Q2 2023 Hersha Hospitality Trust Earnings Call
Okay.
Hello, everyone and welcome to the Hershey Hospitality Trust second quarter 2023 earnings Conference call and webcast. My name is Emily and I will be coordinating no code today.
After the presentation, there will be the opportunity for any questions, which you could ask why pressing star followed by the number one on your telephone keypad.
I'll now turn the call over twice as much here with her show Hospitality Trust. Please go ahead Andrey.
Thank you Emily and good morning to everyone joining us today.
Come to the Hershey Hospitality Trust second quarter 2023 conference call today.
Today's call will be based on the second quarter 2023 earnings release, which was distributed yesterday afternoon.
Before 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.
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 Greek our chief financial Officer, and J shop.
I'll begin by covering the portfolio's performance in this quarter, including a deep dive on our New York portfolio before touching on our capital allocation and strategic outlook.
When we last spoke in late April despite economic uncertainty and general market volatility our positive outlook was driven by the accelerating performance at our hotels, especially in our core urban markets.
While the macroeconomic picture for the back half of the year remains uncertain.
Forecast very significantly among economists overall GDP forecasts have continued to improve and we are seeing more confidence by both businesses and the consumer than at any time in the previous 12 months in fact in June consumer spending adjusted for inflation increased the most since January while annual U S. <unk>.
<unk> rose at its slowest pace in more than two years.
During the second quarter, our urban markets achieved 12, 2% Revpar growth and we recorded a similar level of growth and performance in July as compared to July 2022.
Although we have seen a pullback at these properties compared to the record setting year of 2022, our resorts are still significantly outperforming pre COVID-19 levels and with this segment is stabilizing as we move through the summer we view 2023 as the new base year for growth moving forward for the resort portfolio, we believe the stable.
<unk> at our resorts, coupled with the continued outperformance of our urban markets, which account for nearly 60% of our room count will allow us to drive cash flow and profitability as we continue to progress through the ongoing travel recovery in the back half of 2023 and into 2024.
With that I will move on to discuss our portfolio performance in the quarter.
Our comparable hotel portfolio generated approximately 77% occupancy at.
At an ADR of $303, resulting in revpar of $234 for the second quarter 2023.
This equates to nearly 4% revpar growth to 2022.
Urban demand remained robust throughout the quarter with occupancy growing over 800 basis points compared to the second quarter of 2022.
Urban EBITDA of $22 $5 million represented 60.
An expansion of 11% from the second quarter 2022.
Overall, Manhattan was our largest EBITDA producer for the quarter generating $8 4 million or 25% of total portfolio EBITDA.
The Hilton Garden Inn, Midtown East and the Hyatt Union square, where the highest producing New York assets in the second quarter generating $2 4 million and $2 1 million and EBITDA respectively.
And four of our top 10, EBITDA producing assets were located in Manhattan.
Meanwhile, our total New York City portfolio, including the boroughs reported 13, 4% revpar growth compared to the second quarter of 2022.
Strong summer performance in New York, and Manhattan was driven by a robust return to mid week leisure and long term group demand.
According to <unk>, New York as the top.
Searched U S travel destination for the summer of 2023 and ranked in the top 10 globally.
On the ground International room revenue grew 21, 2% from the first to the second quarter of 2023 at our top five New York assets.
However, despite this growth international room revenue in the New York portfolio remains 23% below pre COVID-19 levels, suggesting more growth opportunities in the coming quarters and years.
On the corporate front for the partnership for New York City, New York City experienced 5% employment growth from Q1 2022 for Q1 2023.
Third highest growth rate in the United States behind only Dallas and Tampa.
And is now solidly in line with most other major metros when it comes to office attendance, where it had previously trailed the national average for most of the pandemic.
Our Manhattan portfolio reported occupancy of 86% in the second quarter more than 1000 basis points greater than 2022.
