Q3 2022 RLJ Lodging Trust Earnings Call
Ladies and gentlemen, the teleconference will begin momentarily please standby.
[music].
Welcome to the R. O J lodging Trust's third quarter 2022 earnings call. As a reminder, all participants are in 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'd now like to turn the call over to Nicky Abella R. L. J Senior Vice President Finance and Treasurer. Please go ahead.
Thank you operator.
Good afternoon, and welcome to our logging costs.
2022 third quarter earnings call.
On today's call Leslie Hale, our President and Chief Executive Officer will discuss key highlights for the quarter.
Sean Mahoney, our executive Vice President and Chief Financial Officer will discuss the company's financial results.
Tom Bartlett, our executive Vice President of asset management will be available for Q&A.
Forward looking statements made on this call are subject to numerous risks and uncertainties that may lead the company's actual results could differ materially from what had been communicated factor.
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 maybe helpful to review the reconciliations to GAAP located in our press release.
Finally, please refer to the schedule of supplemental information, which was posted to our website last night, which includes pro forma operating results for our current hotel portfolio for 2019, 2021 and year to date 2022.
I will now turn the call over to Leslie.
Yeah.
Thanks, Nikhil good afternoon, everyone and thank you for joining us today.
We were pleased with the positive momentum in lodging fundamentals continued during the third quarter against this backdrop, our operating results exceeded our expectations led by strong group production with our group revenues achieving 2019 levels for the first time combined with the continued recovery in business transient and leisure remains strong even as normal season.
AOI return, we are particularly encouraged by the step up in trends, we saw in September , which outperformed our expectations and enabled us to achieve a new peak relative to 2019 revpar at 98%.
Driven primarily by the rebound in our urban markets.
Based on the positive demand trends and continued pricing power, which allowed revpar to achieve a new peak relative to 2019 in September we believe the current momentum can continue and we are encouraged to see these trends carry into October .
In addition to delivering strong third quarter operating results, we made significant progress on a number of our strategic objectives. We completed the renovation and rebranding of our conversions in Charleston, and Mandalay Beach, we completed the acquisition of the 21 C Hotel in Nashville, we address our near term debt maturities, while further strengthening our balance sheet.
And we returned capital to our shareholders with an increase in our quarterly dividend and incremental share repurchases our execution on all these fronts further position our own J to drive growth and create shareholder value.
With respect to our operating performance our hotels achieved 94% of 2019 revpar levels during the third quarter, a new high relative to 2019 led by our ability to continue to drive ADR, which achieved 105% in 2019 levels.
Our strong performance was driven by broad improvement across all of our markets with particular strength in our urban markets.
Within the quarter September benefited from the expected step up in business travel post labor day, which led to achieving new highs relative to 2019 across all metrics.
As expected our urban markets, which represent two thirds of our portfolio. So a significant increase in demand, which improved the pace and momentum for our urban footprint during the third quarter.
This allows for urban Revpar, and ADR to achieve 95% and 106% in 2019 levels respectively.
In September we saw a mix shift with business travelers returning in greater numbers, which in addition to increasing levels of attendance at city Wides in special events relative to pre pandemic levels benefited our urban markets.
These positive trends, let our urban portfolio to achieve 2019 levels of Revpar with most of our individual urban markets exceeding 2019 in September .
As it relates to pricing ADR in our urban markets has exceeded 2019 levels since the spring with September recording a significant premium.
In September our urban lifestyle markets that benefit from seven day, a week demand. So in ADR premium relative to 19 that was ahead of our resort hotels.
In October many of the same urban markets that are driving the most significant ADR momentum are forecasted to generate ATR premiums of 10% to 20% over 2019 supported by near term transient pace tracking above 2019 levels.
Our ability to achieve new highs in 80 are ahead of the full recovery of our urban markets is an indication of the run room that exists to drive Revpar. We believe the building blocks for our continued rate growth are more sustainable, giving you our geographical footprint and the diversification of our demand generators.
With respect to segmentation the most significant improvement to revenues came from the group segment during the third quarter.
Most notably we benefited from improving demand from corporate group, which was a meaningful contributor to the robust recovery in group revenues. Additionally.
Additionally, although booking windows remains short our group revenues also benefited from significant in the quarter for the quarter pick up.
The continuing threat and social groups and increasing citywide attendance in many markets with the scale of the increase in attendance being noteworthy for all of these events.
This enabled our group revenues to achieve 2019 levels during the third quarter.
Representing a 900 basis point improvement from the second quarter, and we were able to drive ADR to 108% of 2019 and 500 basis point improvement.
Relative to business transient using our special corporate segment as a proxy BT revenues relative to 2019 saw a 300 basis point improvement from the second quarter.
We continue to see travel volumes increased with the return of traditional corporate demand from industries, such as consulting financial services technology and health care on top of continued healthy demand from small and medium size enterprises.
Step up in demand was in line with our expectations that corporate travel volumes would increase after labor day and was further evidenced by our weekday revpar achieving 93% of 2019 in September .
Representing a 500 basis point improvement from June .
Our September ADR data provides further support of the return of higher rated corporate demand with weak day rates closing the gap as our absolute ADR was inline with weak in ADR for the first time since the pandemic.
As is well known leisure remained robust during the third quarter, especially in markets, such as South, Florida, Orlando and Hawaii.
Any work from anywhere flexibility for many has elongated the historic leisure demand patterns and it's allowed strong leisure trends to continue post labor day, particularly in our urban markets. We are continuing to benefit from strong leisure pricing power as our third quarter leisure ADR achieved 118% of 2019 levels with September .
Achieving 121% on the strength of urban leisure.
Overall, the step up in positive trends across all segments, particularly in our urban markets throughout the third quarter gives us confidence that our portfolio is set up for strong performance relative to improving fundamentals.
In addition to achieving strong operating results, we executed on a number of capital allocation initiatives, which will enhance our growth profile complement our high quality portfolio and further strengthen our balance sheet.
