Q4 2022 Hersha Hospitality Trust Earnings Call
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Good morning.
And a warm welcome to the Hush of Hospitality Trust fourth quarter 2022, and this conference call and webcast. My name is countries and I won't be off by today's call. All lines have been placed on mute during the presentation portion of the call with an opportunity for question and answer and if you'd like to ask a question. Please press star followed by one.
On your telephone keypad I would now like to hand, the conference I spoke to all host Andrew come on.
Yeah, It's all from Investor Relations. The floor is yours. Please go ahead.
Thank you Candice and good morning to everyone joining us today welcome to the Hershey Hospitality Trust fourth quarter 2022 conference call today's call will be based on the fourth quarter of 2022 earnings release, which was distributed yesterday afternoon.
Proceeding I would like to remind everyone that todays conference call may contain forward looking statements.
These forward looking statements involve known and unknown risks and uncertainties and other factors that may cause the company's actual results performance or financial positions to be considerably different from any future results performance or financial positions.
These factors are detailed within the company's press release.
As well as within the Companys filings with the SEC with that it's now my pleasure to turn the call over to Mr. Neil Shah <unk> hospitality Trust's, President and Chief Executive Officer, Neil You may begin.
Good morning.
And thank you for being with US on today's call. Joining me. This morning are Ashish Creek, our Chief Financial Officer, and our executive Chairman Jay Shah.
I'll begin with our results in the quarter and a quick recap of our strategic accomplishments in 2022 before touching on our capital allocation outlook for the year and discussing our view of the portfolio going forward as.
Ash will take a deeper look at our first quarter guidance talk to the balance sheet and discuss our margin outlook.
When we last spoke in late October despite economic uncertainty and market volatility our positive outlook was driven by performance on the ground signaling a pickup in travel within the core urban markets as well as a continuation of demand for differentiated high end leisure offerings and.
These trends continued throughout the fourth quarter.
Our comparable hotel portfolio generated 71, 2% occupancy and an ADR of $311.86, resulting in revpar of $222 10 for the fourth quarter of 2022.
The high quality of our portfolio, coupled with the ongoing demand environment allowed our revenue managers to continue to drive rate in the quarter as ADR outpaced our 2019 rate by 21, 5% and all of our markets expanded ADR more than 15% compare.
2019.
Our view on rate integrity remains unchanged as we are currently experiencing robust ADR growth throughout February and anticipate continued pricing power as occupancy returns.
Our focus on driving rate resulted in a 5% increase in revpar for the fourth quarter with Revpar growth compared to 2019 in each month since September to close out the year.
As I transition to a more market performance I will start with our urban portfolio.
Urban demand accelerated into October as Revpar pulled even with 2019 production for the first time since the onset of the pandemic.
In total our urban portfolio generated over $9 million of EBITDA, 67% of total portfolio production in October seasonally our strongest month in Q4.
And momentum push persisted throughout the quarter as weekday revpar in December outpaced.
Outpace 2019 for our urban portfolio weekday revpar driven by a 4% increase in Manhattan.
Overall, Manhattan was our largest EBITDA producing market for the quarter generating $9 $6 million or 31% of total portfolio EBITDA, our two highest EBITDA producing assets for the quarter, where the Hyatt Union square and the Hilton Garden Inn, Midtown East, each generating $2 7 million and EBITDA outpacing too.
2019 by 12% and 15% respectively.
Manhattans EBITDA production was rate driven.
As our portfolio posted 16, 8%, 8% ADR growth for the quarter.
Our Manhattan December Revpar growth of 6% was driven by over 20% ADR growth for the month from 2019.
Now, while we were encouraged to see our hotel surpass 83% occupancy in December there is still significant room for recovery.
As ever Manhattan market is still 1100 basis points below 2019 levels.
Boston had yet another strong quarter with 11% revpar growth compared to 2019.
This was driven by nearly 17% ADR growth.
The Boston envoy outpaced 2019, revpar by nearly 5% in the quarter, while generating $1 $7 million in EBITDA, a 21% increase to 2019.
Rounding out our urban portfolio, our Ritz Carlton Georgetown continues to outperform posting nearly 40% ADR growth compared to 2019, resulting in 67% EBITDA expansion for the quarter.
Urban luxury trends are impressive.
Meanwhile, in Philadelphia, our western generated nearly $2 $4 million of EBITDA in the quarter. Despite disruption from our rooms refresh project that is currently underway.
