Hersha Hospitality Trust Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
April 28, 2022

There are 13 speakers on the call.

Operator

Hello, everyone, and thank you for joining the Hersha Hospitality Trust First Quarter 2022 Earnings Conference Call. My name is Darius, and I'll be moderating your call today. Before I hand you over to your host, Andrew Tomasio, Please ensure to now mute yourself locally before asking your questions. I now have the pleasure of handing you over to Andrew DeMazio. Please go ahead, Andrew.

Speaker 1

Thank you, Darius, and good morning, everyone joining us today. Welcome to the Hersha Hospitality Trust First Quarter 2022 conference call. Today's call will be based on the Q1 2022 earnings release, which was distributed yesterday evening, as well as this morning's announcement of our definitive agreement to sell our Urban Select Service portfolio. Before proceeding, I'd like to remind everyone that today's 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.

Speaker 1

These factors are detailed within the company's press releases as well as within the company's filings with the SEC. With that, it is now my pleasure to turn the call over to Mr. Neil H. Schopp, Hersha Hospitality Trust's President and Chief Operating Officer. Neil, you may begin.

Speaker 2

Thank you, Andrew, and good morning, everyone. Joining me this morning are Jay Shah, our Chief Executive Officer and Ashish Parikh, our Chief Financial Officer. And thank you to all of you for joining today's call. We are excited to share that we have signed a definitive agreement $1,000,000 or approximately $360,000 per key. By divesting our non core urban select service portfolio, We are sharpening our focus on Luxury and Lifestyle portfolio where we have been generating excellent operational and financial results as demonstrated in our Q1 financial results announced today and where we see great opportunity for growth.

Speaker 2

Additionally, we are retaining our exposure to New York, which we believe is at the beginning of a very strong recovery and see tremendous unlocked value and site in those assets. As a result of our sale of the Urban Select Service portfolio, we are improving our operational metrics, significantly increasing pro form a ADR and RevPAR. We intend to use the proceeds from the sale to provide liquidity for a significant corporate debt repayment. In addition to approximately $75,000,000 of mortgage debt associated with the Urban Select Service portfolio, we expect to reduce net Debt by $460,000,000 to $480,000,000 resulting in pro form a consolidated leverage ratio of 4.9 to 5.1 times. And finally, we expect to recast our existing credit facility, which will eliminate debt maturities through 2024.

Speaker 2

This will provide significant financial flexibility to continue growing our core portfolio. Following the completion of this transaction, We will own 26 hotels in 6 key destination markets across the United States. On a pro form a basis, the remaining portfolio's total RevPAR based on 2019 performance will increase from $206 to $2.19 Total ADR will increase from $2.47 to $2.62 and EBITDA per key will increase from approximately $32,000

Speaker 3

to $33,000 We are

Speaker 2

very excited about this transaction and what it means for Hersha moving forward. With that, I'll turn to the quarter. When we last spoke in mid February, all indicators pointed to a demand recovery through the spring. Since that time, the rapid acceleration of the recovery has surpassed our expectations. We significantly outperformed our internal forecast for the first on both top line and profitability metrics.

Speaker 2

This accelerating demand recovery took hold across our entire portfolio and has continued into April, and we expect this trend to gain further momentum throughout the year. Property level cash flow sequentially improved from $3,800,000 in January to $12,100,000 in March, our most profitable month since the onset of the pandemic. In March, our 33 hotels posted high watermarks on top line statistics since the onset of the pandemic. Our revenue managers successfully executed our strategy of driving rates, Resulting in a 10.5 percent ADR growth compared to the Q1 of 2019. As the Omicron spike in January waned and demand rapidly recovered to close the quarter.

Speaker 2

Rate integrity has remained one of the hallmarks of this recovery for the industry and is key to the recovery for lodging. Based on year to date performance from our resorts to our urban clusters, we believe strong ADRs will not only prove sustainable, continue to improve throughout the year and across our high quality portfolio. We are encouraged to see RevPAR closing the gap 2019 levels, even before a recovery in business transient and group occupancy has fully come to fruition in our gateway markets. While we have experienced a dramatic sequential improvement in urban demand in March, it's the continued demand growth we've seen so far in April, coupled with our projected gateway market growth we project for the Q2 that will push RevPAR higher from here. The rapidly improving operating environment we are seeing in our markets provides a clear trajectory of growth for our portfolio as we move into the 2nd quarter.

Speaker 2

Shifting focus to our market performance. Once again, our resort portfolio continued robust performance throughout the quarter, with occupancy just shy of 70% and RevPAR growth of 28.6% relative to the Q1 of 2019. The resort portfolio generated $15,200,000 in EBITDA, a 21% increase to the prior quarter and approximately 80% growth on the Q1 of 2019. Our properties in Miami and Key West once again benefited from the unprecedented demand and pricing power in the South Florida market. The Parrot Key Hotel and Villas was our best performing asset during the Q1 from a RevPAR growth perspective, as 85.2 percent occupancy and a $5.79 average daily rate resulted in a $4.94 RevPAR, which surpassed Q4 20 nineteen's RevPAR by 68%.

