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Hersha Hospitality Trust Class A Common Shares of Beneficial Interest
Q4 2022 Earnings Conference Call
2/16/2023
spk01: and a warm welcome to the Hershey Hospitality Trust fourth quarter 2022 earnings conference call and webcast. My name is Candice and I will be your operator for today's call. All lines have been placed on mute during the presentation portion of the call with an opportunity for question and answer at the end. If you'd like to ask a question, please press star followed by one on your telephone keypad. I would now like to hand the conference over to our host, Andrew Tamachio from Investor Relations, The floor is yours. Please go ahead.
spk02: Thank you, Candice. And good morning to everyone joining us today. Welcome to the Hershey Hospitality Trust fourth quarter 2022 conference call. Today's call will be based on the fourth quarter 2022 earnings release, which was distributed yesterday afternoon. Before proceeding, I'd like to remind everyone 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 filings with the SEC. With that, it is now my pleasure to turn the call over to Mr. Neal H. Shaw, Hersha Hospitality Trust President and Chief Executive Officer. Neal, you may begin.
spk07: Good morning, and thank you for being with us on today's call. Joining me this morning are Ashish Parikh, our Chief Financial Officer, and our Executive Chairman, Jay Shah. I'll begin with our results in the quarter and a quick recap of our strategic accomplishments in 2022 before touching on our capital allocation outlook for the year and discussing our view of the portfolio going forward. Ash will take a deeper look at our first quarter guidance, talk through the balance sheet, and discuss our margin outlook. When we last spoke in late October, despite economic uncertainty and market volatility, our positive outlook was driven by performance on the ground, signaling a pickup in travel within the core urban markets, as well as a continuation of demand for differentiated high-end leisure offerings. And these trends continued throughout the fourth quarter. Our comparable hotel portfolio generated 71.2% occupancy, and an ADR of $311.86, resulting in rev par of $222.10 for the fourth quarter of 2022. The high quality of our portfolio, coupled with the ongoing demand environment, allowed our revenue managers to continue to drive rate in the quarter, as ADR outpaced our 2019 rate by 21.5%, and all of our markets expanded ADR more than 15% compared to 2019. Our view on rate integrity remains unchanged, as we are currently experiencing robust ADR growth throughout February and anticipate continued pricing power as occupancy returns. Our focus on driving rate resulted in a 5% increase in rev par for the fourth quarter, with rev par growth compared to 2019 in each month since September to close out the year. As I transition to our market performance, I will start with our urban portfolio. Urban demand accelerated into October, as RevPar pulled even with 2019 production for the first time since the onset of the pandemic. In total, our urban portfolio generated over $9 million of EBITDA, 67% of total portfolio production in October, seasonally our strongest month in Q4. And momentum persisted throughout the quarter, as weekday rev par in December outpaced 2019 for our urban portfolio, weekday rev par, driven by a 4% increase in Manhattan. Overall, Manhattan was our largest EBITDA-producing market for the quarter, generating $9.6 million, or 31% of total portfolio EBITDA. Our two highest EBITDA-producing assets for the quarter were the Hyatt Union Square and the Hilton Garden Inn, Midtown East. each generating $2.7 million in EBITDA, outpacing 2019 by 12% and 15% respectively. Manhattan's EBITDA production was rate-driven, as our portfolio posted 16.8% ADR growth for the quarter. Our Manhattan December REVPAR growth of 6% was driven by over 20% ADR growth for the month from 2019. Now, while we are encouraged to see our hotels surpass 83% occupancy in December, there is still significant room for recovery, as our Manhattan market is still 1,100 basis points below 2019 levels. Boston had yet another strong quarter, with 11% rev par growth compared to 2019. This was driven by nearly 17% ADR growth. The Boston Envoy outpaced 2019 RevPar by nearly 5% in the quarter, while generating $1.7 million in EBITDA, a 21% increase to 2019. Rounding out our urban portfolio, our Ritz-Carlton Georgetown continues to outperform, posting nearly 40% ADR growth compared to 2019, resulting in 67% EBITDA expansion for the quarter. Urban luxury trends are impressive. Meanwhile, in Philadelphia, our Westin generated nearly $2.4 million of EBITDA in the quarter, despite disruption from a rooms refresh project that is currently underway. Our Rittenhouse Hotel in Philadelphia outpaced 2019 RevPAR by 3%, driven by nearly 30% ADR growth. Once again, South Florida's continued strong run drove our resort performance in the fourth quarter. The Parrot Key Hotel and Villas, and the Cadillac Hotel and Beach Club were top five EBITDA contributors for our portfolio, generating $2.4 million and $2.3 million of EBITDA, respectively. South Florida was our second biggest EBITDA contributor, generating $6.5 million, over 20% of the total portfolio. For 2022, these two assets alone generated almost $22.7 million of EBITDA, and are on track to achieve the return on investment we projected when we undertook the transformational renovations at both of these assets back in 2018. We also upgraded the Ritz-Carlton Coconut Grove pre-pandemic and Q4 achieved 37% growth driven by 33% ADR growth. The Ritz-Carlton exceeded group revenue by 20% in Q4 and has a very strong outlook for 2023. On the East Coast, the Mystic Marriott and the Annapolis Waterfront Hotel generated $2 million and $1.8 