Our Rittenhouse hotel in Philadelphia, outpaced 2019, revpar by 3% driven by nearly 30% ADR growth.
Once again, South Florida's continued strong run drove our resort performance in the fourth quarter.
The parrot key hotel and villas and the Cadillac Hotel and Beach club, we're top five EBITDA contributors for our for our portfolio generating $2 $4 million and $2 3 million of EBITDA, respectively.
South Florida was our second biggest EBITDA contributor generating $6 $5 million over 20% of the total portfolio.
For 2022. These two assets alone generated almost $22 7 million of EBITDA and are on track to achieve the return on investment we projected when we undertook the transformational renovations at both of these assets back in 2018.
We also upgraded the Ritz Carlton coconut Grove pre pandemic and Q4 achieved 37% growth driven by 33% ADR growth. The Ritz Carlton exceeded group revenue by 20% in Q4 and has a very strong outlook for 2023.
Okay.
On the East coast, the Mystic Marriott and the Annapolis waterfront hotel generated $2 million and $1 8 million and EBITDA outpacing 2019 by 76% and 47% respectively, clearly demonstrating the earnings potential of best in class assets in regional resort markets with multiple.
<unk> demand generators.
On the corporate front here at Hershey after a strategic and transformational year for our company.
We begin the new year with significant cash on hand.
Excess to an undrawn revolver, and a lower leverage profile than we've had in many years.
While we remain confident in their markets and our portfolio.
We are further comforted with our financial position.
While the debt and transaction markets remained muted we will remain flexible and entrepreneurial in our approach we constantly monitor the markets and actively underwrite opportunities to expand our footprint.
Given our financial flexibility and relatively low sensitivity to the interest rate environment and a time of economic certainty in a time of economic uncertainty, we are particularly well positioned to act swiftly when the right growth opportunities present themselves.
Our management team has worked diligently to rightsize, our balance sheet and to close the significant NAV gap that persist for our portfolio.
We still believe that we traded an outsized discount to our private market value and are extremely sensitive to any capital allocation decisions that would impact our NAV.
Our leverage is a tradeoff to growth.
This is my first call as CEO of the company and before turning the call over to Ash for a more detailed look at our financials I wanted to take a moment to make some comments about our portfolio today in light of this NAV gap.
Our performance during 2022 was far ahead of what many had expected not only from a revpar standpoint, but most definitely from our full EBITDA recovery versus 2019 peak, we achieved during 2022.
Although the anticipated timeline of recovery in our markets was estimated to be sometime in the latter half of 2024 or even 2025.
We surpassed 2019 EBITDA production in every quarter of 2022 and with EBITDA expansion in both our urban and resort markets. We delivered the largest outperformance in the fourth quarter with comparable portfolio EBITDA of $31 4 million or 12, 6% increase to 2019.
This outperformance is a result of our execution, but importantly, it is a result of our streamlined and focused portfolio.
Through our deliberate work to dispose of our non strategic assets. We've created a high quality purpose built portfolio levered toward high growth urban markets and a strategic mix of resort markets.
Our properties are located on premium real estate and in markets, where we identified a multiplicity of demand generators and this refined portfolio continues to be positioned to outperform as the industry continues its long recovery.
We believe it is important to understand that seasonality of our portfolio is also fundamentally different than the portfolio, we held before the pandemic.
With the changes we have made since 2020, our resort portfolio benefits from multiple demand generators.
First it has benefited significantly from an increase in domestic leisure travel, which led to record EBITDA production.
Second in addition to demand for high end experiential leisure travel, which we believe we will continue our purpose built resort portfolio is also positioned to benefit from additional revenue streams and non leisure demand.
All but two of our resorts are located in markets that cater to additional travel segments, including convention centers corporate headquarters and universities.
The most notable case of evolving market drivers can be seen in Miami, which has experienced a significant influx of new business and residential relocations in the past three years as well as the renovation of its convention center.
Similar market trends apply to resort markets in Annapolis, California, and new England.
The exceptions are resorts in key west in Monterey, California, which are more solely focused on leisure. We do expect these resorts to stabilize in 2023 after unprecedented performances in 2021 and 2022.
But we do not expect significant retracement.
<unk> key in particular is on pace to significantly outperform 2019 and is still benefiting from its comprehensive renovation following hurricane Irma.
The sanctuary Beach resort will be undergoing an ROI capital project. This year that will set the property up for another level of growth moving forward.
