This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
Hersha Hospitality Trust Class A Common Shares of Beneficial Interest
Q2 2022 Earnings Conference Call
8/4/2022
spk00: Hello and welcome to the Hersha Hospitality Trust second quarter 2022 earnings conference call and webcast. My name is Harry and I'll be coordinating your call today. If you would like to ask a question during the Q&A session, you may do so by pressing star one on your telephone keypad. I would now like to hand you over to your first speaker, Andrew Tamachio, Director of Investor Relations to begin. Andrew, please go ahead.
spk08: Thank you, Harry. And good morning to everyone joining us today. Welcome to the Hersha Hospitality Trust second quarter 2022 conference call. Today's call will be based on the second quarter 2022 earnings release, which was distributed yesterday afternoon. Before proceeding, I'd like to remind everybody that today's conference call may contain forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties and other factors that may cause the company's actual results, performance, or financial positions to be considerably different from any future results, performance, or financial positions. These factors are detailed within the company's press release, as well as within the company's bonds with the SEC. With that, it's now my pleasure to turn the call over to Mr. Neal H. Shah, Hersha Hospitality Trust's President and Chief Operating Officer. Neal, you may begin.
spk06: Thank you, Andrew, and good morning to everyone. Joining me this morning are Jay H. Shah, our Chief Executive Officer, and Ashish Parikh, our Chief Financial Officer. When we last spoke in late April, we were excited to share that we had entered into a definitive agreement to sell seven of our urban select service properties outside of New York for gross proceeds of $505 million. The closing of this transaction is anticipated to be completed in two tranches, with the sale of six assets to be completed imminently, while one hotel will close later due to the timing of the CMBS loan assumption process for the assets. With the divestiture of our select service properties complete, we are sharpening our focus on our portfolio of luxury and lifestyle hotels, which have continued to achieve historic pricing power and have generated excellent operational and financial results, as our second quarter financial results show. Additionally, we are retaining our exposure to New York, which we believe is at the beginning of a very strong and extended recovery. We recognize the tremendous value and upside in both portfolios. As a result of the sale of our select service portfolio, we are improving our operational metrics and significantly increasing our go-forward pro forma asset quality, ADR, and rev par. As an example, while second quarter rev par for our comparable hotel portfolio is still 4.7% below 2019 levels, comparable hotel rev par for the go-forward portfolio was 1 percent above second quarter 2019 levels, with EBITDA margins growth 179 basis points above our reported comparable hotel portfolio and 414 basis points above the 2019 period. We intend to use the proceeds from the sale to provide liquidity for significant corporate debt repayment, including paying off the junior notes in full and a recast of our credit facility. which our sheesh will cover in detail. Our resulting credit profile will provide significant financial flexibility as our gateway markets recover and we continue executing on our strategic initiatives. With that, I'll turn to the quarter. Rate integrity was broad-based in our portfolio as every sub-market grew ADR during the quarter. For our comparable portfolio, we drove 12.2% ADR growth versus 2019 levels in the quarter. Excluding our urban select service portfolio, the growth is even more notable as comparable portfolio ADR was up 17.2% versus the comparable period in 2019. We have strong conviction that the pricing power our revenue managers are driving is not only sustainable, but has runway for continued growth. Particularly in luxury and experiential hotels, upper tier customers are price inelastic and have fewer alternatives. Property level cash flow more than doubled to $46.4 million from the prior quarter. We began the second quarter on strong footing with portfolio generating $15.4 million of cash flow in April, driven by continued strength in our South Florida cluster. We were very encouraged that our cash flows remain consistent at roughly $15.5 million per month for May and June, driven by the resurgence of our urban non-resort markets. Non-resort contribution improved sequentially from 59% in April to 72% in June, resulting in approximately two-thirds of our portfolio-wide EBITDA driven by our non-resort assets, nearly double that of the prior quarter. The second derivative of this extended recovery will be driven by the urban markets that have been slower to recover as compared to the resort and leisure segments. Our assets located in some of the strongest coastal gateway cities in the country are at the nascent stages of recovery and are positioned extremely well to benefit from long runways in the business travel, convention, group, and international