million in EBITDA, outpacing 2019 by 76% and 47% respectively, clearly demonstrating the earnings potential of best-in-class assets in regional resort markets with multiple demand generators. On the corporate front here at Hersha, after a strategic and transformational year for our company, we begin the new year with significant cash on hand, access to an undrawn revolver, and a lower leverage profile than we've had in many years. While we remain content in our markets and our portfolio, we are further comforted with our financial position. While the debt and transaction markets remain muted, we will remain flexible and entrepreneurial in our approach. We constantly monitor the markets and actively underwrite opportunities to expand our footprint. Given our financial flexibility and relatively low sensitivity to the interest rate environment in a time of economic uncertainty, we are particularly well positioned to act swiftly when the right growth opportunities present themselves. Our management team has worked diligently to right-size our balance sheet and to close the significant NAV gap that persists for our portfolio. We still believe that we trade at an outsized discount to our private market value and are extremely sensitive to any capital allocation decisions that would impact our NAV or leverage as a trade-off to growth. This is my first call as CEO of the company, and before turning the call over to Ash for a more detailed look at our financials, I want to take a moment to make some comments about our portfolio today in light of this NAV gap. Our performance during 2022 was far ahead of what many had expected, not only from a REVPAR standpoint, but most definitely from our full EBITDA recovery versus 2019 peak we achieved during 2022. Although the anticipated timeline of recovery in our markets was estimated to be sometime in the latter half of 2024 or even 2025, we surpassed 2019 EBITDA production in every quarter of 2022. And with EBITDA expansion in both our urban and resort markets, we delivered the largest outperformance in the fourth quarter with comparable portfolio EBITDA of $31.4 million, a 12.6% increase to 2019. This outperformance is a result of our execution, but importantly, it is a result of our streamlined and focused portfolio. Through our deliberate work to dispose of our non-strategic assets, we've created a high-quality, purpose-built portfolio levered toward high-growth urban markets and a strategic mix of resort markets. Our properties are located on premium real estate and in markets where we identified a multiplicity of demand generators. And this refined portfolio continues to be positioned to outperform as the industry continues its long recovery. We believe it is important to understand that seasonality of our portfolio is also fundamentally different than the portfolio we held before the pandemic. With the changes we have made since 2020, our resort portfolio benefits from multiple demand generators. First, it has benefited significantly from an increase in domestic leisure travel, which led to record EBITDA production. Second, in addition to demand for high-end experiential leisure travel, which we believe will continue, our purpose-built resort portfolio is also positioned to benefit from additional revenue streams and non-leisure demand. All but two of our resorts are located in markets that cater to additional travel segments, including convention centers, corporate headquarters, and universities. The most notable case of evolving market drivers can be seen in Miami, which has experienced a significant influx of new business and residential relocations in the past three years, as well as the renovation of its convention center. Similar market trends apply to resort markets in Annapolis, California, and New England. The exceptions are our resorts in Key West and Monterey, California, which are more solely focused on leisure. We do expect these resorts to stabilize in 2023 after unprecedented performances in 2021 and 2022, but we do not expect significant retracement. Parrot Key, in particular, is on pace to significantly outperform 2019 and is still benefiting from its comprehensive renovation following Hurricane Irma. The Sanctuary Beach Resort will be undergoing an ROI capital project this year that will set the property up for another level of growth moving forward. In our urban markets, we made the decision to sell our urban select service portfolio, which reduced our reliance on business transient. Our focused urban portfolio is located in markets with long runways for growth and will benefit from the additional return of occupancy and demand that we expect, aided by an increase of group, business transient, and international travel as markets around the globe continue to open up from pandemic-era restrictions and travel to key gateway markets in the U.S. accelerates. We recognize the macroeconomic outlook remains uncertain, but despite the constant drumbeat of recessionary forecasts and negative sentiment data, We see actual economic activity as measured by job gains, industrial production, and retail sales still indicating growth. This is certainly true for what we are seeing on the ground in our hotel performance as well. In summary, our portfolio is exceptionally well positioned to expand cash flow generation through operations as it benefits from the broader trends we see across the market, including the growth of experiential travel and demand for differentiated high-end leisure travel, and the continued pent-up demand, especially from business travel and the international segments, all in an environment of very low supply growth. The setup in fundamentals is very encouraging. With that, let me turn it over to Ash to discuss in more detail our financial outlook, margin performance, and our updated guidance for the quarter.