In our urban markets, we made the decision to sell our urban select service portfolio, which reduced our reliance on business transient.
Our focused urban portfolio is located in markets with long runways for growth and will benefit from the additional return of occupancy.
And demand that we expect aided by an increase of group business transient and international travel as markets around the globe continue to open up from pandemic era restrictions and travel to key gateway markets in the U S accelerates.
We recognize the macroeconomic outlook remains uncertain, but despite the constant drumbeat of recessionary forecast negative sentiment data, we see actual economic activity as measured by job gains industrial production and retail sales still indicating growth.
This is certainly true for what we're seeing on the ground in our hotel performance as well.
In summary, our portfolio is exceptionally well positioned to expand cash flow generation through operations as it benefits from the broader trends, we see across the market, including the growth of experiential travel and demand for differentiated high end leisure travel and the continued pent up demand, especially from business travel and the international.
Segments.
And in an environment of very low supply growth.
The setup in fundamentals is very encouraging.
With that let me turn it over to ash to discuss in more detail, our financial outlook margin performance and our updated guidance for the quarter.
Great. Thanks, Neil and good morning, everyone.
So during the fourth quarter the company completed the sale of the courtyard Sunnyvale, the only remaining asset of the urban select service portfolio that closed in August of 'twenty two.
In addition to the sale of the hotel Milo Santa Barbara Pan Pacific Seattle Gate.
Hotel JFK airport and our joint venture interest in the courtyards Huff Boston.
In total the asset dispositions completed during 2022 generated approximately $650 million in cash proceeds and.
In gross proceeds and net proceeds from these sales reduced our total debt by approximately $510 million, while generating unrestricted cash of nearly $120 million.
In conjunction with our strategic dispositions, we completed a comprehensive refinancing of our credit facility.
As of year end the credit facility consisted of a $373 million term loan and an undrawn $100 million revolving credit line at two 5% over the applicable adjusted terms sulfur.
The facility matures in August of 2024, and has 112 month extension option to August of 2025.
As part of our refinancing we used an existing swaps to hedge $300 million of the new term loan at a fixed rate of approximately 393%.
As of year end, 73% of our outstanding debt is either fixed or hedged and despite the recent surge in interest rate our fourth quarter weighted average interest rate was approximately 5% with a weighted average life to maturity of approximately two six years.
We closed the year with $230 million in cash on hand in addition to our $100 million Undrawn revolver.
Since the onset of the pandemic management has been focused on reducing our leverage and creating additional financial flexibility with a stated goal of 3% to four times debt to EBITDA or transaction and refinancing activity in 2022 allowed us to achieve this goal as we ended the year with just over three times that.
EBITDA on a TTM basis.
As a result of our reduced debt profile, we were able to save $2 5 million and interest expense in the fourth quarter compared to the third quarter. Despite the rising rate environment.
In fact, we were able to generate $1 4 million in interest income on our cash reserves in the quarter via short term deposits.
Moving forward, we will be able to take advantage of increasing rates using similar deposit which.
Which will generate additional significant additional cash flow as we evaluate optimal uses of our cash on hand, which could include additional debt or preferred pay downs, depending on how the opportunities unfold in the upcoming year.
As Neil noted we have begun our renovation at our sanctuary Beach resort in Monterey. This year and we expect this will significantly improve cash flow for the hotel in years to come.
With this renovation and a few lifecycle refreshes on deck for the portfolio, We project Capex spend of approximately $35 million to $40 million in 2023.
Up only $10 million as compared to 2022 due to our significant investment in the portfolio before the pandemic and our selective disposition of assets that required major capital investments, which did not meet our internal return requirements.
As in previous years, we will attempt to complete the majority of these renovations in the first quarter of the year, which is seasonally the slowest quarter of the year for our portfolio.
And this will impact our first quarter results at a few of our hotels, including the Westin Philadelphia, where we are undertaking a full refresh of the rooms. After completing the public areas a few years ago.
A complete restaurant renovation at the Mystic Marriott.
And renovations at both Hilton Garden Inns in Manhattan that are receiving public space upgrades.
Okay.
With that I will transition to the portfolio's performance and our outlook.
Our consolidated portfolio generated EBITDA of $31 8 million for the quarter. This was only $1 million less than our production in the prior quarter. Despite a reduced property count following the closings I discussed earlier, which was offset by the strong pickup in our urban portfolio.
Our corporate cash flow, however, increased 20% quarter over quarter to $16 million as a result of reduced interest expense and a more efficient balance sheet.