channel recoveries that continue to build. As I transition to our market performance in the second quarter, let me stay on our non-resort portfolio, which turned in its best performance since the onset of the pandemic. Urban rev par increased 17% from April to June, and the portfolio generated $31.6 million of EBITDA, more than triple that of the prior quarter. There is no doubt that a significant portion of the urban performance was leisure-driven, as the summer months are usually much lighter on business transient travel. But the midweek strength in our urban markets is very encouraging, and this portfolio is particularly well positioned for continued growth, as all indications point to increased business, group, and international travel in the coming months. We were able to drive rate growth in our urban markets as compared to 2019. Our urban ADR of $277 in June was 5.6% above June of 2019. even as occupancies continue to recover to well below pre-COVID levels. Among our urban markets, we are most encouraged by performance in New York City in the second quarter. New York was our highest EBITDA-producing market, generating $9.4 million in EBITDA for the quarter. Our high at Union Square, Hilton Garden Inn Tribeca, and the new Hotel Brooklyn exceeded Q2 2019 EBITDA, while the Hilton Garden Inn 52nd Street came in just below 2019 levels. In total, our Manhattan portfolio drove 90% of 2019 EBITDA. As we've noted in the past, New York City has historically been the market leader in occupancy. According to New York City & Company's June Travel Outlook, New York is expected to welcome 57 million visitors in 2022. more than double the 22 million visitors from 2021. This number is projected to grow to nearly 64 million visitors in 2023. This study, along with the actualizing results on the ground today, fuel our confidence that New York will revert back to prior levels over the next few years, which will further drive rate. Pricing power was especially robust in Manhattan, which in June drove ADR growth of 14% compared to 2019. despite occupancy still trailing pre-pandemic levels by 1,600 basis points. During the last cycle, we had record demand for hotel rooms in New York. But year over year, mid-single-digit supply growth resulted in a very challenging operating environment for owners and held down rates. Based on what we are seeing in New York, we believe that is about to change. According to our detailed internal analysis, as well as third-party studies, approximately 10,000 keys may be removed from the hotel inventory for the foreseeable future, if not permanently, by way of demolition, resizing, or alternate use conversions. In our view, this reduction, coupled with the new special permit laws enacted by New York City's City Planning Commission, results in a net supply reduction of 1 to 2%. Now, as the cost of construction and financing continues to rise, supply should be limited to the low single-digit range for the foreseeable future. These positive supply trends, multiple channels of pent-up demand returning to the market, and pricing power in the highest occupancy market in the country significantly improve the operating environment for current New York hotel owners in this next cycle. We believe New York, is in the early stages of a long recovery period, and we are very optimistic about the growth potential of this market moving forward. As mentioned previously, we feel strongly that incremental growth in business travel will provide a significant tailwind to our portfolio and amplify our growth thesis. While there is speculation as to how business travel will look as we move beyond the pandemic, and what impact the macro environment will have on corporate travel. The fact remains that more people are traveling today than at any point since 2019, and that all indications from our corporate accounts, industry publications, results on the ground point to the growing demand for business travel. According to the GBTA's June poll, in-person meetings are a priority for companies when budgeting for corporate travel. with 80% of travel buyers feeling more optimistic about a recovery versus earlier in this year, and 84% of travel management companies reporting increased bookings from the prior month. Airlines, travel agents, and credit card companies are reporting more robust booking pace for the fall than this time in 2019. The return of the business traveler, who is historically less price sensitive, coupled with price inelastic upper tier leisure demand, bodes well for continued ADR growth as gateway urban markets compress. With that, I will shift the focus to our resort portfolio, which once again continued its stellar performance throughout the quarter, with occupancy just shy of 75% and REVPAR growth of 36.5% to the second quarter of 2019. The resort portfolio generated $15.8 million in EBITDA, an increase of over $7 million, or 80% growth over the second quarter of 2019. Our properties in Miami and Key West once again benefited from the unique market dynamics we are witnessing in South Florida. The Parrot Keys 74% occupancy and $497 average daily rate resulted in a $368 rev par. which surpassed the second quarter's 2019 rev par by 59%. Parrot