Braemar Hotels & Resorts Inc.

Greetings. Welcome to the Braemar Hotels and Resorts Inc. Second Quarter 2021 Results Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Jordan Jennings, Investor Relations for Braemar. Thank you. You may begin.

Good morning and welcome to today's call to review results for Braymore Hotels and Resorts for the second quarter of 2021 and to update you on recent developments. On the call today will be Richard Stockton, President and Chief Executive Officer, Derris Eubanks, Chief Financial Officer, and Jeremy Walter, Chief Operating Officer. Your results as well as notice of accessibility of this conference call on a listen-only basis over the Internet were distributed yesterday in a press release. At this time, let me remind you that certain statements and assumptions and this conference call contain or are based upon forward-looking information and are being made pursuant to the safe harbor provisions of the federal securities regulations. Such forward-looking statements are subject to numerous assumptions, uncertainties, and known or unknown risks, which could cause actual results to differ materially from those anticipated. These factors are more fully discussed in the company's filings with the Securities and Exchange Commission. Before-looking statements included in this conference call are only made as of the date of this call and the company is not obligated to publicly update or revise them. Statements made during this call do not constitute an offer to sell or solicitation of an offer to buy any securities. Securities will be offered only by means of a registration statement and prospectus, which can be found at www.sec.gov. In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the company's earnings release and accompanying tables or schedules, which have been filed on Form 8A with the SEC on July 29, 2021, and may also be accessed through the company's website at www.dhrb.com. Each listener is encouraged to review those reconciliations provided in the earnings release together with all other information provided in the release. I will now turn the call over to Richard Stockton. Please go ahead, Richard.

Good morning. Welcome to our second quarter earnings conference call. I'll begin by providing an overview of our business and an update on our portfolio. After that, Derek will provide a review of our financial results and then Jeremy will provide an update on our asset management activity. Afterward, we'll open the call for Q&A. We have five key themes for today's call and they are, first, Our luxury resort portfolio continues to outperform, resulting in $24.7 million of hotel EBITDA for our company and an average daily rate of over $380 for the quarter. Second, for the second quarter in a row, we were cash flow positive at the corporate level. Third, our portfolio is well positioned to continue to outperform with very strong forward bookings for the third quarter. Fourth, our balance sheet is in good shape with no near-term debt maturities. And fifth, we announced the planned acquisition of the Mr. C. Beverly Hills Hotel in Los Angeles, California, a luxury hotel ideally located in close proximity to high-end shopping on Rodeo Drive and business demand from Century City and Culver City. I am pleased to report comparable hotel EBITDA of $24.7 million during the quarter, which was driven by strong occupancy levels at our resort properties and a 35.1% increase in ADR over the prior year quarter. Additionally, rev par for all hotels in the portfolio increased approximately 875% for the second quarter of 2021 compared to the second quarter of 2020. Our portfolio rev par decreased approximately 20% when compared to second quarter 2019 rev par. EBITDA margins continue to be healthy at over 25% across the entire portfolio. This result is accentuated by particularly strong results at the Bar de Sono, Pier House, and Hotel Yonville, each of which had margins in excess of 40%. While leisure demand continues to be strong, particularly on weekends, any significant uptake in Red Park performance is likely to rely on the recovery of corporate transient demand and ultimately group demand. Overall, our resorts continue to perform well, and forward bookings continue to look strong with occupancy for July for our portfolio looking like it will come in over 70% at a rate of over $350. Many of our hotels are in drive-to leisure markets and have been well-positioned to benefit from the resurgence of pent-up leisure demand in recent months. In total, eight of our 13 hotels are considered resort destinations. These hotels include the Ritz-Carlton Sarasota, Bar De Soto, Hotel Yonville, Ritz-Carlton Lake Tahoe, Pier House Resort, Park High at Beaver Creek, Hilton La Jolla at Torrey Pines, and the Ritz-Carlton St. Thomas. We are pleased to report that this segment delivered a combined hotel EBITDA of $26.3 million for the quarter. I'm also encouraged by the advancing recovery of our urban properties. These properties include the Capitol Hilton, the Marriott Seattle Waterfront, the Notary Hotel, the Clancy, and the Soap Hotel Chicago. For the second quarter, two of these five properties posted positive hotel EBITDA, while one of the negative quarter results properties was only down approximately $150,000. This is a significant turnaround and demonstrates that demand is quickly returning to our cities, both amongst the leisure and, to a lesser extent, the corporate transient segment. We expect this trend to accelerate as office reopenings continue during the second half of 2021. Additionally, we were cash flow positive again at the corporate level for the second consecutive quarter. While our balance sheet was in good shape as we entered 2021, this puts us in a much stronger position financially. We're also very happy to resume our growth strategy with the planned acquisition of the 138-room Mr. C. Beverly Hills Hotel in Los Angeles, California for $77.9 million. An irreplaceable luxury property in a premier location in Los Angeles, this acquisition fits perfectly with our strategy of owning high rev par luxury hotels and resorts and further diversifies our portfolio. There's also an attractive price per key of $474,000 for fee-simple ownership of a luxury hotel. It's an impressive property in the middle of over 45 million square feet of office space, supporting substantial corporate demand and a wide array of world-renowned leisure demand generators, including unrivaled shopping with high-end retailers, vibrant restaurants, and various art and cultural attractions. As part of the transaction, we will also acquire five luxury condominium residences adjacent to the hotel, which will be offered for extended stay rentals prior to being ultimately monetized. Additionally, Remington will take over management of the hotel post-acquisition which we believe will help drive superior operating performance at the property going forward. The Mr. C represents our first acquisition during the current industry cycle, and we believe this property will be a great addition to our portfolio. On the capital markets front during the quarter, we completed a private placement of $86.25 million aggregate principal amount of 4.5% convertible senior notes due 2026. Importantly, we used a portion of the net proceeds of the offering to repay the amount outstanding under our secured term loan. The prior corporate term loan had restricted covenants that not only severely limited our capital expenditure program, prohibited property dispositions, and disallowed common dividends, but also would not have allowed us to complete the Mr. C acquisition. We were also recently added to the U.S. small-cap Russell 2000 Index and the U.S. broad-market Russell 3000 Index, and the Russell Microcap Index as part of the Russell Index's annual reconstitution. We believe our addition to the indexes will increase our visibility within the investment community as we execute on our strategic initiatives. Looking ahead, our unique portfolio, focused on the luxury segment, with many properties and drive-to leisure markets, positions us to perform well in both the near term and the long term as business and group travel resumes. We continue to believe that Braemar represents a compelling opportunity in the lodging REIT space. We are a differentiated story with the majority of our assets in very desirable resort locations, the highest quality portfolio in the public markets, a portfolio that is generating positive cash flow at the corporate level, and what we believe is a solid liquidity position and balance sheet with attractive debt financing in place. I will now turn the call over to Derek.

