Playa Hotels & Resorts Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 4, 2023

There are 8 speakers on the call.

Operator

Good morning, and welcome to the Playa Hotels and Resorts Second Quarter 2023 Earnings Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Ryan Heimel.

Operator

Please go ahead.

Speaker 1

Thank you very much, Jason. Good morning, everyone, and welcome again to Playa Hotels and Resorts' Q2 2023 earnings conference call. Before we begin, I'd like to remind participants that many of our comments today will be considered forward looking statements and are subject to numerous risks and uncertainties that may cause the company's actual results Forward looking statements made today are effective only as of today, and the company undertakes no obligation to update forward looking statements. For a discussion of some of the factors that could cause our actual results to differ, please review the Risk Factors section of our quarterly report on Form 10 Q, which we filed with the SEC Last night, we've updated our Investor Relations website at investors. Flyaresorts.com with the company's recent releases.

Speaker 1

In addition, reconciliations to GAAP of the non GAAP financial measures we will discuss on this call were included in yesterday's press release. On today's call, Bruce Wodinsky, Playa's Chairman and Chief Executive Officer, will provide comments on the Q2 demand trends and key operational highlights. I will then address our Q2 results and our outlook. Bruce will wrap up the call with some concluding remarks before we turn it over to Q and A. With that, I'll turn the call over to Bruce.

Speaker 2

Great. Thanks, Ryan. Good morning, everyone, and thank you for joining us. Our second quarter results continue to build on the momentum established in 2022 With both ADR and occupancy growing year over year in our core legacy portfolio and owned resort EBITDA margin expansion despite a significant FX headwind. Playa's owned resort EBITDA of $83,100,000 in the 2nd quarter was the best 2nd quarter performance in the company's history, driven by the continued recovery in our Jamaica segment and an 18.2% year over year RevPAR increase Our core legacy portfolio.

Speaker 2

The quarter was not without challenges, however, as we continue to experience year over year pressure from both of the 2 Jewel In the Dominican Republic that recently transitioned to Playa Management and foreign currency exchange headwinds in Mexico. Additionally, our operations teams executed at the resort level, delivering 100 basis points of owned resort EBITDA margin expansion on a reported basis, Despite an approximate 260 basis point FX drag from the appreciation of the Mexican peso this quarter, The core legacy portfolio resort margins improved 280 basis points year over year, inclusive of a negative 270 basis points foreign currency drag. The margin performance was particularly impressive given the moderating pace of year over year RevPAR growth. As a reminder, Our expectation was that the Q1 would represent the highest year over year ADR growth for 2023 as we lapped the impact of Omicron last year, and that growth would normalize as we enter the second half of twenty twenty three. Finally, I would also like to note that during the second quarter, We recognized a $4,300,000 benefit from business interruption insurance in the Dominican Republic related to Hurricane Fiona, which occurred in the second half of twenty twenty two.

Speaker 2

Although we expect more business interruption insurance proceeds, the exact amount and timing of the proceeds is unpredictable. As I mentioned, fundamental strength during the quarter was led by our Jamaican segment, as this market is a little behind on the recovery curve compared to our other segments due to the longer lived COVID related travel restrictions being in place until April of 2022. The Q2 of 2023 Mark the highest Q2 occupancy rate and owned resort EBITDA margin we have ever achieved in Jamaica, reinforcing our belief Nothing has fundamentally changed for this market compared to the pre pandemic period when it was our best performing segment. Compared to 2019, International passenger arrivals into Montego Bay Airport had been lagging our other major destinations by approximately 15 to 20 basis points during the Q1. That gap narrowed to approximately 10 to 15 percentage points during the Q2 with June showing a significant ramp.

Speaker 2

Comparing ADRs in the segment visavis peers, we believe ADRs still have a meaningful runway of improvement ahead. In Mexico, revenue growth in this market was predominantly ADR driven, given where the country was on the recovery curve. Both of our Mexican segments were negatively impacted by the year over year change in the Mexican peso during the quarter, and we estimate both Segments would have seen improved margins year over year excluding the impact of FX. We have been actively working on efficiency opportunities to manage costs And help mitigate the significant impact of FX on our margins in Mexico, as evidenced by our Yucatan segment growing margins year over year on a currency neutral basis an ADR growth of 6%. Although the Q2 was largely as expected, we experienced some softness in close in demand for the Yucatan in June for the summer period.

Speaker 2

Demand, however, improved in July in the month for the month. Our expectation is that demand in the Yucatan will remain choppy through the fall as the transatlantic travel resurgence subsides. In the Dominican Republic, our legacy Doctor Resorts, excluding the Jewel Palm Beach and Jewel Punta Cana Resorts, grew both occupancy and ADR year over year, Yielding over 900 basis points of margin resort margin expansion year over year. Adjusting for the previously discussed business interruption insurance benefit, Resort margins for the legacy Doctor properties grew by 170 basis points year over year. Results of the 2 Jewel Resorts In the Doctor segment, we're slightly ahead of the expectations we laid out on our last earnings call, representing an approximate $7,000,000 Year over year EBITDA drag in the second quarter.