Key generated $2.9 million in EBITDA for the quarter, 127% increase to the same period in 2019. While the late summer and early fall are typically slow seasons in Key West, we have seen continued strength at the Parrot Key and expect continued outperformance throughout 2022, especially to close out the year. The Miami Beach market turned in another outstanding quarter, as the Cadillac recorded 80% occupancy at a $283 ADR, resulting in a rev par of $226 for the quarter, a 66% increase to 2019. The hotel generated $3.3 million of EBITDA, a 158% increase from the second quarter of 2019. The Ritz-Carlton Coconut Grove drove nearly 50% ADR growth, and over $1 million in EBITDA, 148% increase to the second quarter of 2019. As noted on our last call, we expect to see very strong momentum in the South Florida markets moving forward, driven not only by the traditional leisure traveler, but also by the uptick in future business travel related to the influx of financial and technology companies that have relocated to or opened new and significant office space in the market during the pandemic. To give you an example of the evolving South Florida demand, tentative 2023 convention and major group events in the Miami market are expected to drive a 51% increase in related room nights from 2022. This would represent a 30% increase to 2019 levels. Compression from convention and small group events and large group events and the ramp up in international demand has begun. But there is a long runway for growth on Miami Beach and Coconut Grove. In California, the Sanctuary Beach Resort continued its robust performance, posting an ADR of $572 for the quarter, an increase of 49% to 2019, leading to rev far growth of 29% for the quarter. The resort posted EBITDA of nearly $1.8 million for the quarter, an increase of 73.5% to the same period of 2019. The Hotel Milo in Santa Barbara generated just under $1.5 million in EBITDA in the second quarter, an increase of 80% to the second quarter of 2019. In closing, I want to reiterate that robust performance across the travel sector is a clear indication that the lodging recovery is underway and accelerating. and there is a long runway of value creation ahead in our exceptional portfolio of hotels. During the first half of the year, we took significant action to transform our portfolio and to right-size our balance sheet by the sale of our select service portfolio. As we move forward with our coastal luxury and lifestyle portfolio and our purpose-built New York City cluster, we are extremely well-positioned to benefit from the tailwinds of the return of business traveler and international segments, while also enjoying the unprecedented pricing power of our differentiated experiential hotel offerings. With few capital expenditures on the horizon over the next few years, we can focus on hotel operations to drive high absolute rev par on industry-leading margins, resulting in significant EBITDA and free cash flow growth in the coming years. From a strategic standpoint, our public market valuation continues to be significantly discounted to private market values for our assets, as evidenced by our hotel sale transactions in both 2021 and 2022. As property performance continues to accelerate, we will close this valuation gap through our continued focus on both operational excellence and strategic transactions. With that, let me turn it over to Ash to discuss in more detail our financial performance and outlook, as well as meaningful improvements to our financial flexibility and credit profile.
spk05: Okay, thanks, Neil, and good morning, everyone. So let me start with a brief discussion related to our new credit facilities. Concurrent with the close of the first tranche of our urban select service disposition, we will use the sale proceeds to pay down approximately $416 million of total debt and to recast our revolving credit facility the debt reduction includes a full payoff of our 150 million dollars of junior unsecured notes and all pick interest accrued on the notes the new 500 million dollar credit facility will consist of one 400 million dollar term loan and a hundred million dollar undrawn revolving credit line the facilities bear interest at 2.5% over the adjusted term SOFR. The $500 million credit facility matures in August of 2024 and has one 12-month extension option, which would result in an extended maturity to August of 2025. The company will utilize an existing swap to hedge $300 million of the new term loan at an approximate fixed rate of 3.95%. This swap is forecasted to save the company approximately $10 million of interest expense over the life of the new term loan based on the forward SOFR curve today. Following the refinancing, approximately 72% of the company's outstanding debt will either be fixed or hedged through various derivative instruments. This new financing will also allow us to reduce our weighted average cost of debt by over 50 basis points. down from nearly 4.7% prior to the refinancing to approximately 4.2%. The new weighted average life to maturity of debt will be approximately 2.7 years. Upon the closing of the seventh asset, the buyer will assume the existing $39.1 million of CMBS mortgage