Thanks, Richard. For the second quarter of 2021, We reported a net loss attributable to common stockholders of $15.5 million or 32 cents per diluted share. For the quarter, we reported AFFO per diluted share of 20 cents compared to AFFO of negative 68 cents per diluted share in the prior year quarter. Adjusted EBITDA RE for the quarter was $19.6 million and we were cash flow positive at the corporate level for the quarter. At quarter end, we had total assets of $1.8 billion. We had $1.2 billion of loans, of which $49 million related to our joint venture partner share of the loan on the capital Hilton and Hilton La Jolla Torrey Pines. Our total combined loans had a blended average interest rate of 2.6%. As of the end of the second quarter, we had approximately 49% net debt to gross assets and our next final debt maturity is in April 2022. We ended the quarter with cash and cash equivalents of $157.7 million and restricted cash of $57.4 million. The vast majority of that restricted cash is comprised of lender and manager held reserve accounts. The restricted cash at the end of the quarter also included approximately $19 million of cash that was moved from restricted cash to cash and cash equivalent subsequent to the end of the quarter as a result of the Ritz-Carlton St. Thomas and Pure House Resort coming out of their respective cash traps. At the end of the quarter, we also had $21.5 million in due from third-party hotel managers. This primarily represents cash held by one of our brand managers, which is also available to fund hotel operating costs. As Richard mentioned, our hotel EBITDA during the quarter was $24.7 million. Our current monthly run rate for desk service is approximately $2.6 million. Our current monthly run rate for corporate G&A and advisory fees is approximately $1.5 million. As Richard mentioned, during the quarter we completed a private placement of convertible senior notes due in 2026 for $86.25 million gross proceeds. The notes pay interest semi-annually at a rate of 4.5% per year and will mature on June 1, 2026, unless earlier converted, redeemed, or repurchased in accordance with their terms. The notes are senior unsecured obligations of Braemar and are convertible for cash, shares of the company's common stock, or a combination of cash and shares of the company's common stock at Braemar's option at maturity under certain conditions. The initial conversion rate for the notes is 157.7909 shares of the company's common stock per $1,000 principal amount of the notes, and the initial conversion price is approximately $6.34 per share of the company's common stock. A portion of the net proceeds from the offering was used to repay the amount outstanding under our secured term loan, and the excess proceeds will be used to fund the cash component of the Mr. C acquisition. During the quarter and subsequent to the end of the quarter, we utilized several of our capital management strategies to continue to improve our liquidity position. We issued approximately 7.8 million common shares under our ATM, raising approximately $47.8 million in gross proceeds. Also during the quarter, we entered into a $35 million equity line and issued approximately 766,000 common shares, raising approximately $4.2 million in gross proceeds. We also issued 500,000 common shares under our CETA during the quarter, raising approximately $3 million in proceeds. Each of these instruments has certain benefits that allows us to maximize our flexibility in efficiently accessing the equity capital markets. These capital raises have improved our balance sheet and liquidity by extending in debt maturity, lowering our leverage, and increasing our cash on hand. Since the beginning of the year, we've also completed several privately negotiated exchanges of our Series B convertible preferred stock into shares of our common stock. These exchanges have all been completed at a discount to the par value of the preferred stock. And in total, we've exchanged approximately 2 million shares of our Series B preferred stock equating to 39% of the original share count into approximately 7.3 million shares of our common stock. These exchanges not only remove the cash dividend associated with the preferred shares, but also serve to lower our leverage and increase our flow. We will continue to take an opportunistic approach to these exchanges and will pursue them if we believe it is accretive to our common shareholders. I'm also pleased to report that we have raised approximately $2.1 million of gross proceeds from our Series E and Series M non-traded perpetual preferred stock. Ashford Securities, a division of Ashford, Inc., has been established and licensed by FINRA as a broker dealer in order to act as dealer manager on behalf of the company with respect to these preferred series. We expect to use any proceeds from the sales of the Series E or Series M non-traded professional preferred stock for general corporate purposes and to facilitate the company's continued growth. This capital raising effort is just getting started and we look forward to reporting our progress in future quarters. We are also excited about our planned acquisition of the Mr. C Hotel in Beverly Hills, which will be a great addition to our portfolio. Total consideration will be $77.9 million and will consist of $65.4 million for the hotel, which equates to $474,000 per key, and an allocated price of $12.5 million for the five adjacent condominium units. The acquisition will be funded with approximately $30 million of cash, 2.5 million OP units, 500,000 warrants at a stock strike price of $6 and a $30 million mortgage loan. We expect to close on this acquisition soon. As of June 30, 2021, our portfolio consisted of 13 hotels with 3,487 net rooms. Our share count currently stands at 64.9 million fully diluted shares outstanding, which is comprised of 59.3 million shares of common stock and 5.6 million OP units. In our financial results, we include approximately 5.1 million shares in our fully diluted share count associated with our Series B convertible preferred stock and approximately 6.6 million shares in our fully diluted share count associated with our convertible senior notes. This concludes our financial review. I'd now like to turn it over to Jeremy to discuss our asset management activities for the quarter.