Speaker 2

We continue to expect the year over year profit drag from these resorts To improve during the second half of the year, while we continue to pursue the sale of these assets. We have been in negotiations with 2 separate buyers to sell the assets individually. And the only update I can share with you today is that one of the processes is further along than the other, but we are diligently working on both dispositions. On the booking front, demand has remained steady as a whole. In aggregate, during the Q2 of 2023, 47.2% Playa owned and managed transient revenues were booked direct, down 190 basis points year over year.

Speaker 2

The decline was driven by fewer World of Hyatt redemption bookings following a significant increase during the Q1 Ahead of a change in the conversion rate for point redemptions. We expect this to smooth out over the course of the year and believe we'll Excuse me, and believe we will be ahead of our targeted 50% booked revenue mix of transient revenue. During the Q2 of 2023, playaresorts.com accounted for approximately 10% of our total Playa owned and managed room night bookings, continuing to be a critical factor in Customer sourcing and ADR gains. Taking a look at who is traveling, roughly 39% of the Playa owned and managed room night stays In the quarter came from our direct channels. Our OTA mix has remained the most depressed channel compared to pre pandemic levels for stays.

Speaker 2

Geographically, the biggest change in our guest mix during the Q2 was our Mexican sourced guest mix, which was up nearly 500 basis points year over year. Our European sourced guest mix was down slightly year over year, but well ahead of pre pandemic levels. Our Asian sourced Guest mix improved modestly year over year, but remains the most depressed as it is only approximately 20% recover. Our visibility remains a critical factor of our success as our booking window has as our booking window was just under 3 months. Once again, I would like to thank all of our Playa associates who have continued to deliver world class service in the face of unexpected challenges and rising operating costs.

Speaker 2

Their unwavering passion and dedication to service from the heart is what truly sets Playa apart. Finally, on the capital allocation front, We purchased approximately $34,000,000 worth of Playa stock during the Q2 and an additional $24,000,000 in July, bringing our total re Purchases since resuming our program in September 2022 to approximately $145,000,000 or well over 11.5 percent of the shares outstanding. We continue to believe that our significant free cash flow generation is underappreciated given the modest amount of ROI driven CapEx expected in the near term And our healthy business fundamentals. We believe that our stock offers a tremendous value opportunity and share repurchases are a phenomenal use of capital from our free cash flow to boost total shareholder returns over time. With that, I will turn the call back over to Ryan to discuss the balance sheet and our outlook.

Speaker 1

Thanks, Bruce. Before I begin my review of the quarter, I'd like to remind everyone that beginning with the Q1 of 2023, we elected to reclassify on property room upgrade revenues from non package revenue to package revenue to be consistent with industry trends. We've recapped the prior periods to conform with our current period presentation And a reconciliation of the changes made to the prior reporting period for 2021 2022 can be found on our investor deck on Slide 5. Our Q2 results were in line with our expectations as a result of continued ADR growth and easing pressure from energy costs leading to resort margin expansion of 100 basis points year over year, which again includes a 260 basis point headwind from foreign exchange, 180 basis point headwind from the 2 Jewel Resorts in the Jamaican Republic and 180 basis point tailwind from the business interruption proceeds. While the quarter fundamentally was generally in line with our expectations, foreign currency related headwinds in the quarter were approximately $1,000,000 higher than expectations outlined on our last earnings call, and we also had a one time pension related catch

Speaker 2

up in

Speaker 1

Mexico. Finally, we experienced a safety related Travel warning for Jamaica during the quarter, which temporarily impacted bookings and wait on June results. These types of warnings are not unusual nor unheard of in Jamaica. However, this one picked up more media coverage than we typically see and led to some disruption in bookings and cancellations, particularly in the group segment. It was, however, very short lived We are not seeing any lingering effects into the fall.

Speaker 1

ADR strength is broad based with all segments reporting year over year ADR growth, excluding the Jewel Resorts and the Doctor. On the cost front, as I mentioned on previous earnings calls, we began to see stabilization in food and beverage and utilities costs on a per unit basis in The middle of 2022 and we're hopeful that the inflationary pressures from these two areas will begin to ease as we moved into 2023 And lap the surge that occurred around the start of 2022. We began to see signs of improvement during the Q4 and that carried over into the first half of twenty twenty three. Although it's nice to see some cost relief, these expenses can be volatile quarter to quarter. Again, as Bruce mentioned, we're undertaking efforts to streamline and improve our procurement process across the entire portfolio to take advantage of our size and scale.

Speaker 1

These efforts are just beginning to bear fruit from the work undertaken thus far in 2020 And we expect the benefits to accelerate as the company moves into 2024 and beyond as our cost savings per purchase category are averaging mid single digit to high single digit improvements per category thus far. At the segment level, Jamaica led the way in year over year ADR Occupancy growth and margin improvement despite the temporary impact of the travel warning I previously mentioned. The segment Experienced significant year over year growth in group room night mix, helping yield ADR and closing the gap versus other segments ADR improvement versus 2019. As a reminder, Jamaica got off to a slower start in 2022 due to the Omicron variant having a disproportionate impact on the segment given its COVID testing requirements at that time. The ongoing recovery in addition to the significant investment being made to improve the Montego Bay Airport, which is expected to be completed in the near future, bode well for the Jamaican segment for the second half of twenty twenty three and beyond.