debt on that asset, further reducing our outstanding borrowing, generating an additional $30 million of cash from that closing. As we move forward, this new reduced debt load and lower interest rate is forecasted to reduce our interest expense by approximately $5 million per quarter. The new facility reduces pro forma net debt to approximately four and a half times upon the closing of these asset sales on an NTM basis. The reduced interest expense and tenor of this new debt provides us significantly higher financial flexibility to continue to execute our business plan as we move forward into an extended recovery forecasted for our portfolio. With that, I'll transition to our performance on the quarter. Comparable RevPar achieved 95.3% of 2019 levels in the quarter, the lowest spread since the onset of the pandemic, while our comparable portfolio EBITDA exceeded our 2019 second quarter EBITDA. The strong rate environment and pricing power of our differentiated assets, coupled with our continued focus on operational controls and aggressive asset management strategies, drove very strong operating margins during the quarter. Comparable GOP margin was 49.1%, which exceeded the second quarter of 2019 by 282 basis points, while hotel EBITDA margin of 38.7% with 236 basis points higher than 2019. Our highly rated and efficient luxury and lifestyle hotels in urban markets emerged as margin leaders for the portfolio. This is an extremely encouraging trend for the portfolio moving forward. Boston led the way with GOP margin and EBITDA margin of 56.9% and 48.2% respectively, both outpacing 2019. This performance was followed closely by the Manhattan Cluster, which drove 55.2% GOP margins and 42.5% EBITDA margins of 238 and 308 basis points, respectively. In total, the GOP margin for our non-resort portfolio of 49.3% outpaced 2019 by 29 basis points, while the portfolio EBITDA margin of 39% was on par with 2019 levels. We anticipate significant continued expansion of our non-resort portfolio margins as these assets have the highest growth expectations for the back half of the year and into 2023. Our South Florida cluster demonstrated terrific growth compared to 2019 again this quarter. GOP and EBITDA margin growth of roughly 1,500 basis points led the portfolio driven by the Cadillac and Parrot Quay. Overall, our resort portfolio continues strong margin growth performance with GOP and EBITDA margins up nearly 1,100 basis points each compared to the second quarter of 2019. Excluding our urban select service portfolio that is held for sale, ADR growth for the quarter increased to 17.2% above 2019. This flowed through to GOP and EBITDA margin growth, which expanded 448 basis points and 414 basis points, respectively. Overall, REPPAR growth for this portfolio was on par with second quarter 19, while absolute EBITDA production was 12% higher than second quarter 19. Based on July results and our forecast for the remainder of the third quarter, we're seeing some similar trends for REPPAR and EBITDA generation for our portfolio in the third quarter. Just a few closing remarks on our outlook for the remainder of the year. Since 2019, our portfolio has undergone a significant transformation as we have traded strategically selected assets to maintain operational flexibility. And the timing of our most recent transaction allows us to realize disproportionately higher debt paydowns relative to the reduction in EBITDA. This sale also allows us to focus on our current portfolio of higher quality luxury and lifestyle assets with stronger rev par and margin growth potential. Month to date, so month to date in July, we've seen continued strong trends in our portfolio and have not witnessed any signs of deceleration in trend based on macroeconomic volatility. Rev par and EBITDA for the quarter is expected to be above third quarter 2019. And our New York City portfolio is forecasted to once again produce the largest share of revenue in EBITDA, while our resort portfolios continue their unprecedented run with strong growth forecasted in South Florida and our West Coast markets. So this concludes my portion of the call, and we're happy to address any questions that you may have at this time.
spk00: Operator? Thank you. As a reminder, if you would like to ask a question, please dial star followed by one on your telephone keypad. And to cancel that request, you can dial star followed by two. Our first question of the day comes from the line of Tyler Battery of Oppenheimer. Tyler, your line is now open.
spk01: Thank you. Good morning. I appreciate it. First question for me, in New York City, a lot of optimistic commentary there showing the results for the second quarter quite strong. Can you talk a little bit more about what the mix of business looks like right now leisure versus corporate and then when you look at the gap in terms of occupancy right now compared with 2019 just talk a little bit more about what that recovery looks like I'm assuming the biggest opportunity is really on the midweek side of things to kind of to kind of bring that back but if you could just talk about what you think in terms of the trajectory, building back towards 2019 levels, that would be helpful.