Thank you, Derek. Comparable REVPAR for our portfolio increased an impressive 875% during the second quarter, and we were able to generate hotel EBITDA flow-through of 48%. For the second quarter, Braemar recorded an incredible 80% of its comparable period 2019 REVPAR compared to 66% and 54% for the US luxury and upper upscale chains respectively. Our continued market outperformance over the last quarter is another testament of the overall quality of our assets and the strength of our asset management team. Within our portfolio, more than half of our assets achieved a second quarter rev par higher than the comparable 2019 period. And some of these hotels set all-time property performance records. On an aggregate basis, these assets had a REVPAR increase of 74% over the comparable second quarter 2019 period. Our asset management team's commitment to drive out performance is unmatched, and we could not be prouder of these results. I will now provide some of the hotel performance highlights from the second quarter. First, the Bartasuna Hotel and Spa generated more revenue in the month of June than any month in the resort's history. The performance during the quarter was aided by a contribution of nearly $600,000 in revenue from the newly developed luxury villa, which we believe will continue to provide upside momentum for the property. Next are two mountain resorts, the Ritz-Carlton Lake Tahoe, and Park High at Beaver Creek also had spectacular results during the second quarter, with their aggregate rev par increasing 28% over the comparable 2019 period. The Ritz-Carlton Lake Tahoe saw its ADR increase 26% over the comparable 2019 period. Our team capitalized on the increase in leisure demand by creating packages that targeted the staycation trend, which more than doubled the resort's package revenue relative to 2019. Historically, this property has closed for a period of time in April due to the low demand following the end of the ski season. However, due to our team's effort to uncover additional demand drivers, we made a strategic decision to stay open. And for the first time, the property reported positive GOP for the month of April. Archive Beaver Creek is also performing well, with June's ADR being the highest in its history for that month. Our team has pushed the property to be more aggressive on their upselling efforts, which has resulted in a 350% increase in upsell revenue during the month of June versus the comparable 2019 period. Lastly, our beach resorts, the Ritz-Carlton St. Thomas, the Ritz-Carlton Sarasota, and the Pier House Resort and Spa have all been standout performers. Collectively, second quarter rev car at these properties increased 101 percent over the comparable 2019 period. The Ritz-Carlton St. Thomas produced $8.1 million in hotel EBITDA during the second quarter. That number is particularly impressive when compared to the $8.8 million in Hotel EBITDA the property produced in the full year of 2016, which was the last year without renovation or hurricane displacement. For clarity, this property nearly generated as much Hotel EBITDA in the second quarter as it generated in the full year of 2016. This accomplishment can be attributed to the recent property-wide renovation and our team's ability to successfully capitalize on the significant leisure demand that we are experiencing. Rich Carlton Sarasota has also exhibited significant outperformance with trailing 12-month revenue of $66.7 million, which is higher than any full-year revenue result since we've owned the property. Part of that success has been our emphasis on securing long-term recurring revenue through our membership program, which is now sold out. The membership program, which includes access to the beach club and golf club, has produced nearly $3 million of revenue year-to-date. Finally, the Pier House Resort and Spa had a solid second quarter with occupancy and ADR both exceeding 2019 levels for the comparable period. During the second quarter, the property achieved an occupancy of 95 percent or more for 37 days. Moving on to capital investment, we have invested heavily in our portfolio over the last several years to enhance our competitive advantage. These investments uniquely position our portfolio to benefit from the pent-up demand that we are currently seeing in our markets. Through the remainder of 2021, we're looking forward to restarting several value-add projects across the portfolio. These include adding 10 keys and a new cafe at the Beach Club at the Ritz-Carlton Sarasota, the construction of luxury retail space at the Ritz-Carlton Lake Tahoe, a new grab-and-go market at the Hilton La Jolla Torrey Pines, and a guest room renovation at the Marriott Seattle. In total, we anticipate capital expenditures of $20 to $30 million in 2021. I'd like to finish by stating that we are extremely bullish about the future performance of our portfolio. Including our urban assets, we are beginning to see significant green shoots. Notably, the Marriott Seattle Waterfront and the Clancy are on pace to achieve occupancy in the mid 90s and mid 80s, respectively, for the month of July. We're pleased to see such strong demand in these two urban West Coast hotels, and with demand returning, we should further realize near-term improvement across this segment. I will now turn the call back over to Richard for final remarks.