In the fourth quarter EBITA margin for the comparable portfolio was 33, 1% or 209 basis point increase to 2019 within our projected range of growth.
Both our urban and resort markets exceeded 2019, EBITDA and GOP margins in the fourth quarter.
After surpassing 2019, EBITDA margin by 383 basis points in the fourth quarter. The resort portfolio has achieved margin growth in each quarter of 2022.
Meanwhile, our urban hotels realized EBITDA margin growth of 124 basis points compared to the fourth quarter of 2019.
This marks the first quarter of EBITDA margin expansion for the urban hotels compared to 2019.
And is up sequentially from a loss of 833 basis points in the first quarter of 2022.
Quite a remarkable recovery during the year for our urban hotels with more growth on the horizon.
I would like to reiterate that we currently forecast maintaining margin growth in 2023 compared to 2019 levels on an annual basis.
With 2019, representing the last normalized year of performance before the impact of the pandemic. We will continue to measure margin performance in 'twenty three against that baseline.
Looking at human capital, although some of the staffing challenges the industry experienced over the past two years have abated.
Competition for talent remains strong.
On the positive side, we are generally generally filling roles more quickly and retaining employees longer than earlier in the pandemic.
But labor costs remain elevated in.
In addition to the benefit of ADR, driven revpar and revenue growth, we have been able to offset much of that increase and the broader impact of inflation with operational efficiencies and staffing model changes.
Which we were able to achieve in part through our franchise operating model and close alignment with our affiliated management company.
As we look at the changes we made over the past few years, while many of our pandemic are staffing models and offerings were not intended to be sustainable over the long term or to be permanent.
We are pleased that many of the long term efficiencies we achieved as a result of new staffing protocols and uses of technology are sustainable over the longer term.
Looking ahead now that we have returned to a more normalized operating environment, we will be able to maintain the high level of guest experience that our customers are accustomed to.
At our hotels, while continuing to generate industry, leading margins and cash flows.
As we move into the next leg of the recovery much of our portfolio is margin growth will be driven by the acceleration in our urban markets.
While we are very pleased with our fourth quarter performance, our urban portfolio was still 4500 basis points below 2019 occupancy.
We anticipate significant additional return of occupancy and demand in the urban market aided by an increase of group business transient and international travel.
Additional the resulting additional revenue will have a higher flow through to profitability as the majority of our fixed labor and managerial staff have returned to our hotels.
And we will only require a variable labor to meet this additional demand.
Looking ahead to 2023, although the first quarter is seasonally the lowest contributor for our portfolio accounting for approximately 14% to 16% of full year EBITDA on a historical basis.
Performance through mid February has exceeded our internal forecast despite the disruptive ongoing renovation work that I highlighted.
Our January results were very encouraging with our comparable portfolio Revpar ahead of January 2019 by approximately 4% and.
And month to date, our February Revpar is ahead of February 2019 by five 5%.
And we continue to see a healthy pickup in our booking pace for the remainder of the quarter.
Our current plan is to provide comparable 2023 results versus our comparable 2019 result.
As long as it remains relevant and meaningful instead of comparing against our 2022 result.
As we look at our January results, our comparable portfolio Revpar was up over 65% for all of our urban markets versus January of 'twenty, two and our comparable portfolio was up over 35%.
And at this time, we don't find these results to be meaningful to our stakeholders.
While analysts forecast for the broader economy in 2023 very significantly results on the ground have been positive thus far and our portfolio is positioned to drive cash flow at higher margins than before the pandemic.
This steady and improving cash flow, coupled with our current balance sheet and low interest burden relative to historic levels.
How's us to stay nimble and adapt to the economy real time.
As Neil noted management remains committed to maximizing shareholder value in closing the gap between our NAV and public market value.
Whether that is through capital investments in our portfolio paydown of debt or acquisitions, we will view all corporate activities through through the lens of shareholder value, while striving to maintain lower leverage and flexibility.
So this concludes my portion of the call.
And we're happy to address any questions that you may have.
Operator.
Thank you if you'd like to ask a question. Please press star followed by one on just telephone keypad.
For any reason you'd like to withdraw your question. Please press star followed by tape as a reminder, if you are using a speakerphone. Please pick up your handset before asking your question.
So I'll first question comes from the line of Brian might have B Riley Securities. Your line is now open. Please go ahead.
Oh, great good morning.