In June our Manhattan hotels top 90% occupancy for the first time since 2019 strong.
Demand carried into July with occupancy of approximately 91%.
As we begin to reach pre COVID-19 occupancy levels in our New York portfolio.
To point out that during the last cycle, we had record demand for hotel rooms in the city.
Our year over year mid single digit supply growth resulted in a very challenging operating environment for owners.
As we look forward.
Key differentiator from the prior cycle to today's operating environment are the much more favorable supply dynamics, coupled with very strict zoning regulations and many alternate use conversions.
These factors are forecasted to result in a net supply reduction of 1% to 2% of inventory for the short to medium term with very little new supply forecast is at that time period.
New York is our largest overall exposure and we are extremely encouraged with the market's recovery to date and remain optimistic on the long term outlook for the growth in the city, which in our view is as positive as any market in the country.
Boston had yet another strong quarter with 10, 5% revpar growth compared to 2022, driven by nearly 8% ADR growth.
The Boston envoy was the top EBITDA producing <unk> in our consolidated portfolio generating $3 $4 million of EBITDA.
For the quarter, the envoy reported occupancy of 84% at a $431 ADR, resulting in revpar of $361 up 14% from the second quarter of 2022.
The Philadelphia, Westin generated nearly $2 $4 million of EBITDA in the quarter. Despite disruption from the total rooms revenue, which completed in April .
Looking ahead for the balance of the year, Philadelphia, which has been one of our slower recovering markets has several <unk> related to group in corporate travel.
Comcast NBC Universal one of the city's largest employers is requiring employees back in the office four days a week post labor day.
I've been in Philadelphia, all summer and the momentum is palpable office occupancy retail activity and street life has improved meaningfully.
For the third quarter business transient room revenues are 15% ahead of 2022 for the entire Philadelphia market.
Looking ahead to the fourth quarter for Philadelphia Group pace is impressive with the reemergence of convention demands.
The Western has three considerable convention related room blocks on the books in October and another in November .
At the Rittenhouse group pace is driven by stronger corporate board meeting demand and a social group base, including wedding room blocks and the like.
As corporate and group demand continues to return in Philadelphia, we remain confident that our newly renovated Philadelphia Westin and the Rittenhouse hotel the city's only independent Forbes five star Hotel will be beneficiaries of increased demand in the market.
In Washington, DC, the Ritz Carlton Georgetown reported occupancy of 71% at a nearly $700 ADR, resulting in revpar of $492.
The risk is $1 2 million and EBITDA is up nearly 10% from the second quarter of 2022.
Meanwhile, the St Gregory hotel generated over $1 2 million and EBITDA up 72% from prior year.
Looking forward in the third quarter, Washington, DC will be impacted by a limited congressional calendar with the house and Senate on vacation for the entirety of August however.
However, both the house and Senate are forecast to be in session for the majority of October November and the first two weeks of December which will boost overall demand in the city.
Washington, DC is also expected to host for citywide in the fourth quarter with the largest expected to generate nearly 60000 room nights for the market.
Moving on to our resort portfolio as I mentioned earlier, the broader lodging industry has experienced a pullback in resort markets compared to the record setting 2022 at.
Our service levels normalized and alternative travel options and destinations became available.
Despite that softness versus 2022, we are performing well above pre COVID-19 levels and we have seen a stabilization of these results that has continued into July.
We view 2023, as a base year for growth moving forward.
Despite the difficult comparisons to a very strong 2022, our resorts generated just under $11 million in EBITDA down approximately 24% to prior year, but up 37% to 2019.
The Annapolis waterfront hotel, the Mystic Marriott and the Ambrose Hotel, Santa Monica turned in strong quarters, with $2 $3 billion $1 $8 million and $1 2 million and EBITDA increases of 15%, 5%, 6% to 2022, respectively.
In July Revpar for our resort portfolio has continued to stabilize compared to 2022.
Prior to handing it off to Ashish I will briefly cover our strategic outlook.