Thank you, Jeremy. In summary, we continue to be pleased with the recovery trends we're seeing in our hotels driven by strong leisure demand at our luxury resort properties. While we are still in the early stages of the recovery, we see a clear path for a continued steady recovery in our financial results. We have taken decisive actions to navigate the near-term challenges of this crisis, and we are well positioned moving forward with a solid balance sheet and a unique diversified portfolio. I'm proud of our efforts to protect our assets and maintain financial flexibility to position us for future success. We look forward to updating you on our progress as we move through the second half of 2021. This concludes our prepared remarks. And we will now open the call up for Q&A.

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question is from Tyler Batori of Journey Capital Markets. Please state your question.

Hi, good morning. This is Jonathan on for Tyler. Thanks for taking our questions. First one for me, rates across the portfolio continue to be pretty tremendous. And I was wondering if you could talk about, you know, your revenue management strategy broadly. Who's coming into the properties? Is it an incremental guess? And what is that spend like compared to normal or pre-COVID times, I guess I should say?

This is Jeremy. I can take that question. Our resort properties have really benefited from the demand and our asset management team has been very proactive of working with the property teams to be very aggressive and pushing right. We thought that sometimes maybe we were taking a little bit of risk, but we proved that to be right in terms of being able to benefit from the demand that we're seeing in the resort properties. It's been phenomenal. It's certainly not anything that if you wind the clock a year ago that we would have ever thought that we would see. In terms of where these guests are coming from, in a lot of cases it's first time guests. St. Thomas I think would be a great example that you've got a lot of guests that would otherwise be maybe potentially traveling to other parts of the Caribbean, maybe even to Europe. but those markets are more or less closed or perceived to be closed or not attractive for, you know, guests to have to go overseas. And so we benefited from that demand, which gives us a great opportunity given that we have repositioned that resort. If you've gone to see it, it's just a phenomenal redevelopment, redesign. We've added a lot of additions that we've talked about in previous quarters. So again, it's a really good opportunity to showcase that hotel. I do believe that a lot of that is short-term spike and probably a little bit non-recurring. It makes some tough comps on a go-forward basis. But I do think it also shows the quality of our portfolio. And given the other alternatives that don't exist, that's why we've just been so aggressive on pushing rate. And that proved out to be the right strategy. through all those hotels. We've gained a tremendous, and we haven't disclosed it and probably should, tremendous amount of market share in the Braemar portfolio. It's actually very phenomenal, the growth we've had.