Speaker 2

Parrot Key generated $4,500,000 of EBITDA for the quarter, record for the property and 161 percent increase to the same period in 2019. We have seen continued strength at the Parrot Key through April and expect continued outperformance throughout 2022. The Miami Beach market turned in another great performance in the Q1 as the Cadillac had its best EBITDA producing quarter ever, generating $5,500,000 a 73% increase to Q1 2019. The Ritz Carlton Coconut Grove rounded out this record setting with 19.5 percent RevPAR growth compared to the Q1 of 2019 and generated $1,800,000 of EBITDA, Its Best Quarter Ever and the 72% increase to the Q1 of 2019. We expect to see very strong momentum in the South Florida markets moving forward, driven not only by the traditional leisure traveler, but also by the clear uptick in future business travel related to the influx of notable tech, Finance and cryptocurrency companies that have relocated to and open new office space throughout the Miami market.

Speaker 2

In California, the Sanctuary Beach Resort continues to demonstrate the pricing power of well located, high quality, Differentiated Offerings, posting ADR of $4.78 for the quarter, an increase of 76% to 2019, leading to RevPAR growth of 36.7% compared to 2019. The Sanctuary posted EBITDA of $641,000 for the quarter, a more than 3 times increase to the same period in 2019. Turning to our urban gateway markets. We are seeing strong demand growth even with the return of business travel in only its early stages, which will be the next leg of recovery of demand in urban gateway markets. As we all know, urban demand has been disrupted in prior quarters due to Delta and then Omicron.

Speaker 2

But there is more momentum today than we've seen since the onset of the pandemic. More companies are returning to the office, more conferences are taking place in person and TSA data and airline earnings suggest Americans are traveling via air at the highest rate since 2019. And while the sequential growth acceleration I mentioned earlier has positively impacted our entire portfolio, it has been most pronounced in our core urban markets. While occupancy continues to recover, we have maintained pricing power across the markets that were most severely impacted by Omicron. Our urban hotel ADR of $2.18 in March is only 2.5% below March of 2019.

Speaker 2

The strength was driven by Boston, flat to 2019 at $2.28 Philadelphia down just 1.2% at $2.41 and Manhattan, which was down only 2.5 percent at $2.12 Notable performers for March include the Rittenhouse Hotel, which closed the month with an ADR of $601 34.6 percent above 2019 the Ritz Carlton Georgetown, which generated an ADR of $5.54 18 percent higher than 2019. The Boston Envoy with an ADR of 3.27 1st quarter, an increase of 6% to 2019 and Hyatt Union Square, where ADR of $3.24 was about 5% ahead of 2019. The continued rate strength drove RevPAR for our urban portfolio up 31% in the last 2 weeks of March compared to the 1st 2 weeks. All of our urban markets have experienced sequential growth. The largest drivers though have been Philadelphia with 39.5 percent growth, Washington DC with 36% growth and Manhattan at 28.1 percent growth.

Speaker 2

RevPAR growth has continued into the first half of April and is expected to build for the quarter. In a similar fashion to the urban demand recovery, the return of business travel has grown incrementally after a severe impact from Omicron. According to SAP, 77% of U. S. Travel managers reported they had more employees traveling in March than February.

Speaker 2

In addition, 96% of U. S. Travel managers said their travel spend will increase in the next 12 months, predicting an increase of 34% on average. This trend matches what we are seeing on the ground, where the majority of our business travel for Q1 occurred in March. In New York, the reduction to our on the books occupancy for both group and business transient has improved by 50% from January to mid April.

Speaker 2

While there is still ground to make up, the improvement has been clear and consistent. We believe this rapid improvement in our urban portfolio and the continued recovery of business travel provides a clear trajectory of growth for Hersha's uniquely positioned portfolio. From a strategic standpoint, our public market valuation continues to be significantly discounted to private market values for our assets and our deliberately assembled portfolio. It is our view that as performance continues to accelerate and replacement values skyrocket, This gap will close through continued EBITDA production. That being said, our cycle tested and highly skilled management team will continue to evaluate any and all opportunities to close this public to private market value gap.

Speaker 2

While using the financial flexibility that our recent transaction offers to focus on the parts of the portfolio where we can add the greatest value in the early stages of this recovery cycle. With that, let me turn it over to Ash to discuss in more detail our financial performance and outlook.

Speaker 3

Great. Thanks, Neil, and good morning, everyone. I'll be sure to leave plenty of time for questions on our recently announced transaction after my prepared remarks. So my comments will focus on the rapid accelerating demand improvement across our portfolio as the Q1 progressed and its impact on our margins and cash flow before closing with an update on our balance sheet and Outlook for the current quarter. As compared to 2019, our January comparable store RevPAR was down 31.5% for the month.