Speaker 1

Forecasted flight seats into Montego Bay are expected to grow Over 10% year over year in the second half of twenty twenty three, leading all of our major destinations. On the margin front, Jamaica once again benefited from better than expected food and beverage and utilities expense. And please keep in mind when comparing results in Jamaica versus other segments that Jamaica generally has higher Operating costs in our other segments and we typically generate higher ADRs as well. Looking at our other destinations, Yucatan Peninsula continued to deliver strong results With year over year occupancy improving and reported ADR growth of 6.4%. Reported owned resort EBITDA margins were down 4 60 basis points year over year, primarily as a result of the 5 70 basis point negative impact from foreign exchange.

Speaker 1

Food and beverage and utilities expenses were favorable on a year over year On a currency neutral basis, while higher government policy driven labor costs negatively impacted margins. The timing of sales and marketing spend also had a modest favorable impact All told, as Bruce mentioned, we're pleased with the operations team's ability to expand margins on a currency neutral basis as RevPAR growth normalizes. The Pacific Coast had another fantastic quarter with year over year ADR improvement of over 18%, leading to robust margin performance as food and beverage expenses were also favorable year over year in this Similar to the Yucatan, segment margins were negatively impacted by approximately 4.90 basis points as a result of the sharp fluctuation in the Mexican peso and would have been up year over year excluding the foreign exchange impact. In the Dominican Republic, our legacy resorts, the Hyatt Cap Cana The Hilton Al Ramana grew 18.5% year over year in their ADRs with occupancy of nearly 74%, which is also up year over year. MICE business at these resorts increased significantly compared to the Q2 of 2022, helping yield higher ADRs and driving non packaged revenue per sold room growth.

Speaker 1

The fundamental improvement year over year yet led resort margins at these resorts improving significantly even after adjusting for business interruption proceeds As food and beverage and utilities expense pressure continue to ease. The segment performance was dragged down by the 2 JUUL results resorts we recently assumed management of, Though their performance was slightly ahead of our expectations, we continue to expect the performance of the 2 Jewel Resorts to improve sequentially year over year, while we execute the sale process at the resorts. Now turning to our MICE Group business. Our 2023 net MICE Group business on the books is $59,000,000 versus $55,000,000 at the time of our last earnings call and is well ahead of our final full year 2019 MICE revenue of 32,000,000 Looking ahead to 2024, we currently have approximately $48,000,000 of MICE revenue on the books, well ahead of where we were at the same time last year and Setting us up favorably for the first half of twenty twenty four and the high season. From a pacing perspective, this base of MICE business Combined with our leisure transient bookings has our first half twenty twenty four revenue pacing up over 20% with both ADR and occupancy contributing to that.

Speaker 1

This gives us a sense of optimism as we move through the summer period and look ahead to the high season. Finally, turning to the balance sheet. We finished the quarter with a total cash balance of approximately $269,000,000 and total outstanding interest bearing debt $1,090,000,000 We currently have no outstanding borrowings on our $225,000,000 revolving credit facility and our net leverage on a trailing basis stands at 3 times. We anticipate our cash CapEx spend for full year 2023 to be approximately $65,000,000 to 75,000,000 for the year with roughly $45,000,000 to $50,000,000 for maintenance and other critical CapEx needs as the remainder is designated for ROI oriented projects. Also effective April 15, we entered into 2 interest rate swaps to mitigate floating rate risk in our new term loan due 2029.

Speaker 1

We entered into a 2 3 year contract, both of which have a fixed notional amount of $275,000,000 And carry fixed SOFR rates of 4.05% and 3.71% respectively. On the capital allocation front, as Bruce mentioned, We repurchased an additional $34,000,000 of stock during the Q2 and an additional $24,000,000 in July. Since we began repurchasing Shares last September, we repurchased 19.5 shares 1,000,000 shares or approximately 11.5% of the shares outstanding. We still have approximately $110,000,000 remaining on our existing repurchase authorization. With our leverage ratio is well below 4 times, free cash flow generation of the business and the attractive valuation of our stock, we continue to believe repurchasing shares is a very compelling use of capital and intend to use our discretionary cash to repurchase shares going forward depending on market conditions.

Speaker 1

We will also continue to invest in our business to deliver value to our guests and shareholders, The bar is high for new projects on a risk adjusted basis given the valuation of our stock. Now turning our attention to our 2023 outlook. Relative to the expectations set at the beginning of the year, our RevPAR growth outlook has largely been as expected with ADRs improving versus initial expectations, Occupancy is slightly lower, better than expected performance in our core and legacy portfolio and fundamentals coming in worse at the 2 Jewel Resorts in the Dominican. As we said in our release, we now expect full year adjusted EBITDA of $260,000,000 to 275,000,000 Again, inclusive of approximately $26,000,000 negative impact from the appreciation of the Mexican peso, $15,000,000 of which is expected to hit in the second half of twenty twenty three. This is approximately $5,000,000 to $6,000,000 higher impact than at the time of our last call.