I appreciate all those comments very thorough.
We've been hearing.
Later, this year and the New York City market in particular.
There's likely to be some owners with refinancing problems given the current state of the capital markets, particularly as it relates to debt and interest rates.
Are you guys thinking that there might be.
Any opportunities for Hershey there.
And what are your thoughts on that and maybe any other markets, where youre seeing that potentially happening relative to your exposure already in that market.
Sure Brian .
Brian This is neill.
You asked about New York in particular.
New York, Absolutely, we do think that there will be.
Opportunities in not only in New York, but in every major market in the country. We do think that there will be there is currently a significant kind of.
Lack of credit out there for hospitality, it's the market has definitely thawed since say October November December .
And there are some lenders out there that are that are providing quotes on on the hotel transactions, but very few and far between.
Ltvs are a lot lower than they were one year ago and the cost of financing and just interest expense levels are.
300, 400 basis points higher than they were a year ago. So there is clearly a challenge for anyone any owner who has a maturity coming up if.
If they don't have a maturity and they have just a swap or a cap expiring it's a major issue.
Think that.
We haven't seen a.
Huge influx of.
Potential distressed opportunities, yet, but I would say that by.
<unk>, appearing in the brokers books, there was still real question on whether anything could get done whether the sellers were realistic or whether the buyers are leaning in enough, but I do feel like across the next quarter or two.
Until the credit markets really.
Start.
Moving and transacting in spreads come in I think the next couple of quarters, there is an opportunity for.
<unk>.
For rights or for other buyers to have conviction and are willing to be.
Lower levered or all cash all equity on a transaction may be able to find some good opportunities. So we're out there looking.
You mentioned, New York versus other markets, we do have a very significant position in New York and where we're frankly, we're very grateful for it.
In 2002, it was a very strong performance, but in 'twenty three and 24. We think there is a very strong outlook for New York performance supply remains very low demand fundamentals are very strong.
But it is nearly 30% of our EBITDA was 25% of our EBITDA in annual basis, and so we are probably more likely to look at other markets.
Where where we can get.
Additional exposure.
We think that Theres other urban markets in our existing portfolio Theres other resort regional destinations in our existing portfolio and there is also some new markets that we take a look at.
So that's a long answer Brian , but but we'll continue to look at various markets and various opportunities.
We haven't seen anything yet.
That's a highly compelling, but we are seeing opportunities just to reinvest in our existing portfolio to drive to drive incremental growth this year.
And again, we're very with our market exposures, we think our organic growth is going to be very impressive. This year. So we don't feel like we have to make act.
Acquisitions and deals, but we do have the flexibility and capital to do so.
Thanks, that's helpful and maybe just a quick follow up for Ashish.
<unk> thousand 23 were in your expense items are you thinking you're going to have the most margin pressure or is it still labor or might it be elsewhere, we're seeing across our coverage companies.
Real estate taxes, continuing to place higher.
Any thoughts you can give us on that would be great and thats all for me.
Mhm.
Sure Brian Yes, I think labor is our single greatest expense on the operating side. So we.
We do forecast that to be up in the mid single digit range for the year, So that certainly puts.
Puts pressure on margins I think other areas.
Yes.
We would be concerned with is utilities, which have gone up a lot in the last few years natural gas prices are down pretty significantly because of the mild winter.
Are going to look at hedging some of those costs as we always do.
Insurance expenses property insurance expenses are generally in line, except in hurricane prone markets and wildfire.
Effective markets, where we're seeing.
We're not seeing it yet.
Insurance is locked up through mid year, but we are hearing that those could be pretty significant increases. This year. So utilities property insurance taxes are going up but in markets like New York, where youre backwards looking and its a five year average our property taxes are still forecasted to be lower than 2019 in 2023 24.
Sure and even 25 at this point.
So.
Those are some of the puts and takes.
Thank you.
Thank you.
Our next question comes from the line of Chris <unk> of Deutsche Bank. Your line is open. Please go ahead.
Yeah, Hey, good morning, guys.
Wanted to drill down a little bit on the.
What you've talked about it's the opportunity to kind of get back to prior occupancy levels.
<unk>.
How do you think rate plays into that right I mean, I think there seems to be if we triangulate everything.
Yes. It was we see occupancy recover we see rates, particularly at the higher end.
Going negative year on year, and I know there is a mix shift component to that but I mean is it really reasonable to expect that if we get back.