Speaker 3

With the resurgence of demand across our portfolio, February and March performance reduced the deficit to 13.4% 14.2%, respectively, the lowest spread since the onset of the pandemic. The strong demand at our leisure oriented properties and the recovery of demand at our urban hotels in the back half of March also allowed us to drive rate with ADR exceeding Q1 2019 by 10.5% for the comparable portfolio. Due to the seasonal nature of our portfolio, the Q1 is typically the softest quarter of the year. Coming into the year, we forecasted a corporate cash flow loss for the Q1 and we're extremely pleased with our ability to generate $23,000,000 Property level cash flow and approximately $3,000,000 of positive corporate cash flow during the slowest quarter of the year that was significantly impacted by the pandemic. This cash flow generation was driven by the strength of our margins during the entirety of the quarter.

Speaker 3

Our ability to drive ADR growth along with our stringent cost controls and asset management initiatives resulted in GOP and EBITDA margins for the quarter of 40.8% 28.3%, respectively, roughly 370 basis points better than Q1 2019. Incremental growth in occupancies in conjunction with our focus on rate integrity and expense savings initiative resulted in margin expansion and material cash flow generation at our hotels in March, as comparable GOP and EBITDA margins for the month came in at 47.4% and 34.7%, respectively, both higher than March of 2019 and we are witnessing this type of margin performance in April as well. Our South Florida collector led the portfolio again this quarter with 45.9 percent EBITDA margin, highlighted by the Parrot Key Cadillac and Ritz Carlton's Coconut Village. The Parrot Key finished the quarter with a 59.8 8% EBITDA margin, a 2,100 basis point increase to Q1 2019, while the Cadillac generated 58.2 percent EBITDA margin, exceeding Q1 2019 EBITDA margins by more than 1,000 basis points. Robots results were also seen at our California Drive 2 Resorts as our Sanctuary Beach Resort in Monterrey and the Hotel Milo in Santa Barbara generated EBITDA margins that were both more than 1500 basis points above our 2019 margin

Speaker 2

for the

Speaker 3

same period. As we progressed into March, many of our urban luxury and lifestyle assets also began to drive increased profitability. Notable performers include the Ritz Carlton Georgetown, Boston Envoy and Hyatt Union Square, each posting EBITDA margin growth Greater Than 500 basis points higher than 2019. Over the course of the pandemic, our portfolio has undergone a transformation as we have traded strategically selected assets to maintain operational flexibility. On a same store basis, 1st quarter hotel EBITDA came in just 7.7% below 2019 level.

Speaker 3

As demand continues to recover, We expect to reduce the spread to 2019 to less than 3% in the second quarter, traditionally one of our most profitable quarters of the year. Our recent performance and outlook fortifies our view through this pandemic that based on rate integrity and cost controls, Our EBITDA will recover back to 2019 levels before RevPAR fully recovers. And our portfolio is clearly seeing this dynamic play out. A few closing remarks on our balance sheet and outlook for the Q2. Sunil clearly presented the strategic rationale for our transaction and our ability to pay down between $460,000,000 $480,000,000 of net debt is also transformative for our balance sheet and company.

Speaker 3

We are in close contact with our bank group and anticipate refinancing our revolving credit facility and paying down the majority of our unsecured notes with the proceeds from the asset sales we announced earlier today. The debt paydowns are forecasted to reduce our leverage by approximately 2 turns and pay downs of our unsecured notes will also significantly reduce our interest expense and improve our credit and covenant metrics. The detailed financial rationale and impact on our leverage metrics are clearly laid out in the supplemental presentation that is now on our website. Transitioning to Q2 outlook. Month to date in April, we've seen continued top line growth across our portfolio.

Speaker 3

RevPAR is expected to increase nearly 20% from March. Although South Florida will once again produce the largest share of revenue and while our resort portfolios continue their unprecedented run, it is our urban markets that are outperforming our forecast at the highest level and we're forecasting a continuation and further acceleration of these trends during the Q2. The largest out performances from prior months have been Manhattan, Washington, D. C. And Boston.

Speaker 3

Each is projected to surpass 70 percent occupancy and outpaced March RevPAR by 30% to 40%. With our sights set on the recovery, which has already begun to actualize Across the entire portfolio and today's transformative transaction, we remain laser focused on operational performance of the portfolio and pursuing other accretive opportunities that become available throughout the cycle to highlight the value of this portfolio. So with that, that concludes my portion of the call. And we're happy to address any questions that you may have. Operator?

Operator

Thank you. Our first question comes from Dore Kesten. Please go ahead, Dore.

Speaker 4

Thanks. Good morning and congratulations. On your Q4 call, you talked about marketing to Pan Pacific, but otherwise being opportunistic on sales. Can you detail what happened between then and today's sale announcement.

Speaker 2

Sure. Dory, We continue to look as we always do. We are very active in the Acquisitions and Dispositions market. And we are in order to create more financial flexibility, We have been looking at asset sales now for several years. You'll remember last year we sold 6 hotels early part of the year.