We are encouraged by the resilience of our portfolio and the strength in our urban markets.
Our outlook on the current lodging recovery in the sectors long term fundamentals, including a low supply environment and long runways in the recovery of international and business travel remains very positive.
Sure.
Tyler if you look at the second quarter.
Our EBITDA margins were down from last year.
Our.
Non resort portfolio EBITDA margin, so urban portfolio, even in this quarter compared to last year was flat.
Roughly 1% of our EBITDA in Q3 give or take 17% 18%.
The whole back half of the year.
We think that we can get margins very close to 2022 and the full portfolio for the remainder of the year, which would imply margin growth of roughly 150 basis points.
For the back half of the year compared to 2019.
Okay, Okay great.
And then you mentioned.
They have some noncore.
How many assets you have.
Kind of Wi Fi it makes sense to you.
Selling now and use of proceeds potentially as well.
Yes Tyler.
We've seen the kind of recovery in.
And some of the.
We have been looking at some asset sales, particularly in what we consider non core hotels.
Generally our playbook across the last really since 2019 has been too.
Sell hotels that have <unk>.
We are unclear, whether we'll earn the kind of return and generate.
EBITDA growth from the assets that the rest of our portfolio, Mike and so they are generally older assets.
Net.
By repositioning or or doing something differently or increasingly we're finding alternate used buyers.
Affordable housing.
Student housing.
And a range of other.
Products that are.
Conducive for hotels. So we have been looking at a couple of asset sales some of our smaller hotels in New York City.
That have upcoming capital.
And we have one small asset in Miami that we've been in the market with.
Right now there is there hasnt been a lot of high quality product on the market. So we felt like this was actually a.
A time, where.
There could be some good.
Opportunities to transact, we have seen the debt markets meaningfully improve across the last 234 months or at least since last spring.
And so we are we're encouraged early on these processes are ongoing but.
Hopefully by.
It's early part of the fall, we'll be able to report backlog on a couple of transactions.
To your point.
Use of proceeds as we mentioned in our prepared remarks, we generally view the best use of <unk>.
Capital right now to reduce floating rate debt, which is immediately accretive reduces our interest expense.
In a time of <unk>.
Significant uncertainty, we think that that is.
You manage where you have certainty.
And where we can get good transactions done and and reduce our debt load and interest expense and increase our financial flexibility, we think that that makes good sense.
Okay.
Okay.
For me I appreciate the detail. Thank you.
The next question comes from David Katz with Jefferies.
Please go ahead your line is open.
Hi, good morning, gentlemen.
Thanks for taking my questions.
Hi.
I did get on just a couple of minutes late so I missed really just the first few minutes, but wanted to themes that come up.
Really in the past 24 hours and some of the commentary is the differential between.
Outbound international travel versus inbound international travel and its impact on domestic demand in certain areas and I am curious, whether that's something that is evident.
In New York, where you would expect that to be.
Hey.
Barometer or any of the other urban markets.
Well, David I guess, just on the outbound international travel, that's clearly kind of a kind of a case of what.
<unk>.
People.
Having a lot of pent up demand for international travel and and that has clearly been a place that a lot of people are calling theres also cruise line, but a lot of other areas that people are pushing on the.
The inbound international travel, we were expecting to be a little bit of a slower recovery I think even in the heart of the pandemic because the.
There is concerns around strong dollar there is concerns around how restrictive are visa policy is.
All of which are making improvements.
But it has been slow.
Let's slow to recover but this was the first quarter that we can report David really significant growth on the international side in New York City at least we were able to see nearly 20% kind of sequential quarter over quarter International contribution in New York.
You see a lot more European travelers there.
We've been able to kind of dig into.
Contributing countries.
Italy's up France is up.
Very low levels.
Actually do you want to add anything else on internationally, we've been looking at this a lot because we think of this as a significant tailwind not only for this year, but really for 2024.