Speaker 1

Our fundamental outlook has remained steady for most of the portfolio with the exception of the aforementioned summertime choppiness in demand in the Yucatan And construction disruption impacting the Pacific segment. At the midpoint, our full year guidance represents approximately 10% year over year growth in adjusted EBITDA on a but after adjusting for the hurricane related expenses and business interruption in 20222023 and foreign currency impacts, The midpoint represents adjusted EBITDA growth of approximately 15% year over year. For the Q3, we expect Reported occupancy to be approximately 70%. We expect Q3 reported ADR to grow high single digits on a year over year basis And owned resort EBITDA margins to decline year over year given the year over year EBITDA drag in the Doctor from the 2 Jewel Resorts and continuing FX headwinds in Mexico. Excluding the impact of foreign exchange, we expect owned resort EBITDA margins to improve year over year.

Speaker 1

Putting it all together, we expect Q3 owned resort EBITDA of approximately $50,000,000 to 54,000,000 Supply collection and management fee income of $2,000,000 to $2,500,000 corporate expense of $14,500,000 to $15,500,000 thus leading to adjusted EBITDA of $36,000,000 to $40,000,000 Keep in mind that these Q3 estimates include approximately $8,000,000 year over year impact from foreign exchange headwinds We're approximately $2,500,000 worse than this time of our last call. Given our booking window, we're currently 87% booked for the Q3. For the Q4 of 2023, we expect reported occupancy to be in the low to mid-70s and low single digit to mid single digit year over year ADR growth on a reported basis. And we again expect owned resort EBITDA margins to be down, but up year over year excluding the impacts of foreign exchange in Mexico. We hope that framework helps guide you as you fine tune your models and gives you further insight to what we're seeing and expecting.

Speaker 1

With that, I'll turn it back over to Bruce.

Speaker 2

Great. Thanks, Ryan. With the increasing uncertainty in the macro backdrop, we are diligently focused on the areas within our control and are carefully monitoring the landscape. We continue to believe the price certainty and amazing value provided by Playa's all inclusive resorts resonates very well with travelers even in the face of an uncertain economic Backdrop. With that, I'll open up the line for any questions.

Operator

We will now begin the question and answer session. Our first question comes from Shaun Kelley from Bank of America. Please go ahead.

Speaker 3

Hi, good morning everyone. Thank you for taking my questions. Bruce, Ryan, maybe just to start, obviously, you talked a little bit about choppiness In the Yucatan, and I think this has been a theme we've seen a little bit of seasonal normalization across a lot of different travel behavior out there. It sounds like your rates remain strong. So can you just talk a little bit more about exactly what sort of customer behavior you're seeing or kind of Calling out there, and just sort of like using your longer term experience, kind of how would you characterize this?

Speaker 3

Would you characterize it more as normalization or something a little bit more in the macro?

Speaker 1

Yes. From our perspective, we began to see a divergence between Mexico and the in the Caribbean during the Q2, which we believe is likely attributable to what we've been calling destination fatigue and I think a few others in the space have done so as well. And we believe that's the case rather than anything having to do with pricing or other issues around demand. You've heard us mention many times on the call, we've continued to see Great strength in our other segments in the Caribbean and in Jamaica. And this has really just kind of manifested itself in the summer period.

Speaker 1

Per our comments around our guide and our assumptions, we're going to assume that it continues throughout the remainder of the year. But as Bruce mentioned, we already saw some nice stabilization in July. So we're kind of preparing for choppiness, but it very well could just be a blip in time or a far more normalized A moment for that destination. If you think and you look at the Yucatan, specifically the Cancun Airport and just International arrivals, one, it's you've heard us say many times, it's the deepest and most mature market of all of our destinations. And if you look back, I think to 2013 Through 2019, international arrivals on a kind of annual CAGR basis into that market, into that airport were roughly 7%, 7.5%.

Speaker 1

And if you extend that number through 2022, that CAGR goes to only about 6%. So we're actually still below trend. But I think what essentially happened is you had a lot of people Visit Mexico in 2021 2022, is essentially the place to be. And then this year, as you've seen Europe and other destinations reopen, some of which We own assets and you saw people with more choice and chose to go other locations. So we view it more as normalization and just like the return of other choices.

Speaker 1

But We still expect it to be choppy, but we don't have any long term concerns about the destination.

Speaker 2

Yes. I mean, I echo all the comments Ryan made. And I'll tell you from my standpoint, you can see that this may be kind of a Junesummer phenomena, as Ryan mentioned, when people have other In going into the high season, I think it bodes very well for the high season. Just anecdotally, United announced that they're adding the 777 wide bodies, which they Haven't done ever in some of the markets or in a very, very long time daily flights coming from Chicago, Denver and Houston Into the Cancun market and that's a huge number of flights and just kind of indicative I think of the strength that the airlines are seeing. So if United's doing that, I would imagine the other airlines are going to be doing that.

Speaker 2

It's nothing that I think is indicative of anything kind of Longer term, I think it's more of a kind of a summer phenomenon.

Speaker 3

Thank you for that. And then, just as my follow-up, Thanks for all the color on owned and operated margins. And obviously, there's a few moving pieces here between JUUL and the FX piece. But Ryan, just overall, like how do you think about driving operating leverage from here? We are seeing, I think, for owned and operated hotels in the U.