Speaker 2

And this towards the end of I guess in the Q4 call, we spoke about Pan Pacific in Seattle. We spoke about our joint venture in South Boston. We've spoken about New York Hotels in the past as well. But we felt like at this time we were getting very strong pricing on the portfolio that we announced today. And to be able to achieve a transaction at close to our Net asset value for those assets drove the transaction today.

Speaker 2

It's not to say that there won't be additional asset sales including ones that we've talked about in the past. But right now we felt like this was the best opportunity for the company to reduce some debt.

Speaker 4

Okay. And you mentioned on the call that you're close to recasting a credit facility. And I was just wondering what changes should we expect beyond pushing out your maturity?

Speaker 3

I think that Dorey, this is Ashish. So right now, we are we've had a lot of conversations with the bank group. Clearly, it will be pushing out the maturity. Number 1, we're looking for different ways to structure covenants as we still continue through this recovery period. But even our current covenant the way our current covenant is set, we are anticipating being out of our waiver period clearing covenants by the end of the Q2.

Speaker 3

So I think it'll be just some more flexibility on covenants and extension of maturities.

Speaker 4

Okay. Thank you.

Operator

Our next question comes from Tyler Batory from Oppenheimer. Please go ahead, Tyler.

Speaker 5

Good morning. Thanks for taking my question. First one for me on the asset sales side of things, certainly a lot of positives, But I think one of the things that stands out is going to be the increased exposure to New York City. So can you just talk a little bit about Your comfort level with that exposure, your conviction in terms of New York City and Manhattan in terms of the recovery and maybe just remind us the differentiation or competitive advantage you think those assets have in the market?

Speaker 2

Sure, Tyler. We continue to believe in the long term prospects for the New York City lodging market recovery and see a tremendous amount of unlocked value and potential upside in those assets. We're starting to see the performance on the ground every week, really accelerate. But I would say that we haven't seen the transactions market in that in New York get as mature or at least as stabilized some of the other markets. We've mentioned in prior calls that New York City market benefits from a lot of international buyers and a lot of Capital that's currently just not active.

Speaker 2

But so it's a combination of both things. But New York for us, we expect to provide among the highest growth in the of all markets in the country really for the next several years. So we are pretty bullish on New York. It's not to say that we won't in the future sell hotels in New York, but we felt like for the coming quarters the ramp up we expect on performance is so strong that today we are very happy to be Long New York.

Speaker 5

Okay, great. And then just as a follow-up, I think one of The key focus is from a lot of investors right now is just the sustainability of the pricing power and clearly in Q1 you demonstrated that The very strong rate growth, the commentary that we're hearing sounds very optimistic in terms of April and beyond. But just talk a little bit more, if you could, about Your perspective on how strong rates or how long we can remain at these strong ADR levels as corporate travel comes back and you think that could be a net positive for rate growth and As we kind of move through into the summer, are you seeing any indication perhaps that some of the strength on The leisure side of things might be slowing down a little bit.

Speaker 3

Yes, Tyler, as far as margins go, the way we're looking at it is we're pretty much fully staffed up at our resorts at this time, Which are achieving peak occupancies and very high rates. So there we do believe that The operational model has changed there. And with the rate integrity that we have at these resorts, we think that those margins are sustainable. At the urban properties, we are still about 2,000 basis points below on occupancy than we were in 2019. Most of our fixed labor, the general managers, the front desk managers and others are back on the property.

Speaker 3

And really everything that we have to add now is going to be variable labor and housekeeping, maybe more bellman, front desk attended. That gets solved easily by occupancies coming back. As you know, our portfolio generally runs in these urban markets anywhere from mid-80s to 90s in occupancy and we're still in the 70s, which is strong, but long way to go. So with additional occupancy, we believe that our pricing, which is now getting to be anywhere from 3% to 5% off on 2019 in these urban markets is going to exceed urban market RevPAR ADRs from 2019, probably in Q2 or Q3, which is really going to drive margins even further. So we feel that the margins are very sustainable.

Speaker 3

The margin growth is sustainable going forward.

Speaker 5

Okay, great. That's all for me. Appreciate the detail. Thank you.

Operator

Our next question comes from David Katz from Jefferies. Please go ahead, David. Could you kindly check-in not muted by any chance, David? Apologies.

Speaker 6

Thanks for taking my questions. I wanted to just go back and focus, if I may, on the New York remaining portion of the portfolio and just talk about how you see that evolving, call it 1, 2 years. 1 from, Is it a do you feel like it's well capitalized and or what capital you'll be spending there? And second, we continue To hear more and more and personally we expect a midweek business travel recovery that's really in the very early stages. But I'd love your thoughts on sort of how you see that portion of the remaining portfolio evolving.

Speaker 2

Sure, David. Just on your second comment, and Ash just touched on it as well, but just that is what is so Impressive and remarkable today is the midweek performance in New York as well as in several of our other urban markets. We're getting to the point now that our ADRs in April, midweek are looking like the weekend was. You remember weekends were really driving performance. Leisure was driving performance in these major markets the last 3, 4 months, but we've clearly seen that turn.