I think I'd add to that. Thanks, Jeremy. The other thing I'd add to that is if you look at the segment mix, we're doing, out of necessity, a lot less group business than we have historically. Our group segment for the Second quarter was about 11% with the vast majority of the balance being transient demand. And that compares to a group segment mix of kind of mid-20s called 25% or so generally. And so because that transient, which is primarily leisure transient, because that's much higher rated business, You know, when we're running properties, our resort properties at sort of 90% occupancy, that's going to result in an overall uptick in ADR. Now, as we look forward, you know, how do you turn that into an ongoing strategy? And I think that's a challenge for many of our general managers who are deciding to either be very aggressive on group rate business or decline it. in favor of the shorter booking window transient business. And so that's on a property by property basis, that's one thing that's happening too. We're being very kind of cautious about overly discounting future business given this trend.

I think he also asked about the spend. I think we've done a really good job in our resort properties of capturing ancillary spend. And so that's helped quite a bit in terms of just been able to push and be aggressive on the resort fees and getting more and more guests to stay at our resort properties and eat and drink at our resort properties. I think you'd see that we'd have a much higher mix of non-rooms revenue for the quarter if our urban properties had all their venues open as well. So given that we had a lot of closures or closures lower hours in our urban locations, I'm really pleased with the overall non-true revenue we've had across the entire portfolio.

Okay, great. I appreciate all that detail. That's a nice segue into my next question on the urban markets. You know, the performance at the notary in Seattle waterfront came in fairly strong compared to our expectation, posting positive for Hotel Evita. Jeremy, in your prepared remarks, you gave some color on Seattle and San Francisco in July. But I was wondering if you could provide some additional color there in terms of what's driving or drove the strength of these urban properties?

Yeah, I think it's still – it's mostly going to be your transient leisure guests that have been, you know, pent up and locked up over the course of the last year. And these are great markets. And you look at our locations within the markets. That's one of the things we've always talked about this portfolio. You can look at, like, Seattle Waterfronts. which is a Marriott property and would otherwise be a property probably we wouldn't want in the portfolio because it's not luxury, but its location is premium. Being right on the water, it's just a beautiful hotel and it's a natural for anyone that wants to get out and travel into the Seattle market. I think that we have as good of a hotel as anyone. And so we're experiencing that and that's what we're seeing in July. We're seeing that in San Francisco. I will say that As I reported, we would expect to end up mid-80s in demand at the Clancy in San Francisco. We're surprised. I don't think we would have ever thought six weeks ago, eight weeks ago, that we would have seen that much demand. That just explains the short-term nature of the pickup that we're seeing in our portfolio. As we look forward, If some of that continues, we're very optimistic over the next couple quarters, for sure.

Yeah, I think the other thing to note is in both of those markets, restrictions were fully lifted during the second quarter. And that, I believe, allows some pent-up leisure demand to kind of release into July and August. We're also experiencing a very strong outlook for August and even September. So that's part of it too, having those full restrictions lifted is giving people the confidence and ability to take these leisure getaways.

Okay, great. And then last one from me, can you just provide some additional color on the Mr. C transaction, why that structure on the acquisition made sense over possible alternative ways of funding it? Are you anticipating any possible synergies from the property nearby that is also managed by Remington?

Yeah, let Rich take the first part of that question. I'll take the second part.

Yeah, so the transaction structure was a little complicated given the kind of OP units, warrants, et cetera. It's a consideration package that evolved over time. We've been in discussions on this property for really over a year. And in the early part of those discussions, we just simply didn't have the cash available or liquidity or weren't prepared to utilize it to do a cash transaction. In addition to that, there are many benefits to doing an OP unit transaction for the sellers in this case. Number one, they get to ride the upside in BHR share price, and they are very excited to become major shareholders of Braymark. They're very confident that there is shareholder value that we will create and that the share price will better reflect the portfolio value over time. So that's something they're very interested in seeing happen. In addition to a tax deferral on any potential capital gain through this type of transaction and the ability for them to receive allocated losses that they can set against other passive income. It's a transaction structure that made a lot of sense for really both of us at the time that it was negotiated. You've seen our liquidity position improve considerably since then. I think we would certainly have much more flexibility to do an all-cash deal today, but given the benefits to both parties, that's how we ultimately came to agreement.