Speaker 3

S, A bit more of a struggle to kind of leverage operating costs relative to the top line. So for Playa's model, let's kind of call it FX neutral, what kind of revenue growth do you need right now to be able to draw through and see either hold margins or see a little bit Margin leverage, again, in a normalized FX environment as we're thinking out to 2024?

Speaker 1

Yes. On a currency neutral basis, I think we want to Kind of low to mid single digit ADR growth. We kind of commented on a few times, the first kind of indications or the first Kind of sidelines you have into that were this quarter in the Yucatan with it wasn't low single digits, but it was mid single digits around 6% ADR growth and on a currency neutral basis to expand margins. Bruce and the operations teams have been acutely focused on cost and kind of restapping, giving some of the softness See that we're expecting in the back half of the year. And as I mentioned and Bruce mentioned, we've made investment in time and energy into our procurement team and have seen started to see some nice gains In small bits now, but that's why we're pretty excited about what we can expand into 2024.

Speaker 1

So right now, our expectation is that on a currency neutral basis, We can still expand margins on a low to mid single digit ADR growth.

Speaker 3

Thank you very much.

Speaker 1

Thanks, Sean.

Operator

The next question comes from Patrick Scholes from Truist. Please go ahead.

Speaker 4

Hi, good morning, Bruce, Ryan. Good morning. Bruce, you were in the previous question just briefly touching on airlift And, air pricing, we certainly heard from some other companies, I would say some mixed information or Thoughts about those who trends now and going forward. I'd like to hear your thoughts on Sort of where we are with the trends in Air Lift to your markets and also on pricing And with it sounds like pricing is going down for especially Mexico on the air, the airlines, How do you think that might impact your ability to price at your resorts on the ADR? Thank you.

Speaker 2

Yes. I mean, I think, and Ryan, you can add in here, but I think overall, what we're seeing is very positive. As you said, prices are coming During the kind of the pandemic and early post pandemic recovery, leisure travel dominated The airline business and they were able to increase rates particularly to high demand markets and we were in high demand markets. And as Jamaica has recovered, it's become, as we've highlighted, a high demand market. But overall, with airline Travel kind of diminishing somewhat and then just a change in patterns, right, with the business traveler and what they're doing and more importantly, what they're not doing And how it flows throughout the week.

Speaker 2

And so I think just like you're seeing United adding 777s, you're having The airlines adjust their schedules in ways that they never have before. And so with the weaker kind of weaker Flying midweek, Tuesday, Wednesday, Thursday, they have a lot more capacity. And we're going to be, in my opinion, a beneficiary of that excess Capacity as they try to put more customers into the market. And let's face it, this is where they're making their money. So I think that is Just going to be economically driven and we're going to benefit from that.

Speaker 2

So what you're seeing this summer With people traveling to Europe, it's amazing, I mean absolutely amazing. And so it's not that people aren't spending money and not traveling, they're Absolutely spending money and traveling. They're just traveling different places because the world literally has opened, right? It's much different than it was A year ago or 2 years ago. I mean, look at the Airbnb earnings report for the Q2, record, Record profits.

Speaker 2

And why is that? It's because the rates people are paying. So I think it bodes very well for us, both on the airline side and people's willingness to still pay rates. And just highlight, we never kind of charge the exorbitant rates as Others did. We were always modestly increasing our rates.

Speaker 2

Sure, they look great year over year, but it was not kind of You're price gouging type of rate. So I think our ability to sustain those rates and continue to increase them is very strong. And that's what you're going to see, Particularly in the high season. So for me, I'm very bullish on the high season, so late Q4 and into the Q1 of next year.

Speaker 4

Okay. Just a couple of follow-up questions. Just remind us, I'm sure it's In your earnings release, but somewhere, your average ADR right now for this Summer, how much are you above 2019 at this point?

Speaker 1

Yes. I think Yes. For the summertime, it's between like 40%, 45% on a clean underlying basis when you adjust for some of the accounting things and adjust for The fact that we have Cap Cana and others. So again, that's to Bruce's point. And I think at its peak, Which was last quarter, and in the last year at some point a couple of resorts reached as high as 50%, 60%.

Speaker 1

But again, the absolute dollar is $75 to potentially $175 more than 20 And again, don't mean to assume that that's not a lot of money, but when you include food and beverage, entertainment and a great guest experience, it's not a Not double like you've seen a lot of resorts in leisure markets in the United States.

Speaker 4

Okay. Bruce, one last question. This is very high level. This is a question I get a lot from investors and I think it's really a point of controversy in the stock. Certainly in domestic higher end domestic United States higher end resorts, obviously a lot of pressure Year over year, thoughts that last summer was a bubble.

Speaker 4

We had a hotel We report this morning their high end Napa properties, all RevPAR down 11%. I mean, do you think next summer your resorts Can it maintain flat year over year RevPAR? Again, it's It's highly speculative question, but I just want to hear your thoughts about that. Thank you.

Speaker 2

Yes. I mean, yes. I mean, the short answer to your question is yes, I think we can. And what you've seen is not really Softening, what you described about Napa, I mean, people got kind of tired of paying $4,000 for a room night In Napa Valley, they're not going to do that. We don't charge $4,000 okay?