This quarter, we were pleased to formally reintroduce the iconic Mills House hotel in Charleston, and lunch Sakari dunes on Mandalay Beach, both of which joined the Curio collection by Hilton after completing transformative renovations expanding our exposure to the fast growing lifestyle segment.
But the Mills House hotel in the Historic District of Charleston, We completed a comprehensive re imagination of all public spaces and guest rooms. The renovation included the repositioning of the hotel food and beverage experiences, including elevating the hotels restaurant at any specialty coffee bar and transforming the hotel pool.
So our high end pool with a new rooftop bar.
By activating previously non revenue generating space. We believe these new F&B concept will significantly increase our out of room spend.
Additionally, we added new high end, especially suites and Newsweek configurations that are expected to command a meaningful rate premium.
Charleston is a high growth leisure market with strong fundamentals consistently recognized as a top destination to visit by experiential travelers and this property is now optimally positioned to capture this segment and benefit from its iconic location.
That's the cartoons on Mandalay Beach transitioned from an embassy suites to the Korea collection.
Following a resort wide transformative renovation there.
The hotel, both a rare beach front location in California the.
The renovation elevated the quality look and feel the property to match the premium beach location of this resort.
We also converted our food and beverage offering from the embassy suites comp service model, which required approximately $1 million of annual operating costs historically.
We now have multiple new revenue generating F&B outlets, which will drive meaningful out of room spend by our higher end guests.
With an attractive premium beach front location and he transformed product Mandalay Beach will draw a diverse base of travelers, including upscale leisure corporate and groups looking for unique coastal California experience.
Both properties are attracting the higher rated premium Hilton customer and group booking leads have been strong with meeting planners attracted by these hotels re imagine upscale settings.
Based on the current trends, we expect the incremental rate lift from 2019 to be nearly double our original underwriting and are very confident that we will exceed the 40 to 50 per cent underwritten unlevered IRR is for each of these conversions.
Completing the renovations and up branding of these assets located on irreplaceable real estate will also drive any of the appreciation.
With respect to our other capital allocation initiatives.
The transformation of the Wyndham Santa Monica is in full swing with the relaunch and rebranding as an independent hotel scheduled to take place at the beginning of the new year.
We expanded our footprint to the high growth Nashville market, which is already performing well relative to our expectations and finally, we raised our quarterly dividend of five cents per share.
That's just going to the third quarter, we further strengthened our balance sheet by addressing our 'twenty 'twenty three maturities and reduced our 'twenty 'twenty four maturities, while bringing down our borrowing costs by exiting the covenant waiver period.
Additionally, we continue to take advantage of the dislocation in our stock price by buying back around incremental shares, bringing our total share repurchases to approximately $4 9 million shares so far this year.
Our capital allocation execution demonstrates our ability to unlock embedded value and underscores the tremendous optionality. Our strong balance sheet provides which will continue to be an advantage as we look to pursue internal and external growth in a disciplined manner.
Looking ahead.
While we remain cautious relative to the macro headlines we expect lodging fundamentals to remain constructive throughout the fourth quarter.
October has started out strong with our urban markets continuing to see strength in all segments of demand.
We expect leisure trends to remain robust during the upcoming holiday season.
Business travel volumes to continue to improve and the most recent positive momentum in group revenues to continue as well.
Given the near term positive trends, we are seeing we expect fourth quarter revpar to further narrow the gap to 2019.
Overall, we remain optimistic that fundamentals will continue to recover given the tailwind from the combination of minimum new hotel supply.
Continued pent up demand for travel and the recovery and B T and international travel in urban markets, which remains in early stages with significant room to return to 2019 levels.
I guess, its overall backdrop, our old days, especially well positioned with multiple channels to drive incremental growth and.
Including contributions from our recent conversions the continuing ramp up at our recent acquisitions the ongoing ramp of our urban markets our ability to capture the strong emerging small group trends and the ability of our portfolio to generate significant free cash flow.
Our strong position is further supported by a robust balance sheet.
Which will continue to provide significant optionality as it relates to driving internal and external growth opportunities.
I will now I'll turn the call over to Sean.
Sean.
Finally, we were pleased with our third quarter results, which exceeded our expectations and continued to narrow the remaining gap to 2019, including.
Including finishing the quarter with September results that were the strongest of the pandemic.
Pro forma numbers for our 96 hotels include the acquisition of the 21 C Hotel in Nashville, which we acquired during the quarter our.
Our reported corporate adjusted EBITDA and F. F. O include operating results from all sold and acquired hotels during <unk> ownership period.
Our third quarter portfolio occupancy was 72, 7%, which was 90% of 2019 levels and average daily rate was $189 exceeding pre pandemic levels at 105% of 2019 Rep.
Representing 200 basis points of improvement from the second quarter.
The third quarter results reflected the return of normal seasonality Kantar.
Continued pricing power and increased business travel, especially post labor day.
Our third quarter Revpar was 94% of 2019 levels, which was stronger than we expected at the beginning of the quarter and was 96%, 90% and 98% of 2019 in July August and September respectively.
The strong acceleration towards the end of the quarter was driven by outperformance in our urban markets.
As Leslie discussed our urban portfolio benefited from increased volumes of business travel after labor day.
In September our total portfolio generated occupancy of approximately 75% and ADR of $196, resulting in September revpar of $142, representing 98% of 2019 levels and 800 basis point improvement from August .
Yeah.
Specifically our September growth was strongest in our urban markets with ADR, achieving 106% of 2019.
These markets benefited from pricing power throughout the quarter.
Our September ADR exceeded 2019 levels in key urban markets, such as 108% in Denver, 119% in San Diego a.
119% in Manhattan.
106% in Atlanta.
And 137% in Pittsburgh in Pittsburgh.
And our leisure markets normal seasonality return during the quarter, but revpar remained above 2019 levels as pricing power continued allowing our operators to continue pushing rate.
Turning to segmentation, our third quarter leisure revenues remained above 2019 levels and were driven by continued pricing power and it led to our resorts achieving 113% of 2019, Revpar, representing a 300 basis point improvement from the second quarter.