Back closer to peak occupancy thats going to be at these same rates or do we have to kind of trade occupancy for rate.
Chris.
Obviously, that's the million dollar question for the sector, if youre trying to make like kind of a dramatic call on that answer, but if you look at I think if you break it down to exist to your portfolio and your market positions in your assets.
I think that you can get a little bit more confidence in the ability to drive rate.
And in a market of increasing occupancy like if you take it.
Take the example of of.
Of assets like our Ritz Carlton in coconut Grove, that's an asset that has enjoyed leisure transient business really driving the hotel for 'twenty, one and a lot of 'twenty two but then it was.
As the back half of the year group really started to pick up.
By the fourth quarter, we were up very meaningfully on group ADR and now group occupancy is starting to pick up and we will have kind of our best year of group occupancy in the first quarter of this year in 2003, and thats, allowing us to push transient ADR even higher.
So we're able to project even higher ADR for this year based on just that the transient segment as we fill in the group.
And group ADR is 20%, 30% higher than pre pandemic, we're seeing that same situation in Annapolis as government travel comes back and we get the base business back from legislators.
Legislators that our autograph waterfront hotel, we're able to now drive transient ADR, 2030% higher than Q1, and Q2 of 2023 than we were last year and so there's those opportunities in the portfolio, where you are adding.
Group at high rates, because these arent big box hotels. These are very differentiated.
And.
And kind of.
Draw a very premium customer, where we are able to continue to drive ADR, both on the group side and on on.
On transient.
In cities in the urban.
Markets like New York City, where.
We used to run kind of 90% to 95% occupancy January through December .
We do like this environment, where we're running in the <unk> and <unk>, but pushing much higher rates.
I think that is a function of there's less supply in the marketplace. Our portfolio is differentiated and high quality in the right locations and so we're able to continue to drive ADR growth today and throughout December and as we look through January February where our visibility is not that sharp as you get.
Beyond the second half of this year, but in the first and second quarter, our pace in ADR pace in all of our urban markets remains very high as we are building occupancy.
And so flow through was arent going to be like they were last year, because there will be occupancy driving some of this and we will have some restaurants and bars reopening, but as you remember our portfolio is primarily leased F&B.
And.
And so we are expecting.
Significant ADR growth and and margin growth relative to <unk> 19 across this year.
Okay, yes, thanks, Thanks, Neil Super Super helpful.
And then just to kind of follow up on the <unk>.
On Brian's last question.
You do see acquisition opportunities at some point this year, whether it's new York or somewhere else understand the comments about potentially looking at.
Different markets.
Is that a situation where you might look to.
To use equity.
As a way to further kind of <unk>.
Deleveraged the balance sheet is that is that something that's on the table.
Yeah.
We would unlikely to issue equity until our our cost of equity and our cost of capital as it reflects our NAV, but we today have a couple of hundred million dollars of cash on the balance sheet with $100 million of.
Of line capacity.
We have two or three hotels in our portfolio that we've identified in past calls as.
Non strategic for us.
They are assets that are having a very good recovery in 2003.
One asset in Miami into in Manhattan.
Or two in New York, one in Queens and one in Manhattan.
And so we are expecting to ramp those up across the next quarter or two and consider them as potential sales in the back half of the year. So we have we think we have plenty of liquidity to be.
<unk> without issuing equity.
That was the question Chris.
And.
And so I think it would be what we've done what we've demonstrated probably really across not only the last three to five years, but really going back I think our last common equity issuance was in 2012.
So it's been 11 years.
And we have instead, though you know we've transformed the portfolio a couple of times since then and we've demonstrated consistently that.
Recycling.
As a way to you can achieve the same end with recycling and our portfolio is very liquid and highly attractive even our non strategic assets will be.
The very attractive on sale market. So short term it would be cash on hand.
Mid term it would be kind of recycling as we sell hotels.
And.
And we are still so far away from.
Our NAV being reflected in our stock price Thats very hard for us to think of common equity.
Okay.
Okay very helpful. Thanks, guys.
Yeah.
Thanks Keith.
Okay.
Our next question comes from gesture Choi.
Your line is now open. Please go ahead.
Hey, Thanks for taking my question I'm on for Mike.
I guess just the first one at a high level now that the balance sheet is in a better place. How do you guys think of the best ways to create shareholder value going forward.
Okay.
Mike.
No.
There is with our balance sheet in good shape, we think in the short term, it's organic growth from this portfolio.
And.