Speaker 2

So we have a much more normalized pattern this year in the summer. And I think going into next year, you're going to see it too. And the benefit that Playa has and for those who haven't been to our And don't know our properties is we are for the most part the premier resorts within any given market that we have. And so we are able to garner That premium customer and still attract good healthy rate increases. We do very well on TripAdvisor and other social media rankings And that allows us some level of pricing power.

Speaker 2

So I think if you look at 2024, what do I think Today, at a high level, I think we're going to have a lot of pricing power and strong demand for the high season. And the High season is going to be the Q1 into the early Q2 as we look at that. And then I think you're going to see normalized patterns Throughout the summer and shoulder seasons, and that's not bad. So maybe those normalized patterns are mid single digit rate increases as opposed to the higher Higher ones that we've done in the past, but I think during the high season, we'll have more pricing power. So I don't see anything that has occurred recently for us Any kind of warning signal or red flag, as Ryan mentioned, July recovered Well, so you had a little bit of phenomena, softening phenomena in June and then you had kind of a pick back up in July.

Speaker 2

You'll probably be Kind of soft into the shoulder season into the fall, September I'm sorry, August, September, early October, which is Traditionally, our slowest time of the year anyway. So just the dollar impact isn't as significant. But I think for going into the high season into next year, There's no warning signs. And then you look at what are the headwinds that we face, right? The 3 headwinds that we've hammered through in the 2nd quarter report, The Mexican peso, seasonal weakness in the Yucatan and the drag of the Jewel Resorts and the Doctor, all three of those things can be mitigated.

Speaker 2

The Mexican peso is at levels we haven't seen for almost 10 years. I think we've talked well about the Yucatan situation. If when we sell the 2 Tour Resorts, that eliminates the drag issue. And then it provides more cash for us to continue to buy back stock. So, I'm very bullish,

Speaker 1

very, very bullish.

Speaker 4

Okay. That sounds very encouraging. I could ask a lot more questions, but I think I will stop myself Thank you.

Speaker 5

Thank you, Pat.

Operator

The next question comes from Chris Woronka from Deutsche Bank. Please go ahead.

Speaker 6

Hey, good morning, guys. Thanks for all the details so far. Maybe we could spend a second on Jamaica and Realizing that it's obviously earlier in the recovery phase, does that tail extend into 'twenty four or beyond? And do you think if we try to connect The dots between where, say, Mexico got relative to prior peak, is that going to be a similar kind of Trajectory in Jamaica in terms of percentage over prior peak is going to be better. Any thoughts on that?

Speaker 1

I think the way you said it is perfect and that's kind of our And I know you guys are probably tired of us saying it, but just as a reminder that destination was our best performing market prior to COVID. So we never had any long term concerns or impairment concerns about that destination. It was just purely around the ability to get in and out of the country When the rest of the countries were not testing right. And so we're pretty bullish on that market and learning some of the investments they're making into Montego Bay Airport, and the fact that that market, namely fairly close to the airport where most of our resorts are located, has limited to no supply over The last couple of years and even pre COVID, so it just lends itself to some nice demand and nice runway for that segment.

Speaker 2

And I'll just add to that. What Ryan said is, Jamaica draws very significantly from the Northeast Coast of the U. S. And that's a great market to draw from because those customers are willing to pay higher rates than other markets. And the other place that it draws very well from are higher end groups.

Speaker 2

So I think the fact that we have such premier properties, and As Ryan mentioned, they're very close to the airport. It's really attractive for guests and guests that are somewhat discerning and willing to pay higher rates.

Speaker 6

Okay. Understood. On the Juul sales, I think you mentioned one of them is closer than the other. What needs to happen to get both of those across the finish line? Are there any is this an issue of financing?

Speaker 6

Is it something else? Just Your level of confidence that they can actually get done this year.

Speaker 2

Sure. First of all, to address, it is not an issue of financing. Both purchasers were able to get multiple quotes from debt providers Within the country. And so I think that's a good indicator. And then it's due to the strength in the country and the fact that the banks there are willing to lend.

Speaker 2

So it's not that. Quite honestly, we were further along with the one that's now not further along because the buyer That we were very confident of for a variety of their reasons not related to financing or economics pulled out of the process. So That somewhat delayed where we are on that one, but I'm optimistic we're going to be back on pace and get that done. And the other one, as we've alluded to, is further ahead and there are no Indications of that not occurring. But just and we've said this before, Chris, and you know it, in our part of the world, things just move a little slower.

Speaker 2

So it's just kind of the way it is. And you add to that where we are in the season. And as we said, we're here we are in August going into September, October, slowest time of the year. It's always amazing to me that when you're trying to sell a resort in this time of year, people kind of slow walk it because when do they want to buy it? They want to buy it Like December 1st, when they can immediately have higher cash flow.

Speaker 2

So it's just kind of the nature of the beast, But I'm positive that we're on track to sell the 2 resorts.

Speaker 6

Okay. Great. Last question was just kind of on the I think back to Ryan's comment on the what you have for 2024 so far. I think you said $48,000,000 of MICE revenue and that your overall revenue pacing for first half is up more than 20%. So the question is what percentage of first half Revenue is on the there do you think what percentage do you think that represents or what percentage did you have in 2019 For the first half of

Speaker 2

twenty twenty at this time.