Speaker 2

And as you get occupancy up from this kind of 50%, 60% level midweek to 70%, 80% across the next several quarters, ADR will likely continue to grow, because we're getting this without conventions, without compression. So our expectation is that urban markets and particularly cities like New York, are going to be able to Drive very meaningful RevPAR growth through the back half of this year. Our portfolio in New York, With that as a backdrop, it is a good time to own properties in New York. Performance is accelerating and we're hitting and Inflection. As you know, our New York portfolio even through this pandemic was Relatively resilient.

Speaker 2

Our portfolio of purpose built hotels in New York, nonunion hotels that you can operate lean and drive not only great financial returns, but very high levels of guest satisfaction. Our hotels in New York are in New York City are a mix of select service and luxury and lifestyle hotels. They are clustered for Advantage and we are able to drive real advantage in this market with our nearly 2 decades of experience buying, building, Developing, Managing Hotels in New York. As we look forward, the hotels that require additional capital in the next couple of years to drive portfolio level EBITDA growth rates. There is 2 to 3 hotels that would fit that criteria for looking at recycling assets.

Speaker 2

So I think as we get towards the back half of the year, depending on where the market is, where the pricing is, how many kind of international capital has come back to the marketplace. We could absolutely sell 2 to 4 additional hotels in New York in the future. But today, it's a great time to own properties in New York. Our portfolio in New York We've shown great resiliency and today is showing really high growth.

Speaker 6

Got it. And just one quick follow-up. Portfolio wide, Is there any sort of deferred CapEx that we should contemplate that may need to be caught up this year or next year?

Speaker 3

David, we don't have any significant CapEx on the horizon for this year. For next year, we have 3 to 5 projects, Which we usually do, the more in the 7 year refresh kind of carpets, wall vinyl, things like that and a couple of what we consider more extensive renovations. But I think that 2023 will be more back to our normal levels of CapEx where the last few years we have restricted our CapEx primarily to life safety and preventative maintenance. But we've spent so much money prior to 2020 that we don't feel like anything has really been deferred or that the hotels in any way are starving of CapEx.

Speaker 6

Great. Sounds great. Thanks very much.

Operator

Our next question comes from Michael Bellisario from Baird. Please go ahead, Michael. Your line is now open.

Speaker 7

Thanks. Good morning, everyone. Just first fundamental question Could you talk about what you saw on the expense side, sort of a follow-up to 2 questions ago, in the Q1, where the savings were realized and kind of what is left if anything to take out on the fixed or variable side? Or is it really to your point, Ashish is going to be The variable labor coming back as occupancy comes back?

Speaker 3

Yes. Michael, at this point, it's really the variable component Because we ran about 60% occupancy in the portfolio Q1, but the resorts were well into the 80 plus percent range. So almost into the 80% range. So there's really not much else that We need to come back at those properties. I mean, getting people and getting variable labor still remains a challenge, no doubt about that.

Speaker 3

And that will be a challenge through the remainder of the year. But we aren't seeing the type of wage pressures or the wage growth that we've seen over the last couple of years and we are seeing more People applying for positions and we are seeing more people returning to the workforce. So that's on the positive side. In the urban market, as I mentioned, our occupancies were still low in Q1. We continue to see large increases in occupancy post kind of mid February coming into March.

Speaker 3

We are restaffing the hotels, but Some additional expense on breakfast, bar and amenities at some of the select service assets. We don't plan on changing housekeeping protocols for the remainder of this year at least. So from our standpoint, it's really going to be as occupancies continue to go up, We're just going to need to bring back more people to service the rooms.

Speaker 7

Got it. And then do these pending asset sales change the outlook for how you think about other expenses, property taxes, utilities, insurance, things like that, anything material from the sale going to affect sort of the growth rate and the ramp up on a pro form a basis?

Speaker 3

Not so much, no. We're seeing we did see a lot of property tax reductions, which are based on assessments and operating results over the last few years. So that should not change. I think insurance has now come to a point where It certainly has stabilized. We're getting, what I would say, firmer quotes as we look to Go back to the market and renew our insurance property and casualty this summer.

Speaker 3

So I think that there'll still be growth insurance Events due to hurricanes, wildfires and other kind of catastrophic events that continue to hit markets, but it's not going to be at the same levels that we've seen over the last 3 to 5 years.

Speaker 7

Got it. That's helpful. And then clarification

Speaker 6

on the

Speaker 7

use of proceeds. I'm not sure I heard it correctly. You're going to pay off the line of credit, the 2 term loans and then Where do the Goldman nodes stand in the use of proceeds?

Speaker 3

Sure. Michael, we are working through all of that right now. Our desire is to pay off all of the Goldman nodes. This will be part and parcel of the negotiation in kind of reworking our corporate credit facility. But We would anticipate at a minimum like at least a majority of the Goldman notes will be paid down with these proceeds.

