made up for some of that which is more expensive and less productive, but I still feel I think we're still confident in that 100 200 basis points of margin expansion longer term.
So we should expect margins to continue to rise next I know, you're not giving guidance but.
But can we can we see margins grow next year, even if revpar growth slows in risk labor staffing.
Staffing levels kind of normalized.
Yes, I think so long as that your revpar mixes continued skewed towards rate growth.
Yeah.
Yes.
Any time you have this dislocation that brings opportunities.
Our balance sheet and it may not be in a position to exploit any of these right now, but I'm wondering what your thoughts are.
Three.
Rose.
Areas number one whether you received any inquiries from leveraged owners who might be.
Trouble or whether youre seeing any sort of.
Opportunities on the acquisition side.
Second of all in the Mezz lending side, which obviously got a pretty good asset.
Got it in the Brickell.
Whether there is any thoughts to resuming.
Resuming that process and then you've talked I think before about broken development deals, which just seem too.
And maybe the recoveries too good for them to come up but it seems like theres got to be some.
So that developers.
Developers that are looking for an exit.
What youre seeing out there broadly.
Areas.
Yes, we haven't seen a lot yet bill.
In terms of what I'll say your first and your third buckets broken development deals or kind of Levered owners I would say, we're still fairly early in this higher interest rate environment, and an environment, where the credit markets are open, but certainly dislocated and tighter than they were 60 or 90 days ago. So I think if youre going to see.
Opportunities there, we probably haven't seen them, yet, but they potentially will come in again, I think we'd always love to be opportunistic around finding a deal thats broken or distressed in a way that we can get a really compelling basis.
I'd like to do more in the Mezz lending program you highlighted something that we're incredibly proud of the new deal that we did in Brickell I think.
It highlights the value of the program, where you can earn we earn 9% on our money all through Covid, and then stepped into 89% yield in an asset that we're well well in the money on so we'd obviously love to do more of those it is a difficult time to get development to pencil right now and this is we've always looked at the Mezz program is something that.
We wanted to do.
For assets that we want to own longer term and.
We were never we never designed this just merely to be kind of a lender and so the type of assets that we own again, I think youre going to see just less supply for a period of time. So I do think there'll be some opportunities we will continue to be very selective in what.
What we do but for the time being I think we're just in a lower supply growth environment generally.
Okay. Thanks for the time this morning.
Thanks Bill.
Thank you and our next question comes from the line of Neil Malkin with capital one.
Hey, Thanks, guys just a quick.
Follow up in terms of the leisure demand are you seeing.
Just from the confluence of factors.
Stock market sentiment.
Inflation everywhere, not just with gas prices, but with food.
Everything.
<unk> so.
I know typically arent, particularly people referenced that high gas prices don't affect demand at properties.
That you guys have seen but I think it's a little bit different environment now.
40, plus year highs in inflation, so I'm just wondering given that.
I don't know call it lower budget orientation of this of the leisure traveler.
Some of that sort.
High end resorts.
Are you seeing any impact any chinks in the armor any any issues in terms of <unk>.
Slowing drive to demand or pushback on rate or potentially booking trends not.
Coming to fruition because of some of those things.
And we really Havent Neal I know Theres a lot of concern out there broadly about the trajectory of consumer health I think where we sit today the consumer still really healthy.
Whether you look at how much savings have been accumulated since the start of the pandemic. If you look at the labor market people have jobs and wages are growing inflation admittedly is growing faster but for.
For the vast majority of people they still have disposable income and it hasnt shown up.
Any signs of any crack.
Asia travel so we're monitoring it very closely.
I think that we think that if there is any softness there it's going to be more than offset by strength in BT, which we're seeing come back more rapidly, but the simple answer is we certainly haven't seen anything yet there are no real signs at least in the data at that point to it happening in the near term.
Okay. Thank you.
Thank you I'm showing no further questions so with that I'll hand, the call back over to President and CEO , John <unk> for any closing remarks.
Well. Thank you all for joining today, we'll look forward to catching up with you this quarter and speaking again next quarter have a nice day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.
Okay.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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