Speaker 1

Yes. It's about we're about kind of a third to 40% of our kind of forecasted occupancy already on the books. Again, a lot of that is MICE driven and that's the beauty of MICE and particularly having it in 3 key segments that create 3 key markets for us because it allows the revenue team to yield So we're cautiously optimistic about the high season at this point.

Speaker 6

Okay. Very good. Thanks guys.

Speaker 2

Thanks, Chris.

Operator

The next question comes from Chad Beynon from Macquarie. Please go ahead.

Speaker 7

Thanks for taking my question. Ryan, thanks for all the details around the guide. Wanted to just pry into one of the near term ones. So Q3, you said, I think occupancy should be around 70%. If I'm looking at Q2 portfolio occupancies, It's about 600 basis points off of pre pandemic.

Speaker 7

So 70% would kind of imply around 600 basis points, kind of between 5 600 So I guess firstly on that, you said you're at 87% booked. Why can't this get a little bit higher, particularly in Some of those higher arc markets like Yucatan and Pacific Coast. And then secondly, and we've heard this from Some of the operators, is this just how we should think about how companies like companies are going to be running occupancies a few 100 basis points below? Thanks.

Speaker 1

Yes. So I'll start with your second question first. And we've been pretty strict about the way we've thought about Rate versus occupancy since we reopened. And we've spent an immense amount of time kind of building up the profile of the assets, great consumer reports, great TripAdvisor ratings, Great, high SAP rankings, etcetera. And so we want to do everything we can to protect those rates that we've built and not have a knee jerk reaction even just some summertime softness It's our dropping rates.

Speaker 1

And so we are 100% okay with seating occupancy in favor of ADR. Obviously, that is a hotel by hotel decision tree, depending On the asset quality level and things like that, but in general across the board that's been Bruce's mind and the entire revenue and commercial team's focus. So to answer your question, yes, like many other operators, it makes more sense to run-in a lower occupancy. So and to answer your first one, it could be higher. Our expectation is that the summertime softness that we started to see, particularly in June, is more of a Q3 phenomenon in the Yucatan More than it was even so in Q2.

Speaker 1

And then again, we do have some construction disruption that we pointed out in the last call. It's not major, but it brings the Pacific Coast occupancy down, we've got some rooms out of service at the Puerto Vallarta asset. And then again, just in general, Q3, While it is certainly our lowest season and the differences in rates between Q3 and Q1 are much wider than occupancies would be, It's still our lowest period and it's a little more seasonal. It is hurricane season. People wait a little bit more to book because they want to see what's coming down the pike and when they want to make decisions.

Speaker 1

So it could absolutely be better than what we're expecting, but at this point that's what we're comfortable forecasting.

Speaker 7

Okay, great. Thanks. And then separately just thinking about future ROI projects, you said CapEx is kind of still in that $75,000,000 or $65,000,000 to $75,000,000 for the year with just a little bit of project CapEx. Now that leverage is at these levels and the business is humming along pretty well, how are you thinking about expanding or Renovating any of the properties within the portfolio. Thanks.

Speaker 2

So, I mean, there's no question. We think the business is doing well and that it makes sense where there's high ROI projects to do those projects. But there's just one big caveat And that is, does that return generate more than just repurchasing our stock? And quite honestly, the attractiveness of our stock, I mean, In my opinion, Chad, we're trading at a ridiculously low multiple for our business. And I'm not Kind of in your shoes, I can't tell you what investors think or don't think or what they're concerned about or not concerned about.

Speaker 2

All I know is I'm a hotel guy. I've been doing 36 years and I look at where we sit today and we're in an incredibly attractive position. And so when you've got leverage At 3 times, I'm not worried about our balance sheet. We bought back significant levels of stock and our cash balance at the end of the quarter was still almost 270,000,000 It just says to me, we should keep doing what we're doing and we will reap the benefits of doing that because eventually it will become obvious Our share count is a lot lower and our EBITDA continues to grow at a nice pace that the company is undervalued and the Benefit is going to accrue to the remaining shareholders. And so that's the plan.

Speaker 2

So it's not that we are abandoning ROI projects at all. Just we have set a high bar. And so that's kind of it.

Speaker 7

Fair point, Bruce. We have you trading at a mid teens yield off of next year. So, makes sense

Speaker 1

to us as well. Thanks.

Speaker 2

Yes. Thanks, Chad.

Operator

The next question comes from Tyler Batory from Oppenheimer. Please go ahead.

Speaker 5

Hi, good morning. Thanks for taking my questions here. A couple

Speaker 6

of follow ups. Just in

Speaker 5

terms of the choppy Friends in Mexico, is that isolated to the U. S. Guests? Are you seeing some choppiness from European travelers as well? And then just also talk about the Mix in the summer, U.

Speaker 5

S. Versus Europe, where you are right now versus what's more typical?

Speaker 1

Yes. We're still over indexed to the U. S. Customer than where we were pre COVID, but yes, it has been more acutely seen from U. S.

Speaker 1

Customers going out elsewhere more than anything, same thing with Europeans are down. We actually saw, as Bruce mentioned, Higher mix of Mexicans and local residents coming into the Yucatan and kind of staying inter country, but it's certainly a less of a mix from the U. S. European as they have more choice and heading elsewhere. So you hit that one on the head.