While we were pleased with the leisure results group generated the most significant quarter over quarter growth of all our segments.
Our third quarter group revenues achieved 100% of 2019 levels, a significant post pandemic milestone and a substantial improvement from 91% during the second quarter.
Finally, our portfolio benefited from the continued recovery of business transient revenues.
As evidenced by moving 300 basis points closer to 2019 compared to the second quarter and our weekday revpar, achieving nearly 90% of third quarter 2019.
Representing an improvement of 400 basis points from the second quarter.
The healthy operating trends during the third quarter met our portfolio to achieve hotel EBITDA of $100 million, which represented 91% of 2019 levels.
We were encouraged by the strong third quarter operating margin of 31, 4%, which was only a 160 basis points below the comparable quarter of 2019.
September's Hotel EBITDA was the closest to 2019 since the start of the pandemic and generated margins of 34, 6%, which were only 28 basis points below September 2019 margins.
Yeah.
We made the final push on the conversions and Charleston, Mandalay Beach in Santa Monica during the third quarter.
Excluding these three conversions, our third quarter Revpar achieved 97% of 2019 levels Hotel EBITDA was 96% of 2019 levels and hotel EBITDA margins were within 40 basis points of 2019.
We own several hotels that were in the path of Hurricane Dorian.
Our hotel suffered limited physical damage and the hurricane had minimal impact to third quarter results.
Preliminary October results are expected to benefit from the continuing strength in demand and pricing power.
For October we are forecasting occupancy of approximately 75% and.
And ADR of approximately $204, which represents the highest ADR since 2019 and 105% of 2019.
Forecasted October revpar of approximately $152 will be approximately 96% of 2019 levels.
Looking forward, we expect the fourth quarter to follow normal seasonal patterns.
Turning to the bottom line, our third quarter, adjusted EBITDA was $92 million and adjusted <unk> per share was <unk> 40 cents.
While demand was stable during the third quarter, we remain vigilant in maintaining cost efficiencies that have been effective in this new environment.
Underscoring our continued effective model, our third quarter operating costs, including wages and benefits remained below the comparable period 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 third quarter occupancy was at approximately 90% of 2019 levels, our hotels operated with approximately 20% fewer ftes than we operated with pre COVID-19.
Overall, we are encouraged that the labor environment is improving.
We've 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.
Entering into a new $200 million term loan to address 100% of our 2023 debt maturities and proactively address $100 million of our 2024 debt maturities.
Exiting all restrictions under our corporate credit facilities, which lowered our consolidated weighted average interest rate by approximately 40 basis points, representing annual interest savings close to $9 million.
Exercising our one year extension options on $225 million of term loans to extend these maturities till 2024.
Exercising the first of two one year extension options on a $200 million secured loan.
And maintaining an undrawn corporate revolver.
The execution of these transactions is a testament to our strong lender relationships and favorable credit profile.
Our current weighted average maturity is four years and our weighted average interest rate is three 5%.
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 third quarter, 99% of our debt was fixed or hedged under valuable swap agreements, which protect us from the current rising interest rate environment.
We continue to maintain significant flexibility on our balance sheet with 81 of our 96 hotels unencumbered by debt.
Turning to liquidity, we ended the quarter with approximately $488 million of unrestricted cash $600 million of availability on our corporate revolver and $2 $2 billion of debt.
Now turning to capital allocation, we previously announced a $250 million share repurchase program.
We have been active under our share repurchase program. So far this year, where we have repurchased approximately four 9 million shares for $57 million at an average price of approximately $11 75 per share, including $7 million in share repurchases. So far during the fourth quarter.
Additionally, the board recently increased the quarterly dividend to five cents per share starting with the recent third quarter dividend.
The combination of share repurchases and increased dividends demonstrate the strength of our balance sheet and our commitment to enhancing shareholder returns.
We continue to estimate our Lj capital expenditures will be approximately $100 million during 2022.
We maintained 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 the entire lodging cycle.
We will continue to monitor the financing markets to identify additional opportunities to improve the ladder our maturities.
Reduce our weighted average cost of debt.
And increase our overall balance sheet flexibility.
Overall, our O J remains well positioned with a flexible balance sheet.
Ample liquidity lean operating model and in urban centric portfolio with many embedded growth catalyst.
And this concludes our prepared remarks, we will now open up the line for Q&A.
Operator.
Thank you we will now 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. This is the question queue. You May press Star two if you would like to remove your question from the queue for participants using speaker equipment, it may be necessary to pick.
Up your handset before pressing the star keys.
Your first question comes from Anthony Powell with Barclays. Please go ahead.
Oh, hi, good afternoon, everyone.
Good afternoon Anthony.
Yeah. So we are in terms of I guess the business transient acceleration that you've seen in September and October how durable do you think that is I mean, we've seen kind of a lot of now it's about layoffs and whatnot in the macro environment is uncertain. So I guess as you look to later this year into next what's the prospect of that continuing kind of given kind of the uncertainty that we're facing here.
Yeah, you know I think we feel pretty good about it continuing because of who's traveling right and so.
You know from our perspective, we're seeing the national accounts Ah expand and these are national accounts that are really sort of in the growth industries. There their national accounts, where it's relationship driven right and so the need to get out is pardon the necessity of there from a business perspective. We also seeing you know the Smes continue to travel.
As well and then when we look forward at the pace.
It continues to demonstrate you know that you know that are that they're going to continue to travel I'll, let Tom give some color on also who's who's traveling as well on the on some of the accounts yeah. Good afternoon, Anthony So when we break it down we kind of get our brand reports and we look at September and October and we saw a nice.
Up to <unk> point about the national accounts, starting to produce some volume and that's encouraging because when we think about the categories, where we're looking for the higher rated companies to come back.
We're saying like Deloitte Pwc, Ernst and young all increasing their volume from September to October and that's a good step up not only because that was a good business travel months, but those were the companies that weren't traveling as much in the past when we look out west and we look at you know Samsung Qualcomm Tesla all had nice increases from Sept.