Yes, Jeremy, I want to give Rich some credit for staying after this opportunity for quite some time. As you mentioned, we've been talking to the sellers for a long time. And one of the things I like about it is that if we were to issue all cash, they would have expected a lot higher purchase price. And so they certainly believe in the story of Braymar. They want to be partners with us. I think it's a good relationship and, you know, is about a confidence in the quality of the portfolio, the management team that we have here. Moving on to the opportunities from the operations side, I am extremely excited about this property. There's just so many demand generators in this market that currently exist. There's a ton that are coming in. Just the dynamics of where we think this market is going is very favorable in terms of the outlook. Also, there's just virtually no supply, and there's just huge barriers to entry to build where we are. So, we're excited about that. But even more so, taking into account just the operational opportunity, this is right up our wheelhouse. This is the exact type of acquisition that we want to make, which is buying an asset A management company, not necessarily a selling group, but a management company that is not really a hotel operator. They're an F&B operator. They've got a great history in F&B. They know how to operate restaurants. But as we've uncovered through our diligence process, we have a comprehensive takeover plan. I think there's 50-plus initiatives that, when pulled through, we think could generate as much as a million dollars of incremental EBITDA. And that's just uncovering the way that we think the hotel should have been operated. There's just a tremendous amount of synergies that we see also with Astro Trust Hotel, which is a Marriott in Beverly Hills. And this is a market we know incredibly well. We've operated into it since the days of the RTC, which I think goes back to maybe the early 90s when we originally acquired the Beverly Hills asset, which is now a Marriott. In terms of semi-opportunities, there's been very little group sales. There's a beautiful top floor that offers premium views across the city. That's a beautiful meeting space. There really hasn't been a strong selling effort to optimize that. No audio-visual revenue participation. They just outsourced it to a third party that collected all the revenue. So there's just, among many other synergies, we're very, very excited, and I think we've got a great track record. If you look back at – and this goes back all the way, I think, to 2013, but Purehouse was an acquisition where we took over from an operator that didn't really operate hotels traditionally. I think in the first year we increased EBITDA by 40% for that hotel. So we're excited, but we'll see where we get.

Okay, great. Thank you for all the color. That's all from me.

Our next question is from Chris Voronka of Deutsche Bank. Please state your question.

Hey, guys. Good morning. Can we maybe get any update you have on the SOFTEL situation? I know that's been a saga that's kind of been interrupted with COVID, but is there anything you can share with us today, thoughts or plans for longer term?

Yeah, it's an ongoing complaint. It's still active within the courts. So all I can say is discussions continue. As soon as we have something that we can announce concretely, of course we will. But discussions continue there.

Okay. I guess in the context of that going on, do you think operationally there is – just trying to get a sense as to is there adequate focus on it, or do you think that there's so much attention in the background on this thing that it's not necessarily being, you know, maximized to its potential right now?

I would say that, Chris. I think that we're all very professional. The team here at Ashford and Braymoor, as well as the CORF team, They've been incredibly professional. We've got a great working relationship with them. So I couldn't be more thankful of just the ability to work together to see what we can do to optimize performance. Naturally, we are disappointed with performance, but we continue to work with the teams.

Okay, fair enough. And then turning to the Mr. C acquisition, I know there's the Intercon, I believe, In Century City, which is about a mile away, I think that's permanently closed, right? And then at some point the Century Plaza is going to come back online. How do you kind of view, I guess, the changing neighborhood in the context of maybe taking that hotel further upstream? And I guess the question is, is there any – I know you're considering potential brand options and other things, but how far below – potential rate do you think that property is right now versus what it could get to a couple years from now?

Yeah, I think what's interesting about that property and here's where we see opportunity as well as what Jeremy talked about. Jeremy talked about all the operational improvements that we can bring to bear with the new manager. The other side of the coin is just the physical state of the brooms product and The property actually peaked in 2016, which was six years into its renovation, and then started a little bit of a decline through 2019, really due to an aging product. Our plan is to invest $10 million into the product. in order to really bring it up to a higher standard and bring it up to the luxury standard that it originally had attained, if not even better. We believe that that will result in our ability to generate a higher rate. Exactly how much higher remains to be seen. I can tell you that the rate in 2016 was about 10% higher than what it is now. We could certainly get there and then some. You're right, there's a little bit of additional supply coming into the market, but there's also more demand coming into the market. If you look at the Westside Pavilion where it used to be a mall, that's now being taken over by Google, 600,000 square feet. Google's going to put thousands of employees into that property right down the street. We're confident that we'll be able to not only get our fair share of that future demand but also increase our market share through the improvements that we're planning to put into the property. We'll be operating it as a Mr. C for the time being while we assess other options from a branding perspective or soft branding perspective to maximize revenue.