spk06: You know, maybe I can just get us started, Tyler. You know, it is, the weekends over the summer have definitely driven some very strong results. I think we've been positively surprised and positively encouraged by how quickly midweek is building. That said, there is still a meaningful opportunity to increase that. And I think it's a combination of business travel, just kind of business transient, return to work, return to office, as well as discretionary travel now being permitted by most major employers around the country. that will drive that kind of midweek occupancy. But there's also the increasing kind of group activity related to conventions and big events that will start to kick in as early as August and September. And then finally, international travel, which has always been a source of compression, both midweek as well as during the weekends. We are still missing that. I would say we're probably back 60%, 70%. to prior levels of international travel. So there's still some runway there across the third and fourth quarter and into next year for Asian travel probably. So it's, you know, it is a midweek opportunity and it's likely, I'm just looking over, have we quantified, are we willing to quantify kind of the, it's kind of probably about a thousand basis points still of opportunity, 1,000 to 1,200 basis points of opportunity midweek.
spk05: I think that's right. So Tyler, just to give you some stats there. So June, for our New York City portfolio, we ran 80% occupancy in June. We think that July and August are pretty similar. Really, you start getting into September, October, we're probably getting into the mid-80s at that point. which is extremely strong, but as Neil mentioned, still about 1,000 basis points below what we did in 2019. Now, with the focus on pushing ADR and really just everything that we've seen, we don't know if we've pushed to 95% again for this year for occupancy, which is usually what we run in the fourth quarter in New York City. So I think that we're going to hold steadfast at sort of driving rates in New York, and we're seeing really strong pricing pressure and ability to drive rates, so we may not try to get back to occupancies until next year sometime.
spk01: Okay, great. My follow-up question, just in terms of capital allocation, you obviously have a substantial amount of financial flexibility here, given the asset sales. Your multi-part question, you know, how are you thinking about potential acquisitions? And then in the past, you know, there's been some discussion about, you know, selling additional assets, New York City, Pan Pacific, et cetera. Interested your latest thoughts on that topic as well.
spk03: Sure.
spk06: You know, I Tyler, across the last couple of years we've sold over $700 million of assets and a meaningful portion of that was, nearly all of that was kind of urban hotels. They were lower REVPAR assets and the most stabilized kind of hotels in the portfolio that we've owned for the longest period of time. There aren't, you know, we continue to consider reducing our exposure to New York City. And we'll continue to have some dialogue on an inbound basis, but we're not actively marketing anything right now in New York. The credit conditions have definitely slowed the hotel transactions market. And with the confidence we have in the next several quarters of performance, we'd rather be marketing any additional hotels for sale after we have some cash flow recovery, one, and there's a more fluid credit market available. We had discussed earlier in the year selling in Seattle. That's a great example of a market just that has hit its kind of inflection point a little bit earlier than we might have suspected towards the beginning part of the year. But just kind of on a quarterly basis for Q2, we were up 56%, 57% versus 2021. So we're starting to mobilize and inflect, and so I think we're happy to kind of continue to own these assets and look at sales next year. I think in terms of capital allocation, whether we look at acquisition opportunities, it's again, it's kind of the market is a little bit uncertain right now. I think before we consider acquisitions, we're probably going to be discussing with our board returning some capital to shareholders. And so I think the next big capital allocation decision really centers around the size and regularity of the dividend.
spk01: Okay, great. That's all from me. Thank you for the detail.
spk00: Thank you. And our next question is from the line of Dori Keston of Wells Fargo. Dori, your line is now open.
spk02: Thanks. Good morning. Can you differentiate between where you expect your resort versus urban portfolio to be versus 2019 EBITDA by year end?
spk05: Yeah, Tori, right now we're looking at, by year end, probably around a 60-40 mix still for this year for leaning towards resorts, because resorts have been driving our activity for the first half of the year more than what we would anticipate in, say, 2023. I think that will flip to urban
spk06: 60, resort 40, which is based on 19, and based on this portfolio, it would be around 60, 40, urban to resort. But performance continues to, you know, we continue to have great, if the growth is coming from, through the end of the year, the big growth is coming from the urban side, although the resort sides continue to hold their own.
spk02: Right, sorry, what I meant was, versus 2019 EBITDA? Where would you expect your resort portfolio to be versus where you would expect your urban portfolio to be?
spk06: On EBITDA? Yeah. We haven't provided that level of detail or outlook, but generally speaking, we're still 15% down on top line in major urban markets versus 19% while we're up 15%, 20% in major resort markets. We are capturing great flow through, and so our profitability is a little bit better than that in the urban markets. But, Dory, I'm sorry. We have not provided an outlook for the rest of the year, and And so we're not, we don't have that information with us right now. Okay.