spk08: Great. Thanks, Neil. And good morning, everyone. So during the fourth quarter, the company completed the sale of the Courtyard Sunnyvale, the only remaining asset of the Urban Select Service portfolio that closed in August of 22. In addition to the sale of the Hotel Milo Santa Barbara, Pan Pacific Seattle, Gate Hotel JFK Airport, and our joint venture interest in the Courtyard South Boston. In total, the asset dispositions completed during 2022 generated approximately $650 million in gross proceeds, and net proceeds from these sales reduced our total debt by approximately $510 million, while generating unrestricted cash of nearly $120 million. In conjunction with our strategic dispositions, we completed a comprehensive refinancing of our credit facility. As of year end, the credit facility consisted of a $373 million term loan and an undrawn $100 million revolving credit line at 2.5% over the applicable adjusted term SOFR. The facility matures in August of 2024 and has one 12-month extension option to August of 2025. As part of our refinancing, we used an existing swap to hedge $300 million of the new term loan at a fixed rate of approximately 3.93%. As of year end, 73% of our outstanding debt is either fixed or hedged, and despite the recent surge in interest rates, our fourth quarter weighted average interest rate was approximately 5%, with a weighted average elective maturity of approximately 2.6 years. We closed the year with $230 million in cash on hand, in addition to our $100 million undrawn revolver. Since the onset of the pandemic, management has been focused on reducing our leverage and creating additional financial flexibility. With a stated goal of three to four times debt to EBITDA, our transaction and refinancing activity in 2022 allowed us to achieve this goal as we ended the year with just over three times debt to EBITDA on a TTM basis. As a result of our reduced debt profile, we were able to save $2.5 million in interest expense in the fourth quarter compared to the third quarter, despite the rising rate environment. In fact, we were able to generate $1.4 million in interest income on our cash reserves in the quarter via short-term deposits. Moving forward, we will be able to take advantage of increasing rates using similar deposits, which will generate significant additional cash flow as we evaluate optimal uses of our cash on hand. which could include additional debt or preferred pay downs, depending on how the opportunities unfold in the upcoming year. As Neil noted, we have begun a renovation at our sanctuary beach resort in Monterey this year, and we expect this will significantly improve cash flow for the hotel in years to come. With this renovation and a few lifecycle refreshes on deck for the portfolio, we project capex spend of approximately $35 to $40 million in 2023, up only $10 million as compared to 2022 due to our significant investment in the portfolio before the pandemic and our selective disposition of assets that required major capital investments which did not meet our internal return requirements. As in previous years, we will attempt to complete the majority of these renovations in the first quarter of the year, which is seasonally the slowest quarter of the year for our portfolio. And this will impact our first quarter results at a few of our hotels, including the Westin Philadelphia, where we are undertaking a full refresh of the rooms after completing the public areas a few years ago, a complete restaurant renovation at the Mystic Marriott, and renovations at both Hilton Garden Inns in Manhattan that are receiving public space upgrades. With that, I'll transition to the portfolio's performance and our outlook. Our consolidated portfolio generated EBITDA of $31.8 million for the quarter. This is only $1 million less than our production in the prior quarter, despite a reduced property count following the closings I discussed earlier, which was offset by the strong pickup in our urban portfolio. Our corporate cash flow, however, increased 20% quarter over quarter to $16 million as a result of reduced interest expense and a more efficient balance sheet. In the fourth quarter, EBITDA margin for the comparable portfolio was 33.1%, a 209 basis point increase to 2019 within our projected range of growth. Both our urban and resort markets exceeded 2019 EBITDA and GOP margins in the fourth quarter. After surpassing 2019 EBITDA margin by 383 basis points in the fourth quarter, The resort portfolio has achieved margin growth in each quarter of 2022. Meanwhile, our urban hotels realized EBITDA margin growth of 124 basis points compared to the fourth quarter of 2019. This marks the first quarter of EBITDA margin expansion for the urban hotels compared to 2019 and is up