Speaker 5

Okay. How's your competition Reacting to some of this. Are they dropping rates in the market? I'm not sure if that's kind of exacerbating the problem a little

Speaker 2

It is. Tyler, that's a good question. What always happens, the hotel business, again, I've been through this many, many times, it's Some people get scared more quickly than others and it depends on where you are in the price point spectrum. So if you're kind of in the lower part of the price On Spectrum here, the only really lever you have to pull is price, right? And so some of those who are there, they're doing that.

Speaker 2

We have been very focused on the service side. So even with our lower rated properties, Where they stand kind of in the rate mix, we are focused way more on service delivery, okay, in getting the satisfaction of the customer. And at the higher end, it's even more that way. So it's magnified. And that's where I said that for the most part, we have the premium resorts And in all of the markets we're in, and so we're able to kind of retain that.

Speaker 2

So Ryan answered that before. Our decision tree is very much that we're going to focus on rate over occupancy. And if we have to seed a little bit of occupancy, That's okay, because you know what, we're an all inclusive business. So it's not like it's just an empty room that you can or an empty airplane seat that you can sell at any price. There's a lot that comes into it because of the food and beverage and service component and then the impact on the other gas.

Speaker 2

So we'd rather on the side of maintaining the rates versus driving the highest level of occupancy. And we think it's Done really well since we came out of the pandemic, and we continue to continue that way. But I think you're also seeing That some of the pricing that the competitors are doing is really short term, kind of drops in pricing and it doesn't go into the high season. So again, it gives me optimism that this is more of a kind of a summer shoulder season, shoulder period Phenomena than it is a kind of fundamental change in the market or the demand.

Speaker 1

And if it's truly destination fatigue, which we really believe it is, Then moving a price wouldn't stimulate demand anyway. That just means they want to go try somewhere else. So we're fine with our pricing.

Speaker 5

Okay. That makes sense. That's very helpful. And then last question for me. On the non package side of things, just talk about trends within that.

Speaker 5

I'm not sure maybe the uptake on some of those extra options has changed at all over the past couple of months.

Speaker 1

No, non package continues to be strong on a per room basis. Just as a reminder, when you're looking at our results, They get a little wonky because of the fact that this is the last quarter in a meaningful way that we're lapping our extended stay protection plan. I think you guys All remember that during COVID when you had your test to come back to the United States, we offered that ESP program where adults would pay, I think it was like $49 For guests, essentially, if they tested positively upon exit, then they could stay at our hotel for free. That was a big, big seller. So we're that all ran through non packaged and now we're lapping the effects of that.

Speaker 1

So if you just kind of take our reported year over year non packaged For sold room growth of just basically down roughly 90 basis points, you add back the impact of that ESP Program lapping or ending was roughly 500 basis points. The Juul mix in there as well makes things also A little wonky as well, just given the profile of that customer and the fact that we're building occupancies. But even if you just include the JUUL, your ESP on kind of a on a Clean basis, your non packaged growth is about 4%.

Speaker 5

Okay. That's all for me. Thank you.

Speaker 2

Thanks. Thanks, Tyler.

Operator

The next question comes from Smedes Rose from Citi. Please go ahead.

Speaker 4

Hi, thanks. You've covered a lot of ground, but I just wanted to ask you, are you seeing any significant new supply coming online in any of your markets, Either with new construction or just kind of repositioning of assets that might be more competitive to you?

Speaker 1

No. It still remains where most of the supply that is The schedule that has come in is in the Greater Riviera Maya market, south of the airport or points north of the airport. Obviously, For the sake many times, there's really nowhere else to build or not a whole lot of conversions going on in Cancun proper, but a lot of that supply is being absorbed. It's really Riviera Maya where you saw the most. And that's basically from 2019 to 2023, roughly a 4% CAGR, but you compare that to our other destinations that were like 2% or below.

Speaker 1

So while it's elevated relative to others, it's still not

Speaker 2

a massive, massive amount. And one trend that's going on, and you've seen

Speaker 1

Hilton made a recent announcement of

Speaker 2

converting the Royal Uno in Cancun proper, converting the Royal Uno in Cancun proper in the hotel zone there to a Hilton brand, is you are Continuing to see kind of brand conversions, but that's not adding any new rooms. It's adding more branded rooms within the market. And from our standpoint, that's a positive because the more kind of big hotel brand customers that start to look at The all inclusive product and look at the markets that we're in and kind of get that confidence level to go there, we think that's So you are seeing that trend, but very importantly, it is not adding new rooms.

Speaker 5

Okay. Thank you. Thanks, Smedes.

Operator

This concludes our question and answer session. I would like to turn the conference Back over to Bruce Wardinski for any closing remarks.

Speaker 2

Great. Now, we just appreciate everybody joining us early on this Friday morning in the summertime. Thank you very much for participating in our call. We think there's a lot of reasons to be optimistic about the future of Playa, and we're going to continue to execute on our strategy. So with that, I wish everybody a great day and a great weekend.

Speaker 2

Take care.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now

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Earnings Conference Call
Playa Hotels & Resorts Q2 2023
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