Speaker 3

The other sort of potential uses of the capitals we'll have to see at year end how we because there is a big capital gain on this transaction. We do have some net operating losses that we can offset those, but we may be in a position to potentially pay a special dividend.

Speaker 7

Got it. And then just last one for me. It's probably early, but as you think about next steps. Obviously, there's you've hinted at maybe a second wave of dispositions at some point later this year or early next year. Where do you see yourself going on the capital allocation front maybe 6, 12 months from now?

Speaker 7

Does this put you in position to start looking at acquisitions or is that still further down the road after the second wave of dispositions might be completed?

Speaker 2

Mike, This is Neil. We're going to continue to try to close the gap with where we're trading versus NAV. And If that means asset sales at different points across this year or next year, That will we will execute on that. If we see very attractive acquisition opportunities That would also drive value for the company, then we would definitely look at that as well. But right now, we're very focused on driving EBITDA from our core portfolio, and staying very close to the marketplace to know when we can transact on assets at private market values and drive growth from our existing assets, We still have a great leg of recovery ahead.

Speaker 2

This is Mike. The world is just very volatile. So we're increasing our financial flexibility so that we have the ability to grow our portfolio, as well as continue to take advantage of opportunities to close the gap.

Speaker 7

Understood. Thank you.

Operator

Our next question comes from Bill Crow from Raymond James. Bill, please go ahead.

Speaker 8

Hey, good morning guys. Obviously, we've all seen these debt bullets coming at us. I'm just wondering Two quick questions and then some details. But what other paths did you go down over the last 6 months to prepare for this liquidity need. And then Was the portfolio sold unencumbered by management contracts?

Speaker 3

Yes. Bill, let me start with the financing on this. So we did go down looking at the CMBS market and refinancing all of our debt, utilizing those markets. We looked at another few kind of refi options. This was more of an inbound inquiry that led to a very quick transaction.

Speaker 3

That in addition to sort of just volatility in those markets made it the clear choice that we want to pursue this transaction. So we have been working on this. And in addition to just working with our bank group over the last Those conversations have been very fruitful. So we continue to look at various options. We felt like this was the best one to pursue.

Speaker 8

Ashish, were there other portfolios that were shopped alongside the urban non core?

Speaker 2

We've been having active dialogue the last 6 to 8 months on lots of hotels built. Like we spent a lot of time Some New York hotels, the New York portfolios, we didn't see pricing where we felt it made sense yet. We continue to spend time on our South Boston joint venture and hope we'll be able to Execute on that at some point across this year. And we continue to look at some single assets even. But I think this started as kind of an inbound around Aelis.

Speaker 2

And then across the last 2 to 3 months, There was a pretty it was a quiet but a pretty thorough process with all of the Major Players in the space, that could execute on the transaction in this kind of environment. And The hotels are sold unencumbered. That's one of the great values of our portfolio. And our Board and all of us here on the management team are just very committed to acting in making decisions and executing in a way to close this gap that we've been talking about for several years. And There is a big difference between private market values and where public market lodging is trading or at least our portfolio is trading.

Speaker 2

And we'll continue to

Speaker 8

Congratulations on the pricing of the deal for sure. If I could just ask two details real quick. Are there any pre penalty or prepayment penalties that you're going to have to deal with as you put these proceeds to work. And then number 2, is there an opportunity to reduce G and A? I mean, you cut the size of the company dramatically over the last 3 years.

Speaker 8

I think you're still between cash G and A and restricted stock or stock incentives. You're still up in that same range you were in 2019. I'm just that really takes away kind of any flow through to AFFO if you shrink the company without shrinking G and A.

Speaker 3

Let me take the first part of that, Bill. So there are no prepayment penalties on any of the debt, that we had on portfolio level. We do anticipate the 1 CMBS loan would be assumed by the buyer. So nothing there and no repayment penalties of any kind or cost of any kind on the management terminations either, so from that side of it.

Speaker 2

And Bill on the G and A side, yes, in the short term, the pro form a we will have moderately increased G and A as a percentage of EV as our existing G and A will stay with this remaining business. But over time, we'll be able to right size G and A either through the growth of our enterprise value and where we're trading, as well as through, other ways to share costs with And just to optimize the business, I think you'll remember we cut about 20% to 25% of our G and A across the pandemic. So I'm not sure if it's at the same level as 2019. It doesn't seem to that wouldn't make sense. So I think we're I think we will be at very similar levels, Frankly, but it does depend on where our enterprise value is marked.

Speaker 2

But we are sensitive to it and focused on it, but We don't think it's going to be, an outlier.

Speaker 9

All right.

Speaker 3

Thanks for the time.

Operator

Our next question comes from Ali Klein from Hersha. Please go ahead, Ali.

Speaker 10

Maybe going back to the transaction and the process. Can you talk about how the value of those properties may have changed over the last 3 or 6 months or so?