sequentially from a loss of 833 basis points in the first quarter of 2022. Quite a remarkable recovery during the year for our urban hotels with more growth on the horizon. I would like to reiterate that we currently forecast maintaining margin growth in 2023 compared to 2019 levels on an annual basis. With 2019 representing the last normalized year of performance before the impact of the pandemic, we will continue to measure margin performance in 2023 against that baseline. Looking at human capital, although some of the staffing challenges the industry experienced over the past two years have abated, competition for talent remains strong. On the positive side, we are generally filling roles more quickly and retaining employees longer than earlier in the pandemic, but labor costs remain elevated. In addition to the benefit of ADR-driven REVPAR and revenue growth, we have been able to offset much of that increase and the broader impact of inflation with operational efficiencies and staffing model changes, which we were able to achieve in part through our franchise operating model and close alignment with our affiliated management company. As we look at the changes we made over the past few years, while many of our pandemic-era staffing models and offerings were not intended to be sustainable over the long term or to be permanent, we are pleased that many of the long-term efficiencies we achieved as a result of new staffing protocols and uses of technology are sustainable over the longer term. Looking ahead, now that we have returned to a more normalized offering environment, we will be able to maintain the high-level guest experience that our customers are accustomed to at our hotels while continuing to generate industry-leading margins and cash flows. As we move into the next leg of the recovery, much of our portfolio's margin growth will be driven by the acceleration in our urban markets. While we are very pleased with our fourth quarter performance, our urban portfolio was still 1,400 basis points below 2019 occupancy. We anticipate significant additional return of occupancy and demand in the urban market aided by an increase of group, business transient, and international travel. The resulting additional revenue will have a higher flow through to profitability as the majority of our fixed labor and managerial staff have returned to our hotels and we will only require variable labor to meet this additional demand. Looking ahead to 2023, although the first quarter is seasonally the lowest contributor for our portfolio, accounting for approximately 14 to 16 percent of full-year EBITDA on a historical basis, performance through mid-February has exceeded our internal forecast, despite the disruptive ongoing renovation work that I highlighted. Our January results were very encouraging with our comparable portfolio REBPAR ahead of January 2019 by approximately 4%. And month-to-date, our February REBPAR is ahead of February 2019 by 5.5%. And we continue to see a healthy pickup in our booking pace for the remainder of the quarter. Our current plan is to provide comparable 2023 results versus our comparable 2019 results as long as it remains relevant and meaningful instead of comparing against our 2022 results. As we look at our January results, our comparable portfolio rep par was up over 65% for all of our urban markets versus January of 22. And our comparable portfolio was up over 35%. And at this time, we don't find these results to be meaningful to our stakeholders. While analysts forecast for the broader economy in 2023 vary significantly, results on the ground have been positive thus far, and our portfolio is positioned to drive cash flow at higher margins than before the pandemic. This steady and improving cash flow, coupled with our current balance sheet and low interest burden relative to historic levels, allows us to stay nimble and adapt to the economy real time. As Neil noted, management remains committed to maximizing shareholder value and closing the gap between our NAV and public market value. Whether that is through capital investments in our portfolio, pay down of debt, or acquisitions, we will view all corporate activities through a lens of shareholder value while striving to maintain lower leverage and flexibility. So this concludes my portion of the call, and we're happy to address any questions that you may have. Operator?
spk01: Thank you. If you'd like to ask a question, please press Start followed by 1 on your telephone keypad. If for any reason you'd like to withdraw your question, please press Start followed by 2. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. So our first question comes from the line of Brian Meyer of the Riley Securities. Your line is now open. Please go ahead.