Timber to October with October being the most significant amount of travel and B T and so we're looking at you know accounts that we had not seen that type of travel before as they are picking up now we're going to go into the negotiations for the RFP in 2023, and we're also encouraged that we're going to be able to get some rate increases going into 2023 as you.
No we rolled over rates from 19 in 2020 'twenty, one and 'twenty. Two so we're encouraged based on what's happening on the National account front and we can see the step up from September to October they give us a little bit of a boost yeah, but I think in general when we sort of boil it down it's about who's traveling the Smes have been traveling throughout Umm because it.
It's critical to their business and it was picking up now it's more relationship driven and necessity a part of their business and so we're not talking about sort of office dwellers, who are coming to sit next to their.
Their clients, we're talking about people, who need to get out and be able to sell we're looking at industries in sort of in the biotech and life Sciences were seeing that part of the of the growth as well as the need. So I think it's a function of who's traveling and who's, causing the step up in the BT demand.
Thanks for the detail and maybe one more on transactions.
You didn't national this year, but I think there one one deal this year versus three last year, what's the prospects for maybe accelerating acquisitions next year are you seeing more product out there.
Just curious what you're seeing in the market right now.
Yeah, I mean anything from our perspective, just sort of given what's going on in that market dislocation at the transaction market has really not actionable, whether it's from a buy or sell side perspective, you know deals are very difficult to get done in this environment and I think this is an environment, where your patient and thoughtful and you sort of cultivate conversations.
But from a ability to sort of transact I just don't think the environment is supportive and constructive around that right now I do think at some point you know when things sort of move you know and and sort of settle down is what I would say all cash buyers will have an advantage you know as you issue as we've talked about before you know we focus on.
Off market transactions and our ability to do that will increase as the backdrop improves but I would say today that the current environment is not supportive of the transactions right now.
That's great. Thank you.
Next question comes from Gregory Miller with true with Securities. Please go ahead.
Hi, Thanks, good afternoon, everyone.
I'd like to start with New York City, you mentioned in the prepared remarks about the improved performance there and it's reflected in our supplemental.
I imagine some of this could be related to the Nic just looking at the room rate growth could be wrong.
Just love to get some thoughts from your end, that's how you see New York City market today, and perhaps anything on the mix specifically.
Yeah. Good afternoon, Greg So you've picked it right and the Knickerbocker is the leading indicator. We also obviously have a courtyard. That's a about 92nd Street and we're very pleased with the average rate performance of both assets. What I would say is similar to what we just discussed on the BT front.
We're seeing some of the top accounts come back and traveling in September and again continuing into October we expect a good fourth quarter in New York as well counts like a bank and Bank of America Morgan Stanley are starting to now pick up rooms, and addition to that we are saying international start to really show it.
You know its opportunities as we go into the fourth quarter for shopping as well as the the holidays and we're seeing that come through longer term booking window now where we're actually encouraged based on having higher average rates going into the fourth quarter in that location.
The last thing I would say as banquets rooftop everything related to food and beverage is also people are now back out you see a business vibe when you travel to New York City versus leisure only in the summertime and that's encouraging because we're staying parties start to book events on a rooftop epic St cloud and we're seeing that.
Activity really pick up speed as well, so a little bit of banquet and catering as well as December Christmas parties, or a new thing again, right, where we're two years in a row. They didn't really have events. So I would say we're encouraged by what's happening in New York and think it can continue into Q4.
That's terrific to hear this this fall. It may also go right back to you and I would.
Like to ask you about the labor front.
Yes.
At the property level, and maybe taking the the rooms department out out of and just focusing on F&B and other operating departments.
You give us the latest in terms of how staffing and labor costs have held up.
Relative to your expectations.
Yeah, Craig I'll start on that I would say you know first of all obviously everybody has the same pressures as it relates to you know to wage pressure, but I would say that one thing that we've been able to do relatively well across our portfolio is maintain the FTE efficiency you know as we've been talking about for the last several quarters, we've talked about the fact that.
Our portfolio given our footprint given the number of assets in our portfolio that we have the ability to cluster.
And that clustering is around those across more assets than we've done before and it's deeper within the organization. We also talked about the fact that the average size of our asset would allow us to maintain that clustering, even as occupancy move back to normalization and that larger bigger boxes would have a problem with that you know when when when demand came back.
And that's playing out for us and that's how you see that we're kind of averaging whereabout, 77% of 2019 levels of Ftes and our ability to sort of maintain those levels as a function of our ability to be fun to be efficient around the <unk>.
Clustering the other thing I would say and the other area that we've been able to be pretty efficient around is on the F&B side.
As we talked about before you know we have a significant portion of our portfolio that has a fixed food service model and that allows us to control the offering the hours of operation and also the the labor model associated with that and so as a result of that we've seen margin improve by a couple of hundred basis points and so I think it's a function of the average size of.
Our asset our.
And you know the types of assets that we have that's allowing us to be efficient on the FTE side and then take it to the boat on realize these comments to give you. Some some specifics Greg I think it's as much an out.
If I drill down on F&B, it's as much what's open and F&B because they think the outlets that are open and that are more profitable outlets and so that's banquet and catering et cetera. So when you look at our wages and benefits on a per occupied room versus 19, it's down over 13%.
Relative to 19. In addition, our direct costs on food beverage Navy is down six 5% on a per occupied room basis and it.
It happens to be and so that's driving that couple of hundred basis points of margin expansion that wisely mentioned and lastly, Greg I would say the most profitable portion of F&B as banquets as well as beverage and we got back to 95% of 2019 levels in Q3 and for the first time, we actually exceeded beverage at 105% in 19, so you've got some great.
Metrics that our combined both on the topline and the Bottomline in F&B.
I'll leave it there and ask you some follow ups in San Francisco in a couple of weeks I appreciate it.
Yeah.
Thank you.
Next question comes from Austin, where Schmidt with Keybanc capital markets. Please go ahead.
Hey, good afternoon, everyone speaking of the Bay area I was wondering if you could provide your updated outlook on how you think you know northern California, more broadly trends versus your other markets from here and I'm also curious where you think occupancy needs to reach before operator.