spk02: And my last question was, I think resort margins have been, I mean, over 1,000 basis points up for the first half of the year. Is there, I guess, is there a reason to believe that that can hold?
spk05: Yeah. Based on what we're seeing currently, we do feel like it will hold to above 1,000 for the rest of the year.
spk02: Okay, thank you.
spk00: Thank you. And our next question is from the line of Michael Bellisario of Baird. Michael, your line is now open.
spk04: Thanks. Good morning, everyone. Good morning, Mike. Neil, I just want to go back to your comments from, I think, two questions ago, just on dividends you mentioned. That's sort of next in the queue, but where do buybacks fit and kind of how are you thinking about NAV for your portfolio or more broadly, especially in light of all the changes in the last, call it, three, four months in the capital markets and the transaction market?
spk06: Yeah. You know, we have not made major adjustments to our NAV calculations. I think when you speak to people in the transactions market today, they'll tell you that deals and trades aren't happening without a 10% to 15% reduction in sellers' expectations to reflect the change in the credit market. Because we are not in any way for sellers or have any kind of non-core assets that we're really looking to jettison, we're not sellers in a time where there's that wide of a bid-ask spread. So we consider our NAV to be relatively stable since the early part of this year. We sold these seven assets very close to our private market value and our view of NAV on those assets. And so the discount to where we trade versus where our private market value or our view of NAV is still pretty wide, 30 to 40% kind of discount. you know, we'll see how the world emerges across the next six to 12 months to see if we have to adjust our expectations on value. But right now, we believe that the cash flow that these assets will generate and the attraction of kind of lodging real estate among commercial real estate alternatives across the next several years will lead to to good values and values returning to lodging. So we haven't adjusted our NAV expectations. We're still trading at a meaningful discount to our NAV. And in that environment, it's very difficult to consider acquisitions. And so we do think about returning capital to shareholders. And at this stage, we're not thinking as much about buybacks. We think that with the sale, we have significant gains that we do need to for tax purposes make a special dividend. And what we'll likely be talking about with the board is whether it's a meaningful, sizable special dividend and a starting of any kind of regular dividend or whether we'll continue with just the special dividend this year and then consider other alternatives next year. But that's for board discussion, but our mind is more there today than additional dispositions or acquisitions right now.
spk04: That's helpful, Colin. Thank you. And then just switching gears on labor, can you just maybe provide an update on where you're seeing wage growth and where headcount is, really just kind of the puts and takes on labor and what's changed in the last 90 days or so?
spk05: Yeah, sure, Mike. We're seeing... As we look at our current labor rates to 19, we're still in that sort of 15 to 20% higher at this time than what our overall in-house wages were in 2019. Staffing levels are approaching 80% of 2019 as our occupancies start getting pretty close in most of the markets to 2019 levels. If we look out maybe a year from now, maybe by second quarter, we're probably 85%, maybe 90%, but we don't really see our portfolio, the need to exceed that based on efficiencies that we've garnered through the pandemic.
spk04: And then what does that translate into kind of just your high-level, long-term view of of margin upside versus 2019 levels? Is it still the same as it was previously?
spk05: Yeah, it still is. I mean, I think that we're seeing better ADR across the board, which is helping sort of bring that to a, you know, to keep that range to 150 to 250, but we've been exceeding the 200 basis point range for the last few quarters, so I still think we have a lot of confidence in that.
spk00: Great, thank you. And our next question is from the line of Eric Field of Jefferies. Eric, your line is now open.
spk09: Thanks, and good morning, everyone. I'm on for David Cass. Similar to an earlier question that was asked, both the transaction, you stated that you're moving into a cash generation mode for now. And I was just curious to maybe put some parameters on that and maybe where you'd like to take leverage levels over longer term.