spk06: Oh, great. Good morning. I appreciate all those comments, very thorough. We've been hearing that later this year in the New York City market in particular, there's likely to be some owners with refinancing problems given the current state of the capital markets, particularly as it relates to debt and interest rates. Are you guys thinking that there might be any opportunities for Hershey there
spk07: And what are your thoughts of that and maybe any other markets where you're seeing that potentially happening relative to your exposure already in that market Brian this is Neil You know, you know you asked about New York in particular New York absolutely, you know, we do think that there will be opportunities in Not only in New York, but in every major market in the country, we do think that there is currently a significant kind of lack of credit out there for hospitality. The market has definitely thawed since, say, October, November, December, and there are some lenders out there that are providing quotes on the hotel transactions, but very few and far between. LTVs are a lot lower than they were one year ago, and the cost of financing and just interest expense levels are 300, 400 basis points higher than they were a year ago. So there is clearly a challenge for anyone, any owner, who has a maturity coming up. If they don't have a maturity and they have just a swap or a cap expiring, it's a major issue. I think that we haven't seen a huge influx of potential distressed opportunities yet. But I would say that by the time we were at ALS late January, there was now more and more deals appearing in the broker's books. There was still real question on whether anything could get done, whether the sellers were realistic or whether the buyers are leaning in enough. But I do feel like across the next quarter or two, until the credit markets really start moving and transacting and spreads come in, I think the next couple of quarters there is an opportunity for REITs or for other buyers that have conviction and are willing to be lower levered or all cash, all equity on a transaction may be able to find some good opportunities. So we're out there looking. You mentioned New York versus other markets. We do have a very significant position in New York, and frankly, we're very grateful for it. In 22, it was a very strong performance, but in 23 and 24, we think there is a very strong outlook for New York performance. Supply remains very low, demand fundamentals are very strong. But it is nearly 30% of our EBITDA or 25% of our EBITDA on an annual basis. And so we are probably more likely to look at other markets where we can get additional exposure. We think that there's other urban markets in our existing portfolio. There's other resort regional destinations in our existing portfolio. And there's also some new markets that we take a look at. So that's a long answer, Brian, but we'll continue to look at various markets and various opportunities. We haven't seen anything yet that's highly compelling, but we are seeing opportunities just to reinvest in our existing portfolio to drive incremental growth this year. And again, with our market exposures, we think our organic growth is going to be very impressive this year, so we don't feel like we have to make acquisitions and deals, but we do have the flexibility and capital to do so.
spk06: Thanks. That's helpful. And maybe just a quick follow up for Ashish. In 2023, where in your expense items are you thinking you're going to have the most margin pressure? Is it still labor or might it be elsewhere? You know, we're seeing across our coverage companies, you know, real estate taxes continuing to push higher. Any thoughts you can give us on that would be great, and that's all for me.
spk08: Sure, Brian. Yeah, I think labor is our single greatest expense on the operating side, so we do forecast that to be up in the mid-single-digit range for the year, so that certainly puts pressure on margins. I think other areas that we would be concerned with is utilities, which have gone up a lot in the last few years. Natural grass prices are down pretty significantly because of the mild winter. We're going to look at hedging some of those costs, as we always do. Insurance expenses, property insurance expenses, are generally in line, except in hurricane-prone markets and wildfire-affected markets, where we're not seeing it yet. Our Our insurance is locked up through mid-year, but we are hearing that those could be pretty significant increases this year. So utilities, property insurance. Taxes are going up, but in markets like New York where you're backwards looking and it's a five-year average, our property taxes are still forecasted to be lower than 2019, in 2023, 2024, and even 2025 at this point. So those are some of the puts and takes. Thank you.
spk01: Thank you. Our next question comes from the line of Chris Wawranka of Deutsche Bank. Your line is open. Please go ahead.
spk03: Yeah, hey, good morning, guys. Wanted to drill down a little bit on the, you know, what you talked about is the opportunity to kind of get back to prior occupancy levels. I mean... how do you think rate plays into that right i mean i think there seems to be if we triangulate everything um you know as we see occupancy recover we see rate uh particularly at the higher end going negative year on year and i know there's a mixed shift component to that but i mean is it really reasonable to expect that if we get back closer to peak occupancy that it's going to be at these same rates or do we have to kind of trade occupancy for rate?