<unk> are more comfortable getting.
<unk> on an.
On ADR.
Okay.
Oh sure what we'll tag team on this Austin I mean, obviously.
Northern California for Us.
So good improvement quarter over quarter on a revpar basis.
And that was obviously driven by improved citywide and it demonstrates that when the city wides come the demand you know emerges and that's encouraging you know clearly the fourth quarter, it's not going to have that same dynamic.
Because you know in.
2019 had record demand record city wise and in in 2019, and so I think overall you know San Francisco is really going to be a 223 story.
We expect room nights to be to ask what they were this year you know from our from our perspective.
And the other thing I would add because of our footprint too when we think about Silicon Valley I'll give you. Some examples of where we're seeing some demand come back compared to CBD, which we know Leslie you've just referred to the citywide compression that needs to be.
And in that environment, but we've had like a significant amount of project business out there.
Year to date, our extended stay assets are at 53% of five plus nights and that indicates that we've got in our project business Thats coming back the corporations that are having new hires and offices actually filling again, that's helping us where we are seeing meaningful improvement on the BD front in Silicon Valley and as we move into.
'twenty 'twenty three I think when you look at who is expected to have the highest growth again, it's coming from a lower.
Mark It is gonna be San Francisco based on two times, the citywide development, which really pushes out to emeryville in airports as well when you have the higher peak night concentration when the city Wides come in in the top 25 markets and then when it Austin the question with respect to the ability to drive rate and what occupancy level I think when there is compression in the city as well.
We saw.
During the third quarter, the operators were able to drive rate I mean using September and.
In a vacuum.
And in San Francisco, We ran about 80 80, 485% of 2019 occupancy levels, but we were able to drive rate.
90, 394% of 19 levels and so I think you know.
The bet that the.
Dynamics there similar to the rest of the country is that when there is compression.
Our operators are able to push rate.
No. That's helpful. Thanks for all the detail there and I think based on your prepared remarks, you guys mentioned BT had improved 300 basis points sequentially, which I think puts BT revenue as a percent of 19 in that 65% to 70% range and I'm just curious how wide that range is across your top 10 Mark.
Yes.
Yeah, I think so the one thing to caution around BT as Dave is that the that the high 60% youre, referring to a special corporate.
And that is a proxy or an indicator of a b T. But what we're seeing in the data now is our a lot of our traditional business transient travelers are our booking via bar and so I think the mid week stats that Leslie mentioned are probably a better proxy for that which are approaching and and and and met.
2019 levels and so I think our view around around BT in across the markets, we're seeing it.
Widespread across the markets. When you look at the T correlates, mostly with our urban markets as well our urban markets. There you know the majority of our urban markets.
We're able to drive rate during the quarter in excess of.
In excess of 2019 levels and so that gives us confidence around around the health of the business traveler MPT specifically.
Great. Thanks, Sean I appreciate the time.
Next question Dori Kesten with Wells Fargo. Please go ahead.
Thanks.
Sure.
And that's a drag for that case presented it means that you can share.
Hey, operator, operator, we can't we can't discern the question.
That's better go ahead I'm sorry go ahead Lori.
You can hear me.
Dori is coming from your line or can you pick up the handset.
It is.
Okay. We can hear you now.
Okay.
Hi, Bob.
And we're actually outpace your budget significantly, but if she can pair your monthly budget actually over the last few quarters are they getting tighter in general and is that what youre looking for.
When you consider when you'd like to.
Will you start providing guidance.
So door to make sure I understand the question you were asking about how much variability there is relative to our to our internal forecasts.
Forecast actual and whether that's narrowing is that the question.
Yes.
Yeah. So so the short answer is yes, we are continuing to and we did outperform our internal forecast as we said on the internal call. The further you get into the recovery.
Where are you from the steep ramp to this sort of a there's a more stable environment that outperformance is narrowing because you just have less less upside with which to capture but are our outperformance is like I said is continuing but the gap is narrower because you just have a smaller gap with which to Phil.
As Leslie mentioned in her prepared remarks.
On a go forward basis.
And in the fourth quarter, we would expect to further narrow that gap.
During the during the fourth quarter relative to the third quarter.
Okay.
And regarding the fixed Wyndham hotels are just now.
A few less if you can care your initial underwriting of them to what you would prepare today how different would that I.
I guess EBITDA upside b is that entirely on rate.
Yeah. So.
The question around.
Around EBITDA EBITDA upside continues I think the the thing that makes it a little difficult to answer that question. Specifically then so I'm just going to give you a directional answer is that you have market forces, which are driving them.
Driven both of those markets I had 2019 levels, but I think the rate upside, which is ultimately driving that EBITDA upside.
Is roughly double where we thought it was going to be as part of our initial underwriting and our unlevered IRR, which were 40% to 50% depending on the on the two that we've that we completed are going to be in excess of that so we are outperforming and it's good and it's and it's rate driven.
Okay. Thanks.
Next question comes from Tyler Battery with Oppenheimer. Please go ahead.
Thank you good afternoon, just one question for me.
What do you think about the relative valuation gap between between you and peers and how you close back up I mean, narrowing a bit today, which is good and it seems to be on warrants. It to begin with in my opinion, but this is a topic that comes up with investors. So wanted to know your thoughts and your <unk>.
Messaging in terms of rank order priorities for closing that valuation stuff.
Well I mean, obviously you know with the backup that we face today the stock prices don't reflect the value of anybody's underlying real estate hours or anyone's right. We know that theres, a general skepticism around lodging fundamentals I'm not to mention the overall economic backdrop, but as those things improve clearly the sentiment towards BT.
And urban will improve as well and that will help our position given our urban centric portfolio, but in addition to that we have you know how the building blocks to be able to close that gap, we're delivering on the value creation, just having launched a b are the two of the three conversions and we have more in the pipeline to come. Additionally.
We have the balance sheet, Tyler that we're gonna be able to deploy towards incremental growth in the meantime of that you know.
Weather dislocation exists we do have our buyback program, we have been active in that and we're taking advantage of the dislocation.