And demonstrating to the marketplace the quality the composition the segmentation of this portfolio.
And demonstrating the earnings growth profile of it I think is.
Is step number one.
Step number two is.
As being opportunistic.
We think of.
Uses of our capital in.
We've looked at a lot of different opportunities.
We talked to earlier with some of the earlier questions about acquisitions. We're also always looking throughout our portfolio with the.
For opportunities to reinvest in the existing portfolio to drive meaningful returns and we've had now across the last five years to seven years, we've transformed nearly nine hotels on the balance sheet.
Kind of timing, it and seasonally slow quarters and getting it done and then creating a lot of value from that that's the growth that we're achieving in Annapolis and mystic in.
South Florida is a function of those kinds of upgrades and so we see a lot of opportunities throughout our portfolio of Ash mentioned the work we're doing at the Westin right now where the new restaurant at Mystic and St. Gregory.
We have.
Some great Great project, starting at the Sanctuary Beach resort. So there's some great opportunities to reinvest in the existing portfolio to drive incremental EBITDA.
We also look at.
Pay downs of debt.
We're fortunate to have a primarily fixed or capped capital structure, but we do have about 20% to 30% of our financing is floating rate and today floating rate financing is.
Is north of 7%. So that's always a easy use of capital for us.
But the world. So uncertain today, we're not in a rush to do that just yet, but we're we're seeing what opportunities are out there relative to the pay down of debt.
I know some of our some investors have asked about our preferred and I know some of our peers have bought that back hours was issued kind of in the six 5% range.
May be today, it's trading at 758, but.
Relative to where that financing is for lodging.
Perpetual preferreds with no covenants at six 5%.
It feels very good it feels like very good paper. So we're really not looking at that if we were able to buy it at a discount in a meaningful size that it made sense to go through all the the cost of that effort, we would consider it.
But today, we lean more towards paying down floating rate debt.
Or acquisitions.
And what we're doing right now is reinvesting in our portfolio with the extra flexibility.
Got you. Thank you for that and then one just quick follow up can you remind us again, how you guys think of your JV interests going forward.
Yes, absolutely Joe.
We're down to two joint venture investments at this time, both with one partner in South Boston, We're happy with those assets, but.
We would look to potentially liquidate that those interests in the next 12 to 18 months as well.
As those urban assets continue to wrap up I think it's a cleaner story.
Sure.
Almost 25% of our EBITDA at one point historically it was generated from our JV portfolio, but I think it's just from a simplicity standpoint.
We'll look to exit those in the next few years.
Got it. Thank you that's all for me.
Thank you as a reminder, if you'd like to ask a question star followed by one of your telephone keypad. Our next question comes from Tyler <unk> of.
<unk>. Your line is now open. Please go ahead.
Good morning, Thank you.
One multi part question for me I, just wanted to put a finer point on expectations for margin in 2023, and it sounds like you're expecting a decline in margin year over year, but compared with 2019, you put out that 150 to 250 basis points range for 2023.
Maybe on the higher end of that potentially and then when you look at potential performance in your resort versus your urban markets on the margin side versus 2019.
Are you thinking there's more still more opportunity for growth on the resort side or perhaps maybe urban given some of the opportunities on the rate side of things.
We could expect a little bit more margin growth there.
Comparable resort side.
Sure Tyler, let me start with a couple of stats there so.
You mentioned the resorts I mean, when we look at our resorts for 2022.
We ran about 800 basis points higher alumina EBITDA margin standpoint than we did in 2019.
So we do not anticipate the resort EBITDA margin going up from 22 to 'twenty three I think that some of that was just.
With open positions protocols food and beverage offerings. So no on the resort side is where we actually think that there will be some backtracking for 2023 versus 22, but still.
We are.
Significantly significantly ahead of 2019 margins.
Think that the growth that's likely to come once you get past the first quarter with all of these renovations and disruption is really going to be more in the urban markets.
Urban markets when you think about when they really started performing.
Markets like New York that started coming back of Boston in Q2, but almost all of the other markets were disrupted DC Philadelphia through the entire year.
So as those start to ramp back up and really build some momentum we think that the margin growth is in the urban portfolio.
Sure.
Over 22.
And not in the resort portfolio.
Okay.
Just one quick follow up on this on this topic, but more specifically to the labor side of things just remind us where you are on staffing levels versus pre COVID-19 or maybe versus ideal level, but I'm also interested.
What share of your labor and employee base is contract labor.