Yes.
Couple of things, David we did see a big uptick in international travel in the second quarter, leading into the third quarter in New York, which is definitely helping our.
Occupancy and helping our performance.
Still about 20, I think right now for the second quarter about 23% off from 2019.
So there is still a long ways to go when you think about international travel as a tailwind.
These urban urban markets I mean, those stats that I'm, giving you are just in New York in particular, but I think that.
The outbound international travel has had an outsized impact on <unk>.
Postal resorts, whether it's California, or Florida, and even in the northeast.
Over the last few years and are now going international because they haven't been able to build international. So I think that has amplified some of the retrenchment in the resort market I think all of these things tend to normalize over time.
People will sort of start doing more domestic leisure will start getting more inbound international, especially from the Asian markets and from Europe . So we just think that it's such a volatile time that you are but you are seeing the real tailwind of international travel comes back into some of these urban markets.
Understood.
Just a second.
Question, you talked about potential potential divestiture processes.
Out there and Im curious for just a bit more color on the markets movement.
Let's say discussions at NAREIT.
There was.
Deals were challenged by underwriting conviction.
And higher cost of debt.
Is that something that you are seeing do you think it's been alleviated a bit just with this past 30 days shift toward a soft landing.
Whats perspectives might you have about that.
I think since NAREIT take the last 60 days I think we've seen we have seen the debt market has improved since that point, we've seen more <unk> transactions take place.
On the other hand, the base rates did go up but but the outlook for them has.
Has remained pretty.
Consistent and so I think that market has gotten a little bit better and then and then pop.
Pretty performance or kind of conviction around underwriting.
At least in cities like New York I think that conviction is building pretty significantly as performance has just been so strong.
The.
So I think it is.
Is marginally a better environment than it was at NAREIT.
And there is a.
A real lack of high quality properties on the market today. So we'll see how these processes go.
The two first ones are smaller assets, which we feel are even easier transactions because they require less quantum but.
Of debt or equity.
But they do require capital expenditures and the like as I mentioned in some of our remarks before there is a increasingly there is a very active alternate use bid in in major cities and particularly in New York and so we're.
We believe that not only is the hotel kind of opportunity.
Something thats getting easier to underwrite, but the alternate use bid is also growing as available.
Got it as with most things most questions. It depends I appreciate it thank you.
Okay.
Yes.
The next question comes from Chris <unk> with Deutsche Bank. Please go ahead. Your line is open.
Hey, good morning, guys. Thanks for taking the questions.
So wanted to circle back I know you gave some pretty decent data points for July .
I think in terms of both pricing and ox, but.
I guess, the one area of potential pushback is.
Q2, how Q2 unfolded.
Maybe a little better not a lot.
And then last year as we look back July was the strongest month of the.
The year end of the quarter, both year over year and relative to <unk>. So the question is no.
Do you think you have enough visibility on August and September so that we don't have a situation where.
Chris.
What gives us more confidence is is September .
August is a <unk>.
Island leisure oriented months and so.
So we do expect some softness we had mentioned Washington will be a little bit softer.
But in September are out.
Look and are.
And our perspective is very strong right now for September October and through the end of the year and so thats whats giving us.
<unk> I think if you look at kind of each of our markets.
We mentioned about Washington, and some of the prepared remarks, but think of New York like This September and October . The setup is is better than last year. The Jewish holidays. The day of the week that they fall.
<unk> at least as of now.
There isn't any competing kind of issues last year, we had the queens.
Funeral at the same time.
We have a.
Statements around fashion week.
And so there is I think for September the setup is good for for New York.
And and we are seeing some strength in Philadelphia as well so on the urban side, we feel pretty confident right now.
But to your point there is a lot of uncertainty in the market and the environment we.
We feel like we have.
Put out guidance that is appropriate for what we're seeing at this moment.
Yes, Chris I'll, just add to that just our reliance upon urban market.