And using that tool as well.
Yes.
Okay perfect. That's very helpful. That's awesome. Thank you.
Okay.
Next question comes from Neil Malkin with capital One Securities. Please go ahead.
Hi, Thanks, everyone. Good afternoon.
The first one I think it may have been talked about and some.
Context, but maybe over the next 12 to 18 months do you think about the brands ramped it reinstating pips.
A lot of owners are capex.
Hotels are capex dark cash strapped elevated C N b S maturities et cetera tough.
Financing environment, he kind of overlay all of that with them.
Your.
Elevated cash balance.
I understand it's a difficult environment right now for penciling deals, but but what did you guys see over the next again 12 to 18 months.
You know opportunities to potentially take advantage of.
Some distress.
You know across markets, you're in or or potentially would want to gain exposure to.
Yeah, I think what we what I would say is is that your windows kind of 12 to 18 months based on the backdrop that you sort of articulated whether it is maturity pressure or having to put capital into an asset.
I think those will create opportunities over the next 12 to 18 months I do think that you know given our balance sheet and our cash position.
We will be in a position to be able to take advantage of that what I would say, though is is that it's going to be less about describing those as distressed and more about looking at assets that will come to the market that we otherwise might not have gotten access to as a result of those pressures, but what I would say is that we never put our pencil down we're always cultivating relationships.
He's talking about you know deals so that when the window opens up that we're in a position to be in the pole position you should expect us to be able to do that you know in the next 12 to 18 months they used to describe.
Okay great.
And then I just wanted to be clear you talked about a b T. The weekday is close to.
19 loves right that was the the commentary you mentioned during the call.
Yes.
Okay. So I guess.
What's preventing you know.
Recovery.
19, revpar in the fourth quarter seasonality aside considering you know BT is.
You know, we gave us kind of back to 19.
Inclusive of obviously San Francisco, because it's your whole portfolio leisure continues to be really strong and you know all the data. We're hearing holidays. You know on leisure side are you know very strong, particularly on the rate side. A man group continues to you know surprised so maybe can you kind of like bridge that gap because that you know a lot of company.
As I've laid out a lot of really strong numbers.
But the numbers you're kind of talking about you know for the fourth quarter it kind of seemed to.
Fall short is it is it conservatism or am I missing something.
Yeah.
So Neil I may.
On the fourth quarter, specifically I think our our house view was and is is that the industry and Harald J gets back to 2019 levels next year.
I think as we look forward to the fourth quarter.
Our prepared comments were that we would expect to bridge the gap, but we are not indicating that we are going to be at that I think the.
You know they they the headwind tailwind sort of thought about what what could impact the fourth quarter.
Is he is about to continue to recover I think the urban markets and and and the mid week Stat that Leslie mentioned is midweek rate in September equaled weekend rate, but we still.
From an industry standpoint are still from an occupancy perspective, you know still high single digits to 10% below 2019 level from an occupancy standpoint. So that you know that dynamic would need to change, albeit at a higher rate, but you're still from a total revpar level sterling rates still recovering I think the other dry.
Over there is going to be as BT is continuing to recover we like the trend lines in BT, but we're not there yet and so that would have to happen.
To hit 2019 levels and then the last impact within our portfolio Northern California in the fourth quarter and in San Francisco, specifically had a blockbuster citywide calendar in the fourth quarter of 2019, and so when you look across.
Across our portfolio the ability to eclipse that relative to what the citywide activity is in the fourth quarter.
It's just it's going to create an incremental headwind as well, but I think the key takeaway for us from the trajectory of our fundamentals continues to be strong we think that our portfolio is positioned in stable to be able to continue to bridge that gap based on the types of hotels, we have the diverse demand generators, we have et cetera, but we are not willing.
To call fourth quarter, Equaling 19, we would love for it to happen, but that's certainly not our base case.
Okay. That's helpful. Thanks.
Okay.
Next question comes from Michael Bellisario with Baird. Please go ahead.
Thanks, Good afternoon, everyone.
First question. Tom first question is for you Tom.
When you look at flow through to the bottom line today.
Trying to better understand kind of incremental flow from here with occupancy still having room to recover so maybe can you help us understand.
How much of the cost structure today is fixed versus variable and how that mix has changed versus 2019 levels.
Yeah.
Yeah. So I'll start with as you know Mike ADR is leading the charge and occupancy is going to be the secondary improvement that we still need to achieve I think what's interesting on the topline.
We're set up successfully because the type of accounts that gave us the ADR even before the national accounts started to come we're giving us less and so now we think that that's going to help ADR continue to drive while the occupancy is coming back with it. So those those are critical elements. The other thing I would mention to you on the on the go.
The revenue side as group for the first time got back to a 100% levels and the group ADR is were also higher than Q3, and 2019 and so we see as we look into 2023 that we're continuing to press the accelerator on rates on the group side. So when we think about the room revenue picture.
We think we're set up positively as the occupancy starts to come back that we're gonna have a higher rate of BT. The proper group, that's going to be coming in and set us up to have those metrics as you think about occupancy growth that's going to happen with the <unk> at the higher rates on the national account basis.
The thing that I would add before we get into the flow through is we've taken a real strong approach towards other income food and beverage that we talked about earlier that type of mix that we're focusing on and so we're seeing nice lift on the other income side. When we think about miscellaneous revenues, whether that's parking cancellations attrition everything.
Related to trying to drive profit. So we think that's also a positive as we go into the flows when I think about flow through coming down into the margin side earlier conversations that we already had was about FTE. We know that wage pressures are always going to be there and we know that we gotta be market when we.
Talk about retaining.
Individuals to be able to clean rooms, as well as work in food and beverage and our smaller footprint, but I would say that we have control of the of the wheel when it comes to FTE and the type of payroll that we're putting against those type of revenues because of our footprint the longer length of stay the suites. The actual footprint of our compact full service and select service or.