Generally we are at back to where we were in 2019 on the managerial side.
Well I wouldn't want to say back to 19, but where we're where we want to be on the managerial side. We're still below 2019 levels and we don't expect some of those positions to come back on the property level, we're about 85% to 90%.
Looking at Occupancies for 'twenty, two 'twenty three we still are forecasting occupancies in most of these markets to be below 2019 level, so not anticipating that our staffing levels go up too much from where we are today.
Was there another part to that question Tyler.
I'm just I'm sure if I can follow up offline I'm just not sure.
The contract labor what percentage of your employee base is contract labor right now and how that compares with pre COVID-19.
Yes.
I don't have that off hand, I know that in some markets, we use a lot more contract labor than others.
We generally try not to.
But just with the availability of housekeeping, we are probably using more contract labor today than we did in 2019.
Okay very helpful. Thank you and could you tell us all for me.
Thank you.
Final question comes from Anthony Powell of Barclays. Your line is now open. Please go ahead.
Hi, good morning, Thanks for taking the question.
I guess another margin question.
Over the long run I guess, what Revpar growth do you think you need to maintain margins not necessarily this year, but going forward I think people used to say it was 3% to 4% is that still the case.
And how is that compared to what it was pre COVID-19.
I think it's a good baseline Anthony I mean, you have to look at where it's coming from right. If all of that 3% to 4% is coming from occupancy.
It would be tough to get consistent margins I think even if you have a balance of ADR and <unk> are.
Certainly the more you can push the ADR.
Yes, I think that 2% to 4% you could definitely have margin growth, but if it primarily occupancy I think that makes it challenging.
Okay.
Alright, and then it leads to my second follow up I guess is it the main I guess opportunity for you and I guess a lot of peers occupancy growth I think most of it most hotel rates are 10% or below kind of 19 levels and.
If that's the case does it make it harder to push margins, if you're really gaining back busy.
Business travelers and whatnot were coming on mid week, and really pushing up at midweek occupancy.
Yes, it does it does make it harder but.
If you can maintain your rates push rates because of that occupancy.
Really bringing back just variable labor.
If youre going from 70% to 80% youre not bringing back any managerial staff, you're really bringing back a few desk agents and housekeeping.
So the flow on that isn't too bad.
And that's really what we're looking at for this year is absolutely occupancy is going to be the driver of a lot of the revpar, but.
The costs associated with those incremental room sales.
Shouldn't.
Make us go faster.
Got it thanks, maybe one more quick one and sorry, if you've talked about this before.
What's your outlook on leisure pricing.
I think it's remained pretty robust, but there seems to be worried about leisure pricing throughout the balance of the year what are you seeing.
Right now what is your expectation for the rest of the year.
Okay.
Leisure pricing, we have not seen a retracement.
At this time in the fourth we mentioned that in the fourth quarter and even into the first quarter, we have a little bit of softness in two resorts are key west parrot key hotel and villas and.
And the.
Sanctuary Beach resort.
They have they have gone backwards on Revpar from 2022, ADR has held pretty close in both cases.
And as we look forward in the couple of quarters ahead, we are still projecting and pushing ADR growth and our pace in those markets and so it is hard to keep pushing ADR, but with certain assets.
And with the right business mix, we are able to drive it and the vast majority of our portfolio in leisure assets I made. The example of Annapolis. Just you are able to push transient ADR. If you have a significant base of business and if that base of business is coming in at ADR levels.
That are higher than two or three years ago, we are able to continue to push that kind of level of ADR growth.
Yes.
I think it just goes property. It goes it is specific to various portfolios and various assets, but ADR growth in the end is a function of of of an asset being.
Differentiated and being a target for this premium customer that is demonstrating in all sectors of the economy willingness to pay more than they have in the past and we're seeing that in our luxury hotels, we're seeing in our lifestyle hotels, both in the resort space as well as the urban space.
Sure.
Alright, we can only share what we've seen so far.
Understood. Thanks.
Thank you as there are no additional questions waiting at this time I will pass the conference back over to Neal Shah for closing remarks.
Great well. Thank you all for your time today.
Theres a couple of other calls today that may take people offline, but feel free to give us a ring throughout the day today and in the coming weeks, we look forward to speaking to everyone. After the end of the first quarter if.
If not at some investor meetings in between but thank you for your time.
Ladies and gentlemen, this concludes today Harsha Hospitality Trust conference call have a great day ahead, you may now disconnect your lines.
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