And we may keep it as independent. We haven't made that decision yet. But what I'd say, Chris, is that if you look at where they were, peak, red bar index, from their high to where they are today, it's about a 17% discount. So we think there's tremendous opportunity to gain more market share for this hotel.

Okay. Appreciate all that color. And then last question is, Richard, I think you mentioned a minute ago, you obviously had a creative financing solution for Mr. C. But you said that, you know, if that if that was happening today, you probably could have been in position to do an all cash transaction. So if you look at some of those those pins on the map that you've talked about in the past, Hawaii and Arizona and Las Vegas and others, are there are there things you look at today that since you are in an improved liquidity position that that that might be possible to add another acquisition?

Yeah, I can tell you, starting around June 1, there was a dramatic expansion of the pipeline of available opportunities that we're seeing. In the first five months of the year, there was virtually nothing of interest to me. Other than this deal that we had already been working on for some time, of course. And now there are multiple opportunities in the markets that you've mentioned, but also other markets where, you know, we'd love to plant a flag. So we are looking at a number of things. You know, Derek went through our liquidity position, so we do have cash to do deals. And stay tuned. You know, we're certainly going to be looking to do some more.

Okay. Very good. Thanks, guys.

Our next question is from Brian Mayher of B. Reilly Securities. Please state your question.

Yeah, good morning, guys. Maybe a point of clarification. Derek, you said that the share count currently is 64.9. Just to be clear, that's as of today, not at the end of the second quarter, correct?

Yeah, that's right. That's the most recent number. That's right.

Okay. And then kind of following up on that, we've got a number of calls and emails from investors who are curious as to why with things going so well, you guys continue to issue equity. And maybe it's to the point Richard just made that you're seeing opportunities and that you want to have the liquidity to do so. But can you just clarify that that is the case?

Yeah, no, that's right, Brian. I think it's a combination of things. It's firstly, you know, the abundance of conservatism. I think it looks like we're out of the woods. There's some still negative headlines out there, but it looks like we're out of the woods. It's the strategy of deleveraging over time, which we've certainly talked about. Derek had told you that we're at 49% net debt to gross assets. If you look across our peers, they're at sort of 35%. That's the place we'd like to be in the coming years, but we want to be very thoughtful about how we get there. Then the last thing, which is being able to avail ourselves of these acquisition opportunities. What we are seeing in the second half of this year is we have a number of sellers that maybe they're not long-term buyers. natural owners of hotels. Maybe they only own one or two. Maybe the past year and a half has been about as much fun as they want to have in the hotel business and are seeking exit. We have some sellers, as was the case with Mr. C, that had a debt maturity that wasn't something that they felt that they could refinance efficiently and therefore chose to monetize or at least merge into our portfolio. So we're seeing opportunities that are being driven by that dynamic as well. But we're being as disciplined as ever in terms of our financial metrics, in some cases seeking even higher returns than we would have pre-COVID, and therefore we have to look at a lot before we can kind of narrow it down to things that make sense for us. So it's really the combination of all those things. We are absolutely focused on creating shareholder value, in all of this, and that continues to guide us. So that's what we're doing with these recent equity raises.

Yeah, I think we've all had about as much fun as we can handle over the past year. You mentioned that some negative headlines go out there. To that point, are you seeing any impact on, you know, the next month's few bookings relative to the Delta variant news we continue to see every day?

We've seen absolutely no impact of it. I think it's the media's way of fearmongering, frankly. Yes, cases are up slightly in the U.S. We're at 20 cases per 100,000 people per day now in the U.S. But if you look at India and you look at the U.K., just plummeting, just really just plummeting. So they're on the other side. My suspicion is there's going to be a turnaround in the U.S. as well fairly soon. In the meanwhile, I think the media's having fun with it.

Two more for me. On the renovations for Mr. C, I think you said $10 million. Is that mainly going to go to rooms or lobby? How's that money going to be deployed?

It's a little bit of everything. I think the rooms have been designed in a very unique and impressive way. It kind of has a a nautical theme including teak wood floors as if they were a boat deck and heavy metal fixtures and portholes and this sort of thing. We'll see what will ultimately come out on design but there are a lot of features that we'd like to retain. Some of the hard goods have gotten a little nicked up over the years. Certainly soft goods will be replaced and then a refreshed pool deck outside. refreshed restaurant and lobby. So it's really a little bit of everything. But no major structural work, at least not in that scope.

And just last for me on the urban hotels, I think Jeremy mentioned, I think he said the Clancy and the Notary were mid-90s occupancy for July. Did I get that right?