Speaker 2

On one hand, as cash flow has increased pretty significantly across the last 6 months, Their values have definitely increased across the last year, because we've moved from markets that had Very little cash flow to now actually producing on a forward basis, some very attractive cash flow. So that's helped pricing. I think since late last year, the debt markets have been much more volatile. And post Russia invasion and just some of the inflation prints and then the interest rate discussion just taking center, kind of peaking kind of fear around interest rates has definitely widened the credit market. So Credit.

Speaker 2

That part of it, there's just less of it around and it's a little more expensive today, except for folks that have the flexibility to transact and then put debt on in the future, which there are many Large asset managers that can do that these days. So it's kind of mixed, but net net definitely Significantly higher than 6 months ago, just because there's we're just in a different place in the recovery profile. Is that does that answer your question?

Speaker 10

Yes. I guess maybe as a follow-up to that, Has the buyer pool thinned in any way given what we've seen going out with rates and inflation more broadly?

Speaker 2

I don't think so really. I mean it's I mean I think we'll see it's going to slow the number of transactions in the first and second quarter than we might have had before because it impacts pricing and debt availability. And there are fewer folks that can take down something without debt financing. But on the other hand, we've gotten to a whole different place in the recovery, where there's just many more participants and much more cash flow. So I think we've definitely gone through A tough time in the transaction market, the last 30 to 45 days or 60 days.

Speaker 2

But I think most expect transaction market to continue to accelerate as cash flow accelerates across this year.

Speaker 10

Got it. And then It seems like there's a lot of optimism on New York, but the transaction market doesn't necessarily reflect that right now and I presume that's part of the reason that for the sales of the hotels outside of New York City. So as far as getting valuations back to pre COVID level. Do you think it's just the recovery playing out and proving out? Or does something else need to change to really get those valuations back to where you want them to be.

Speaker 2

No, I do think it's just simply the recovery playing out really. The macro environment, the volatility and debt market and stuff definitely makes it a little bit choppier, but the micro fundamentals of the market are better than they've ever been or better than they've been in the last 3 to 4 years. There's much less supply. The supply pipeline is much lower, and demand is growing, pretty significantly. So we would expect across the next Several quarters, to see more and more transactions in New York.

Speaker 2

And once pricing gets to a level, you're not seeing like these kind of hotels like we have, like purpose built, high quality, newly built assets trading in the marketplace because the sellers, there's Not many sellers at today's price. It's not so much about buyers. It's just where they're not meeting of minds. But you are seeing transactions on the lower quality assets, bigger aging boxes that there's real obsolescence risk where sellers are willing to take A 50% discount on value, in order to stop the bleeding. But the kinds of hotels we own in New York, They're not bleeding.

Speaker 2

And so, you're just not seeing those trade until the transaction market really gets there. And I think that's it's Probably towards the end of this year, but for sure across the next couple of years, we will we do expect that we will get, We'll get back to prior peak kind of transaction values in New York. And very likely, it will be higher by probably a significant margin. It's just from where we're seeing rate or ADR and where we're seeing the supply picture developed in New York.

Speaker 10

Got it. That's all for me. Thanks.

Operator

Our next question is from Chris Woronka from Deutsche Bank. Please go ahead, Chris. Your line is now open.

Speaker 11

Yes. Hey, good morning, guys. My question is kind of a follow-up to Bill's question, which is With the asset sales you've announced today, totally get strategic rationale, the pricing makes sense. Obviously, Yes. One of the things it does, it takes some EBITDA away from your base.

Speaker 11

And you've talked about potentially selling more assets at some point in the future. So the question is kind of is there or how confident are you that you can kind of refill the EBITDA bucket to kind of at some point you're getting that closing that gap to perceived NAV is somewhat about maybe market cap and trading liquidity and EBITDA levels and such. So how do you think you can possibly solve that puzzle?

Speaker 2

Chris, It's a it's definitely a good question, but it's something that we just don't feel like we need to solve that puzzle just yet. We just take one step at a time. We're trying to close the gap with NAV. So if we can sell assets Close TO NAV and their assets that strategically Makes sense. And when I say strategically in terms of their growth rate profile relative to the rest of our portfolio, the capital required to achieve their business plans across several years and just supply demand fundamentals in those markets.

Speaker 2

It makes sense. Just we'll see where acquisition opportunities look like and we'll continue to look at disposition opportunities. We're just committed to driving shareholder value here. And with this transaction, we'll have the flexibility and the time to make the right decisions, we believe.

Speaker 11

Okay, fair enough. And then just on the kind of the employee side, are you guys seeing as staff back up and particularly in the urban markets. Are you seeing any increased turnover of folks that may have come in and maybe getting bid away as other your some of your competing hotels are also looking to staff up.

Speaker 3

Hey, Chris. So I think we are seeing a little more stabilization actually. Most of the hotels that we compete with are open now. I mean it is still a very, very competitive market for employees and we continue to You spend a lot of time and resources in recruiting people into our hotel. So I guess everybody's Effectively playing the same game right now, but we are actually seeing less turnover and a longer duration of employee retention at this time.