spk07: You know, Chris, you know, obviously that's the million-dollar question for the sector if you're trying to make kind of a thematic call on that answer. But if you look at, I think if you break it down to your portfolio and your market positions and your assets, I think that you can get a little bit more confidence in the ability to drive rate in a market of increasing occupancy. Like if you take the example of assets like, you know, the Art Ritz-Carlton in Coconut Grove, that's an asset that has enjoyed leisure transient business really driving the hotel for 21 and a lot of 22. But then it was as the back half of the year group really started to pick up. And by the fourth quarter, we were up very meaningfully on group ADR. And now group occupancy is starting to pick up, and we'll have kind of our best year group occupancy in the first quarter this year in 23. And that's allowing us to push transient ADR even higher. So we're able to project even higher ADR for this year based on just the transient segment as we fill in the group. And group ADR is 20, 30% higher than pre-pandemic. We're seeing that same situation in Annapolis. As government travel comes back and we get the base business back from legislators at our Autograph Waterfront Hotel, we're able to now drive transient ADR 20, 30% higher in Q1 and Q2 of 2023 than we were last year. And so there's those opportunities in the portfolio where you are adding group at high rates because these aren't big box hotels. These are very differentiated and kind of a draw a very premium customer where we are able to continue to drive ADR both on the group side and on transient. In cities in the urban markets like New York City where We used to run kind of 90% to 95% occupancy January through December. We do like this environment where we're running in the 70s and 80s but pushing much higher rates. I think that is a function of there's less supply in the marketplace. Our portfolio is differentiated in high quality in the right locations. And so we're able to continue to drive ADR growth today. And throughout December and as we look through January, February, our visibility is not that sharp as you get beyond the second half of this year. But in the first and second quarter, our pace and ADR pace in all of our urban markets remains very high as we are building occupancy. And so flow-throughs aren't going to be like they were last year because there will be occupancy driving some of this. And we will have some restaurants and bars reopening. But as you remember, our portfolio is primarily leased F&B. And so we are expecting significant ADR growth and margin growth relative to 19 across this year.
spk03: Okay. Yeah, thanks, Neil. Super, super helpful. And then just to kind of follow up on the, I guess on Brian's last question, if you do see acquisition opportunities at some point this year, whether it's New York or somewhere else, understand the comments about potentially looking at different markets. Is that a situation where you might look to, you know, to use equity as a way to further kind of, you know, deleverage the balance sheet? Is that something that's on the table?
spk07: We would unlikely to issue equity until our cost of equity, our cost of capital reflects our NAV, but we today have a couple hundred million dollars of cash on the balance sheet. We have $100 million of line capacity. We have two or three hotels in our portfolio that we've identified in past calls as non-strategic for us. They are assets that are having a very good recovery in 23, one asset in Miami and two in Manhattan, or two in New York, one in Queens and one in Manhattan. And so we are expecting to ramp those up across the next quarter or two and consider them as potential sales in the back half of the year. So we think we have plenty of liquidity to be acquisitive without issuing equity. If that was the question, Chris. And so I think it would be what we've done, what we've demonstrated probably really across not only the last three to five years, but really going back, I think our last common equity issuance was in 2012. So it's been 11 years. And we have instead now, you know, we've transformed the portfolio a couple of times since then. And we've demonstrated consistently that recycling is a way to, you can achieve the same end with recycling. And our portfolio is very liquid and highly attractive. Even our non-strategic assets will be very attractive on the sale market. So short-term, it would be cash on hand. Mid-term, it would be kind of recycling as we sell hotels. And we are still so far away from... our NAV being reflected in our stock price, that's very hard for us to think of common equity.
spk03: Okay, very helpful. Thanks, guys.
spk01: Thank you. Our next question comes from Joshia Chai of Fed. Your line is open. Please go ahead.
spk09: Hey, thanks for taking my question. I'm on for Mike. I guess just the first one at a high level, now that the balance sheet is in a better place, how do you guys think of the best ways to create shareholder value going forward?