No, we're running, we're on pace for Seattle Waterfront close to mid-90s. And then Clancy is mid-80s. So, yeah, those two West Coast properties.

Can you give us an idea of how the notary is doing?

Yeah, it's on pace for about 50% occupancy in July.

Okay. And just, you know, one last thing. I mean, look, the capital of Hilton, I mean, the occupancy there is just sad, for lack of a better word. What's going on there, and when might that turn around?

Well, you know, that property is a big property. It's our largest, 550 rooms. It's also very heavily dependent on citywide meetings and groups with its various ballrooms and meeting space. So we're waiting for that business to return in addition to corporate transient business in D.C. At the moment, that looks to be more of a fourth quarter phenomenon than anything. So I think that property will continue to kind of bring up the rear in terms of its results until we get there. And then it's a question of what is our group pace. So for our fourth quarter, group pace is down only about 27% relative to 2019. But then if you look at 2021, it's actually ahead by 5% in the first quarter. So that indicates to us that we're going to get there. But for that property, we still have to wait a few more months for it to really kick in.

Yeah, and Brian, what I'd say is just keep in mind that all the restrictions were just lifted in June, on June 11th in D.C., and then there were still capacity restrictions in museums that were lifted in July. So it's slowly opening up versus maybe some of the other markets as well.

Great. Thanks, and congrats on a good quarter. It was really good, all things considered. Thanks.

Thanks, Brian.

Our next question is from Michael Bellisario of Robert W. Baird. Please state your question.

Thanks. Good morning, everyone. Good morning. First quick clarification, the 5% I had and the 27% down figures you just gave, was that specific to DC or was that for the entire portfolio?

That was the entire portfolio. I'll give you just a little bit more clarity, Michael. Looking into 2022 as compared to 2019, the overall group pace is basically flat. It's actually slightly up $72,000. But the mix of that is, I think, very interesting. We're up 11% in ADR and down 10% in remnides. So that's like the perfect scenario for us. So we're very, very excited about where we stand from a group position standpoint. And that speaks to the discipline the team's had of just now that we've got a high-quality portfolio, I'm pushing right. That's what we've been doing.

That's helpful. Thank you. And then can we just go back to the Mr. C transaction, maybe kind of piece everything together that you've said so far, just from a high level to get to that 8%. yield that you guys are targeting in a few years? Maybe how much is operational? How much is the market simply recovering? And then how much do you think is going to come from the renovation upside the $10 million you're going to put in?

I think it's a combination of all. Yeah. So and hopefully, hopefully we exceed that. Because When we look at the pro forma that Rich is quoting, it doesn't take into account all the operational opportunities we've identified and we continue to identify. But certainly, we anticipate the recovery in the market. We anticipate that we're going to gain market share. We anticipate that we're going to have some synergies. And then we still have not fully decided what we want to do from a branding or independent perspective. We're going through that process. We plan to be diligent about it, but I think we've got a great track record of reposition assets within this portfolio. So we are excited to do that with this asset as well.

Got it. And then just on the topic of acquisitions, big picture, 8% unlevered yield, 10% IRR. I think the last couple of deals pre-pandemic, the same kind of 10% unlevered IRR. Maybe why is that the right number to target and how have you seen maybe that number change based on what you were looking at and how things were priced pre-pandemic versus what you're looking at today and how things might be priced today?

Yeah, you know, that's my 10% on levered IRR is, you know, how I assess the riskiness of lodging cash flows. I just believe that that's the right return for that type of risk. I think that does match up nicely also with our cost of capital. I'm sure you've calculated our weighted average cost of capital. Certainly others have. We have about 2.6% weighted average interest rate on debt, which is about 50% of our capital. Then you can calculate your own equity cost of capital. That represents a premium over our cost of capital, so there's economic value added there as well. We haven't changed that bogey, if you will, pre-pandemic, post-pandemic, because I don't believe that the riskiness in lodging cash flows has materially changed. I feel like we have more visibility on lodging cash flows, the lodging industry cash flows, than we've ever had, just because we're just returning back to where we were. And you can be a little bit wrong. on the timing of how to get back there, but there's really no doubt in my mind that we're going to get back there. It's fairly easy to now forecast, at least from my perspective, versus what we've had to do in the past. That's how we go about it. I think that's a good approach, and I think that's going to deliver value.

Understood. Thank you.

All right, well, I think that's all the time we have. So I want to thank everybody for joining us on our second quarter earnings call. We do look forward to speaking with you again on the next call. And then in addition, we're planning to have Investor Day in New York on October 12th. And we'll provide additional details on that later. But thank you all for joining.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.