Speaker 11

Okay. Very good. Well, thanks guys.

Speaker 2

Okay. Thanks, Chris.

Operator

Our next question is from Anthony Powell from Barclays. Please go ahead, Anthony.

Speaker 9

Hi, good morning. You've talked about how you're seeing business travel return across most of the urban markets, but Most of your hotels are selling are business travel weighted. So I'm curious what do you think your pro form a customer mix now is Business versus Leisure relative to where it was pre pandemic and where you want to take that going forward?

Speaker 2

I think pre pandemic, we used to describe it as sixty-forty between business transient and leisure. During the pandemic, obviously, leisure was what Working, so it was probably 80% of our income during the during 2021. As we go into 2022, we are selling our urban select non New York Hotels, which are highly business transient focused. But we continue to have and continue to believe in the long term strength of these urban gateway markets. And in Boston, we'll have the Envoy Hotel and the Boxer Really expecting to drive really significant performance on the back of both business and leisure.

Speaker 2

And that's what we're seeing now is Ritz Carlton Georgetown. In April, we're going to hit a whole new record on ADR. We'll probably be well above $600 on ADR. And that's with the midweek also being in that same neighborhood, which is all driven by business transient. It's just that higher priced business transient customers coming back.

Speaker 2

We do a lot of small group meetings at our luxury and lifestyle hotels in Philadelphia at the Rittenhouse Hotel or in Washington and Boston, New York. So the urban side of the business is still alive and well. I think it will net net maybe post like in 'twenty next year if we if the portfolio didn't change at all from here to there, Maybe we would be forty-sixty business transient, maybe 35% business transient and 65. It really hard to give you a number just yet. It really depends on how this recovery plays out in the coming months ahead.

Speaker 2

But during the week, our luxury and lifestyle hotels in urban markets Our business oriented traveler and that's what's coming back. And it's just during the pandemic, the business traveler wasn't The high priced customer, they weren't the price taker. It was the leisure customer. That will likely switch across the coming year. And then some of that business that we're driving in our urban markets will become a little more business oriented.

Speaker 9

Yes. So to be clear, it was sixty-forty Business Leisure pre pandemic and you think it becomes forty-sixty

Speaker 2

Instead of forty-sixty.

Speaker 9

Forty-sixty Business Leisure in 2023?

Speaker 2

Business Leisure. Yes. Yes. I'd like to be more leisure. I'd like to quote that just because they I don't Like if you could take the Rich Coconut Grove, let's take that as an example.

Speaker 2

Like right now, we're doing we had been doing a lot of leisure, but it is a Business Hotel in a lot of ways. And so across the coming year, that hotel will become much more business driven. And so it's going to reduce a little bit of Leisure segment even in a market like South Florida. So that's why it's we're a little bit

Speaker 9

Right. Okay.

Speaker 2

Hesitant to give an exact number, but I would say like 35% to 40% business transient in the future versus pre pandemic 60%. Do you think that I'm asking

Speaker 9

the question. Go ahead. No, I

Speaker 2

was just asking J and Ash if that's how they think about it too. Like it's

Speaker 12

Yes, I mean, I think it's really kind of driven by the fact that we still have very significant urban exposure. Yes. And the urban exposure is going to benefit from Travel Business Transit Recovery. I mean, where to plot it out across the next couple of years through stabilization is difficult. There's going to be some there'll be some displacement happening, but the good news is that the rate is sort of consistent across leisure and BT.

Speaker 12

So As that happens, we don't expect there to be rate disruption, but it's hard to know exactly where it will stabilize.

Speaker 2

I think Neil's point is

Speaker 3

Probably by the time we

Speaker 8

get to 23, we're going

Speaker 12

to see more BTs, but it's not going to be where we're going to stabilize longer term.

Speaker 9

Right. I'm asking because every lodging REIT says that they see BT coming back, but almost none is seeing to increase their BT mix. So I'm curious as you refill your portfolio over the long run, are you going to be looking at BT oriented hotels or more leisure like everyone else has done?

Speaker 2

It's hard to say. It really depends on pricing. But we are not We don't believe that you need to be 100% resorts in order to drive great Hotel Returns. And very likely, the opportunity set and our capabilities will likely lead us to more urban opportunities, but you just never know. I'm not sure.

Speaker 2

It depends on pricing and we're very disciplined and about pricing and value creation and we're not as We've never been follow the herd kind of folks. We're really looking at what drives value and where we can create value. Got

Speaker 9

it. Thank you.

Operator

It appears there's no further questions. I'm going to hand it back to the management team for final remarks.

Speaker 2

Yes. Well, thank you, everyone. If with no more questions, we'll just say thanks again and let you all know that we are all available for questions throughout the day today and anytime obviously, but we're all standing by for any follow ups that anyone has. Thank you very much for your time.

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Earnings Conference Call
Hersha Hospitality Trust Q1 2022
00:00 / 00:00