And that gives you that flexibility with the proximity of our hotels. So I think on the flow through will continue to generate good flow because of the FTE count that's really the main driver because labor is 40% of our total fixed side and on the variable side I know you want to make a comment Sean Yeah, I I would actually just telecom.
Mike I think the our operating cost environment today and through the balance of the year as stable is how I would characterize it.
When you look at our operating costs continue to be below 2019 levels. We expect that to continue through the balance of the year and in our overall cost environment is.
Stable to fixed costs et cetera out of things that have been put back into the business I'm generally we've been been put back in the business and so the incremental costs from here are going to be as Tom mentioned, the variable costs that will they will put in as revenues go up and so.
Cause of the portfolio construct the rooms only.
Nature of the portfolio, we've reached stability probably in our portfolio you know earlier because of the types of hotels, we have that there may be some of the some.
Some of the other full service centric.
Portfolios and so we feel good about what you see in this quarter and next quarter are going to be.
Fair proxy to what our cost structure looks like.
Got it that's helpful and then Sean one more for you I mean to the extent you can can you maybe talk about the process that you just went through with the with the banks on the relationship side for the term loans that you just refinanced and extended.
Where do you see the high yield market today, and then maybe just more broadly overall view on the debt capital markets for hotels.
Yes.
Sure.
Start at the high level, but the debt markets continue to be challenging across the board.
Within <unk>.
High yield specifically.
C N b as secured and even any of the bank market.
You know I believe and have our optimism that this will that this will pass I think as we enter it into into next year.
You know the expectation, particularly from some of the bulge bracket.
Lenders is that they would expect as the calendar turned to get more constructive but.
At this moment in time.
It's pretty challenging I think on our deal specifically, we were able to you know we have a great relationship with our lenders we were able to leverage those relationships within the bank market and get support.
For for this deal I think that you know.
Our our leverage point.
It's certainly a differentiator or our operating model with higher free cash flow was a differentiator for the lenders.
As well as this being a leverage neutral transaction at the end of the day, where it's 200 million for $200 million like for like.
Corporate debt for corporate debt.
But it was a you know the process was leveraging our very strong relationships.
With our with the bank market on the high yield specifically, it's actually gotten a little better or at least the pricing has gotten a little better although volumes are still low over the last couple of weeks I expect there to be continued volatility in that market through the balance of the year.
Until until things settle out and settle down with respect to you know.
You know, where the feds going et cetera.
Yeah.
Thank you.
Next question Floris Van <unk> with Compass point. Please go ahead.
Hey, Thanks, guys for taking my question just a.
Given the some of the uncertainties still but it's.
That seems to be lifting the fact that bts recovering group.
Sort of back at 19 levels.
Do you feel comfortable.
When you report your fourth quarter earnings do you think you can be in a position to provide <unk> with full year 'twenty three guidance at that stage.
Yeah, Florida.
No we've historically provided guidance.
And if things remain the way they are today, our bias with next year would be to provide guidance. Obviously that is a a decision between us and the board.
But if things continue to sort of be as stable as they are today that would be our intent today, we believe it's important to.
The public company, providing guidance is important when the environment is right to provide it.
And we would hope and expect that in 2023 that the stars would align for that.
Thanks, Sean and maybe if you guys could also comment I had one or two investors reach out to me. This morning, just about.
The obviously you're in you're in a really solid position is as you indicated in terms of sitting on a lot of cash.
The transaction markets are sort of gummed up right now hopefully there'll be some one off opportunities here, but.
Why are you not.
A little bit more aggressive on the on the share buybacks given the given the fact that there are few assets are trading right now.
Yeah.
What I would say is you know that first of all we've been pretty active on a number of fronts right. We've leveraged the optionality that our balance sheet has provided us relative to the tools that we have we've been very thoughtful about identifying the windows in which to deploy those tools all of the tools, we have available to us whether it's buybacks looking at the internal growth or external.
Road, you know all those tools have benefits, particularly thoughtful and disciplined about how you deploy them now we acknowledge that buybacks are the most attractive tool today, but given the macro headwinds that we're all seeing and hearing we need to be measured I think you've also seen a sort of deploy it at different windows, where we're maximizing the.
<unk>.
Where we bought at most recently relative to where stocks were trading at since the last since our last earnings call. We've been very thoughtful about that and we're going to continue to do that we're looking at where the trends are today, where we think the trends are heading.
And determining where you know, what's the right window and the right amount to deploy so we're being thoughtful about it we're going to be disciplined about it but we do acknowledge that buybacks are the most attractive use of capital today, particularly where we're trading at and given dislocation with what we're seeing from the fundamentals and the underlying value of the real estate relative to where we're trading at today.
Thanks, Leslie maybe if I can ask one more.
In terms of cap rates your outlook I mean, obviously rates are going higher return expectations from from from the private market is going higher.
But obviously your hotels reset rents every night.
Do you see much of an impact in terms of cap rate expectations from buyers for hotels.
Look I think there's no doubt that with the movement in interest rates is having an impact on on spot values and therefore implied cap rates.
But the market is sufficient.
And that as the macro background backdrop improves our moves one way or the other.
That ultimately you know cap rates will settle down in a way that we think is constructive and that ultimately you won't see.
Significant movement in cap rates Youll see a appropriate movement in cap rates, but not significant movements from our from our perspective I think that investors are smarter today. They know that values will will move up and down and that unless you are a.
Motivated seller.
The game plan here is to be patient and that was gonna allow cap rates to move in a much smaller movements, because investors and buyers and sellers are smarter today.
Thanks, a lot.
Next question comes from Chris for Rocco with Deutsche Bank. Please go ahead.
Hey, good afternoon, thanks for taking the question.
Little bit of a longer term question because I was like I hear what you said about the transaction market spend.
Being pretty quiet right now, but as you look out is there, possibly an appetite to have less select service in the portfolio and I'm kind of defining that as non suite.
Upper mid scale stuff or upscale stuff not the what we'll call the embassies the residence inns.
Not in that category. So is there an appetite to do that just thinking about how the public markets appear to be kind of valuing full service versus select service right now.