spk06: Yeah, Eric, you know, I think over the longer term, we aim to get to below four times on a debt to EBITDA basis. We're currently closer to five times as the year goes and as we generate cash and or generate cash through asset sales. We will be able to get by 23, get kind of within shot of that goal. and keeping that kind of, having that kind of cash will give us the, allow us to continue to be opportunistic as well. But that is our goal, and that's been kind of where we've been aiming to get to, and as we've said in many of our calls across the pandemic, although that is our goal, we have a lot of confidence in the quality of our portfolio and the ability for this portfolio to generate cash, so we haven't been willing to dilute shareholders to get to that leverage level, nor sell our most valuable highest growth assets to get to that level. And we've been able to take our time across the pandemic to wait for periods where we can get asset sales done at a level that we're able to pay down debt disproportionately versus the lost EBITDA. And we're very appreciative of our relationships with our bank group that gave us the kind of patience and flexibility to get through these last couple of years and time transactions just right. And we've also been fortunate to work with some great counterparties on the buy side of our assets to get things done. And our team has just been phenomenal across these last couple of years. We always herald how well we do on the operational excellence side, our asset management team and our folks in the field that are really driving results. But I think what's very important across these last couple of years has been the transactions that we've been undertaking and doing them, achieving great results on the financial side and executing them in-house here with our finance and legal and acquisitions team. But it's just been a really strong performance.
spk00: Perfect. Thank you. Thank you. And our next question is from the line of Anthony Powell from Barclays. Anthony, your line is now open. Please proceed.
spk10: Thank you. Good morning. I think you mentioned earlier that your resorts are up 15% versus 19% while urban is down 15% roughly. As the recovery kind of continues, do you expect those resorts to kind of maintain that 50% growth or premium versus 19% as urban recovers? Or do you think they may converge back to kind of like, you know, I'm just trying to figure out if resorts can really kind of maintain the premium they've received this year.
spk06: You know, Anthony, we do believe that at least, you know, we're not making a call on resorts all around America, but for our portfolio, our resorts, which are coastal California, the PCH, Miami and Key West, the Chesapeake and Connecticut, Those markets, we do believe, those markets and those assets will stabilize at significantly higher than 19 levels. As you've been following the company for a while, so you know all of what we did to these assets in 2017 and 2018. And these assets, to be fair, were ramping back up after major transformative upgrades in 2019. So we would be highly disappointed if they did not stabilize at meaningfully higher levels of profit. So we do expect our resorts to continue to, that they will stabilize well above 19, and we believe that the urban markets, based on the level of ADR growth that we're achieving without really reaching compression levels of occupancy, gives us confidence that we're gonna stabilize urban well above 19, and likely before we all thought at the start of the pandemic. We're not willing to go that far yet, but we used to talk about highly urban portfolios taking until 24, 25, 26 to recover, and I think what we're seeing on the ground in 22 gives us a lot more confidence that that can be done earlier. Thanks, and maybe a follow-up.
spk10: I think earlier, I think some commentators are saying that the transaction market was undervaluing kind of current resort performance given there is some doubt of its sustainability, but you seem pretty confident about these resorts holding up and they continue to do well. So do you think the transaction market has started to maybe recognize the stability of these cash flows that you and others are generating at these resort properties?
spk06: I mean, I would say that There is probably right now, like the transactions that are still getting some interest today are probably more on the resort side because Capital does believe that that is a sustainable kind of demand, not only from domestic travel, but when international travel returns and when group and conventions and major events start occurring at these resort markets. I think that is the view today and it's a view that I think we share. It hasn't allowed us to have the conviction to buy a lot of resorts at a time like this because it is still a question I think in our mind and it depends on the resort market that we're speaking of. I think we've always held to this view of trying to have a multiplicity of demand generators. And as you know, our resorts are part of our gateway clusters. They're a couple-hour drive from San Francisco or L.A. or Miami or New York City or Washington. And so we believe that at least those resorts are going to continue to grow and continue to be a great asset class for investors. The urban side is where there's just been very, very low sentiment through the very beginning of this pandemic. And just now, I guess the cash flows are recovering to a level that investors were starting to get pretty interested in the beginning part of this year, but then the recession and the dislocation of the capital markets, I think, and the credit markets has discouraged a lot of transactions. But I think most of the brokerage community believes that 23 is going to be a very big year for urban asset transactions, because that's where the puck's going, as they were.
spk10: Thanks. And maybe one more quick one. What's your view on odd loan portfolio size? I think you're still talking about maybe losing more sales. The EBITDA is getting a bit smaller as you do that, so I'm curious what's your view on kind of a minimum either hotel count or EBITDA count, if that makes sense. given your platform.