In the back half of the year, especially when you get past August which have been the best performing markets.
So it probably gives us the most comfort in our outlook.
Okay.
Fair enough and then as a follow up wanted to.
Ask you guys. What your perspective is on the notion of higher for longer in terms of interest rates. What do you think that means for the industry and you guys in particular and really just talking about.
One the transactional environment.
How that impacts potential buyers, but also.
New construction and.
Just curious for how you guys think this is going to play out in the next several years.
Yes, I mean, just just start on the supply side. It is it is a supply environment.
Is very attractive moving forward for the next several years, probably the lowest levels of supply that anyone.
And for US, what's most compelling for New York City.
To see a relatively flat or negative at times a supply environment.
Great fundamental setup.
On the higher for longer.
Sure.
The the market takes time to adjust I think we've just gone through a year. The last year I think the most interest rate hikes in history across 12 months and the impact that that had on the market. If you think of 2022 is probably one of the hardest years in the capital markets and in the stock market.
2023, it seems like the world's starting to adjust to it.
And.
And the performance is continues to be very strong.
I think there is a little bit more consensus around a kind of soft landing.
And we are seeing spreads starting to come in on on financing.
Lodging is.
One of the more attractive sectors within all commercial real estate.
Put out financing AD and so I think we will continue to see spreads come in well.
We will see where base rates go, but we think the world adjusted borrowing.
Between six five and 8% for high quality hotels, I think we've seen the financing markets go from kind of 50% LTV to 60% to 70% LTV already.
It is at a higher cost and that has an impact on on valuations.
Rod.
Maybe the volume of transactions, but we do think that the world adjust over time and now it's been nearly 18 months.
Of this drumbeat and at the very least the drumbeat is at least stabilizing and likely more conversations about when things come down rather than.
Go up further.
Okay fair enough thanks, guys.
Our next question comes from Daniel Hagan with that Daniel. Please go ahead. Your line is open.
Hi, good morning, guys.
Just one question on the Capex side of things what are your expectations on those upcoming renovations you mentioned instinct.
<unk> of mitigating disruption in 2023, but also those products you mentioned heading into 2024.
Yes, Hi, Danielle.
Mentioned this year for 2023, Theres only two projects the major projects that we are undertaking one is the winter Haven hotel, which is closed right now that generates very little EBITDA in the third quarter as if the soft season in Miami, we do see the impact of ramping that asset.
Back up in Q4.
But it's not going to be that significant its a fairly small asset.
So we don't think that $1 billion and thats built into our guidance as well for Q3 and will be built into Q4.
And the Sanctuary Beach resort, we will start renovating that again.
In November and the occupancy start falling off in November December .
Once again, we don't think that it'll be that impactful because of the way that asset is laid out you can start doing.
Individual rooms, and they are all sort of bungalow style. So that you don't disrupt the rest of the rooms when you.
When you start renovating so we don't think the impact will be that significant for either of these renovations. We do believe next year in the first quarter. We have two larger New York assets that are going to be renovated those who will be disruptive for Q1, but it's by far the softest quarter in New York and the best time to do it.
Got it and then.
What are you hearing from operators there.
I think what.
We're hearing are better.
We're not hearing about the type of labor shortages.
And the extent of them I mean, I feel like they can get the labor is more expensive, but the rate of growth on wages has also normalized.
We're more in the.
Take 4% to 5% range instead of.
So generally I think the availability of labor and the stabilization of costs.
Have improved as we've gone through the year.
Okay.
Great. Thanks, that's it for me.
And as you are all the questions. We have for today, So I'll turn the call back to Neil for any closing remarks.
With no more questions, we'd like to take a moment just to thank everyone for their time on this very busy morning of earnings calls.
We will be available for the rest of the day if anyone has any further questions but.
But thank you for your time.
Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.
Yeah.
Okay.
Yes.
Yes.
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Yeah.
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