I would say our appetite is clearly defined and what you've seen us. Most recently acquire I think they speak two perfect. Examples of what we're focused on.
It is you know the assets that.
Speaks to what we've done in Nashville speak to what we did in Atlanta and in Boston. The characteristics of that is what we're focused on it doesn't matter if it's a hard brand or a soft brand.
Matter is the characteristics of the dislocation the demand drivers that are around it the growth that's in that market.
And I think the quality and in the age of the asset matter as well and I think all of those things are represented in what we've acquired most recently and that's what I would look to you know from a quality.
Perspective of what we're adding to our portfolio and what we have the appetite for.
Okay. Thanks, I appreciate that and then.
It was a follow up you guys have brought in a few.
The soft brands through the Wyndham conversions and maybe some more to go.
But do you as you look at your markets do you worry at all that there is more competitive supply coming in the form of.
Conversions into soft brands and you could say well.
Net addition of room supply hotels, there, but it's obviously maybe more competitive against against you because we hear the brand is talking about.
A lot more soft conversions come and just your thoughts on whether that's a competitive pressure on the radar or not.
Yeah.
I think about just look at our two examples okay as a proxy for that Chris.
If you think about the markets that we are doing it and we think about Charleston, the rate was already there in the market, but the product and the brand we're not going to lift us we needed to be able to make the changes and then put us into a system that has changed the way people think about our hotel. So for instance, if the rate already existed in the.
A market we know we're chasing something that that we feel like is desirable and we can tell already that the national salespeople from Hilton the type of accounts that wouldn't have considered us before now are because of the things that we did to that location. So it wasn't new product. It was new higher rated product as we think about mills house same thing in.
Mandalay you know when we think about it is not new product coming in there was a conversion but here we are sitting between L. A and Santa Barbara with a irreplaceable beach location that people and meeting planners are looking to try to do a rotational or where are they going to go so for instance.
We have groups that have actually booked at Ritz Carlton the monetize that have already booked with us because we're a curio by Hilton and we're focused on that opportunity where you know you are changing the opportunity within those markets to be able to attract a clientele that maybe wouldn't have considered you before as an embassy suites. So to answer your question.
Our situation and are two that I would say that a good proxy for us we know the rates in the market. We know the clientele is looking for something different and we don't feel like that supply is going to impact us. If we were the other guy in the situation, where we were in in that.
Environment and.
Chris two other sort of comments around sort of supply in general as well as as as the soft brands I mean supply.
Is gonna be a net tailwind for the industry.
For several years, which is.
A normal cycle trend, but I think it's going to be even more pronounced in lighter you've got COVID-19 and then whatever happens over the next couple of years and the financing markets have sort of.
Both been tailwind from a supply perspective, and so I think.
That will also help help.
To help insulate any any risk of new of new competition and the other thing is that these soft brands.
Although they are having strong unit growth are still relatively new in their lifecycle and so.
When you look at where you know how many of them. There are in a specific market and we've got territorial is on our assets, which is important from a protection standpoint, but also.
You know, there's just you know they are.
In growth mode, but there is the distribution of those are still relatively early in their lifecycle. So there's you know there's just not as many of them as you would.
As the other.
That's the heart of brands, because they're there they're newer in their lifecycle.
Okay very helpful. Thanks for all the input.
Next question, Chris Darling with Green Street. Please go ahead.
Thank you.
Just going back to the the recent conversions, you've obviously given plenty of detail around you know the long term kind of stabilized outlook, but curious if you could comment on you know the extent to which you expect some immediate uplift to portfolio performance just given that your you know presumably no longer dealing with any.
Renovation disruptions there maybe if you could frame that a little.
You might expect <unk> and early 'twenty three to look like relative to what you saw in the second and third quarters.
Yeah.
Okay, Chris Obviously, we're limited because we haven't given guidance for the fourth quarter or next year, but for the conversions in general.
We do expect immediate benefits from those some of those conversions, there's obviously a soft copy comp against against the the renovations, but you know that.
That is that will be transitory I think more importantly, the way we think about these conversions and a rapid conversion usually it takes two to three years to ramp we think because of these locations.
We believe that will be at the low end of that ramp and so what we underwrote is.
It is a couple of years to stabilization, but the rate upside that we've seen in the market because both of these markets have have already seen significant re up left in 2019.
You've already exist within the market and so we feel good about the upside, but we still believe it's it's you know as these get.
It's it's a it's a two year ramp.
Thing I would add to you as far as immediacy, Chris So when we created some ROI opportunities that both of these locations. We know by change in the food and beverage concepts that that's our immediate win for instance at the Mills House, we have a black door cafe, when we talked about it was really underutilized space it's already.
Producing revenue and it's a it's a real plus the same thing on the rooftop bar when we have weddings in the destination location like historic Charleston, we already see the bookings happening pretty quick that they wanted to be able to secure that space as it is a great location, where you can be outdoors for a ceremony of that.
Size and Mandalay same thing, we converted from complementary comparable food and beverage to know or have a restaurant called axon Ocean and air stream that will actually produce you know opportunities to be outdoors with people enjoying the coffee as well as the beverages facing the ocean. So we think that the immediacy of though.
These type of outlets and the Rois help us to move that along to sean's.
Environment in regards to ramping faster.
Yeah, I mean, I think you know, we're thrilled to be able to reintroduce the mills house and launch the car. He dues I do want to thank our design and construction team did an amazing heavy lift on bringing these assets. The life, we're very confident based on the asset the location and the market dynamics.
And the new product that we're going to get outsized returns I think that what Sean and Tom summarized from the standpoint of what's in the market on the out of room spend but also how they performed during the pandemic before the renovation.
It gives us confidence in our ability to to achieve and see incremental lift with these assets, but we look forward to you all being able to see these assets and really experience them.
Okay.
Got it very helpful color. Thank you.
Thank you I would like to turn the floor over to Leslie Hale for closing remarks.
Well. Thank you everybody. Thank you for joining us this afternoon, and we look forward to seeing many of you at NAREIT have a good afternoon rest of your day.
This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.
Yeah.
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