spk06: Yeah, you know, Anthony, I think we've spoken about this topic before. You know, we do not have an ideal, idealized kind of view of it. I think there's been a lot of debate on where, at what level there's diminishing returns in hotel ownership and hotel management and whether there's any significant cost of capital advantage to scale and the like. But as we've discussed, there are certain costs of running a public business that you do need to have assets and EBITDA to be able to offset. And so I would say that we are not at the optimal size for a public platform, but we believe that we can generate significant value at this size for shareholders. And that's what we're very focused on. The credit conditions really aren't supportive for meaningful M&A of large transactions on the buy side or the sale side. But there is real increasing visibility on free cash flow and profit growth. And so we're focusing on what we can control. You need a really good environment for M&A, but in the meantime, we can drive great free cash flow, deliver strong shareholder returns, try to close more of this gap. and then see how the world looks in a couple of quarters. Thank you.
spk00: As a reminder, if you'd like to ask a question, please press star followed by one on your telephone keypad now. And our next question is from the line of Bill Crow of Raymond James. Bill, your line is now open. Thanks, and good morning.
spk07: Three quick questions for you. First of all, can you just remind us the – perspective size the special dividend?
spk05: Right now, I mean, look, we haven't discussed this with the board. We still need to work through it, but as a proxy, I think that we would look at just looking at our gains from these transactions, about $200 million. We have NOLs we can utilize, but I think that to think it should be at least special should be somewhere in the range of probably 25 to 50 cents is not out of bounds at this point.
spk07: Okay. Thank you for that. You have a gut feeling, Neil, about how the resort portfolio might perform next year relative to 2022? We're getting about 19 per minute. I'm just looking at the tough cops that we're facing.
spk06: Yeah. That instinct is that it will be positive. But in certain markets, you know, I think it might be a little bit, you know, it might be tougher on the ADR side. Like I think like a market like Key West, for example, was the only asset in South Florida where we had any kind of level of retracement in Q2. And we were down... you know, 10% to 12% or so on RevPar there. The main driver of it wasn't the kind of overall ADR or overall kind of leisure demand. It was not having an airline crew in the hotel that we had the prior quarter last year. I mentioned that because Key West is a very small market and it can move very quickly and these assets can move with a new contract, a new convention, a new group in town. And so our outlook for the rest of the year for Key West is in Q3 we're right now forecasting to be down a bit compared to 21, but in the fourth quarter we expect to be meaningfully above our 21 and Q4. All of this, we're way above 19, obviously, but just a market that a lot of people look to as being a real beneficiary of kind of the pandemic travel patterns. Even a market like that is still not significantly down and still has quarters even coming up that will be up meaningfully. Now I'll contrast that with Miami Beach where compared to we shared in our prepared remarks all of the kind of meaningful outperformance versus 19, but even versus 21 we're still up on Q2 nearly 20% at the Cadillac versus 21 still up nearly 32% at the Ritz-Carlton Coconut Grove, and 21 was very strong years for both of those hotels. So we still have some occupancy that we're going to gain at these hotels next year as international demand comes back and group and convention comes back. But having kind of low to mid-single-digit growth from our resort portfolio in 23 is where my head is at right now. Yeah, that's perfect. I appreciate that.
spk07: And then finally for me, and maybe this is for Ashish, but congratulations on the improvement on the balance sheet front. We're always going to ask for more, of course. And what I would suggest is your debt ladder looks a little like a stepstool. And you've got an awful lot on a short-term basis. Is there any flexibility to extend maturities over the next year or two if we get this this ongoing recovery in EBITDA?
spk05: Yeah, no, absolutely. Look, we've got the credit facility that with the extension option is three years out. So that when you think about our debt, you know, the $500 million facility bill is, you know, now roughly 60%, 70% of our total debt. The remainder of it is really single asset mortgages with cash flow improving. And with our, they're almost all balance sheet loans that we have very good relationships with. We feel very confident. I feel very confident we'll be extent, we'll be able to extend those mortgages out as well. Okay. All right.
spk07: That's it for me. Thank you.
spk00: Thank you. And we have no further questions lined up for today. So it's my pleasure to hand back to Neil H. Shaw for any further remarks.
spk06: Well, thank you. With no more questions, I would like to take a moment to thank everyone for their time. We know everyone has an extremely busy day and week, but feel free to call us whenever you free up. Jay, Ash, and I are all here for any further follow-ups.
spk00: Thank you. Thank you, everyone. This concludes today's conference call, and you may now disconnect your lines.
Disclaimer