spk07: Mike, with our balance sheet in good shape, we think in the short term it's organic growth from this portfolio. and demonstrating to the marketplace the quality, the composition, the segmentation of this portfolio, and demonstrating the earnings growth profile of it, I think is step number one. Step number two is being opportunistic. We think of uses of our capital We've looked at a lot of different opportunities. We talked earlier with some of the earlier questions about acquisitions. We're also always looking throughout our portfolio for opportunities to reinvest in the existing portfolio to drive meaningful returns. And we've had now, across the last five to seven years, we've transformed nearly nine hotels on the balance sheet, kind of timing it in seasonally slow quarters. and getting it done and then creating a lot of value from that. That's the growth that we're achieving in Annapolis and Mystic and South Florida is a function of those kinds of upgrades. And so we see a lot of opportunities throughout our portfolio. Ash mentioned the work we're doing at the Westin right now or the new restaurant at Mystic in St. Gregory. We have some great projects starting at the Sanctuary Beach Resort. So there's some great opportunities to reinvest in the existing portfolio to drive incremental EBITDA. We also look at pay downs of debt. We are fortunate to have a primarily fixed or capped capital structure, but we do have about 20 to 30% of our financing is floating rate, and today floating rate financing is north of 7%. So that's always a easy use of capital for us. But the world's so uncertain today, we're not in a rush to do that just yet, but we're seeing what opportunities are out there relative to the pay down of debt. I know some investors have asked about our preferred, and I know some of our peers have bought that back. Ours was issued kind of in the six and a half percent range. Maybe today it's trading at seven and a half, eight, but relative to where debt financing is for lodging. Perpetual preferred with no covenants at 6.5% feels like very good paper. So we're really not looking at that. If we were able to buy it at a discount in a meaningful size that it made sense to go through all the costs of that effort, we would consider it. But today we lean more towards paying down floating rate debt or acquisitions. And what we're doing right now is reinvesting in our portfolio with the extra flexibility.
spk09: Gotcha. Thank you for that. And then one just quick follow-up. Can you remind us again how you guys think of your JV interests going forward?
spk08: Yeah, absolutely, Joe. You know, we're down to two joint venture investments at this time, both with one partner in South Boston. We're happy with those assets, but we would look to potentially liquidate those interests in the next 12 to 18 months as well as those urban assets continue to ramp up. I think it's a cleaner story. Almost 25% of our EBITDA at one point historically was generated from our JV portfolio, but I think it's just from a simplicity standpoint, we'll look to exit those in the next few years.
spk09: Got it. Thank you. That's all for me.
spk01: Thank you. As a reminder, if you'd like to ask a question, it's staff followed by one on your telephone keypad. Our next question comes from Tyler Bertore of Oppenheimer. Your line is now open. Please go ahead.
spk05: Good morning. Thank you. Just one multi-part question for me. I just wanted to put a finer point on expectations for margin in 2023. It sounds like you're expecting a decline in margin year over year. But compared with 2019, you put out that 150 to 250 basis points range. I mean, for 2023, are you thinking maybe on the higher end of that potentially? And then when you look at potential performance in your resort versus your urban markets on the margin side versus 2019, you know, you think there's more, still more opportunity for growth on the resort side or perhaps maybe urban markets? given some of the opportunities on the rate side of things, we could expect a little bit more margin growth there compared with the resort side.
spk08: Sure. Kyle, let me start with a couple of stats there. So you mentioned the resorts. I mean, when we look at our resorts for 2022, we ran about 800 basis points higher from the EBITDA margin standpoint than we did in 2019. You know, we do not anticipate the resort EBITDA margin going up from 22 to 23. I think that some of that was just, you know, with open positions, protocols, you know, food and beverage offerings. So, no, on the resort side is where we actually think that there will be some backtracking for 2023 versus 22. But still, you know, we are significantly, significantly ahead of 2019 margins. We think that the growth that's likely to come once you get past the first quarter with all these renovations and disruptions is really going to be more in the urban markets. You know, the urban markets, when you think about when they really started performing, you have markets like New York that started coming back or Boston in Q2, but almost all of the urban markets were disrupted, D.C., Philadelphia, through the entire year. So as those start to ramp back up and really build some momentum, we think that the margin growth is in the urban portfolio, you know, over 22, whereas not in the resort portfolio.
spk05: Okay. And just a quick follow-up on this topic, specifically to the labor side of things. Just remind us where you are on staffing levels. versus pre-COVID or maybe versus ideal levels, but I'm also interested, you know, what share of your labor and employee base is contract labor?
spk08: Generally, we are at back to where we were in 2019 on the managerial side. Well, I wouldn't want to say back to 19, but we're where we want to be on the managerial side. We're still below 2019 levels, and we don't expect some of those positions to come back. On the property level, we're about 85% to 90%. Looking at occupancies for 2023, we still are forecasting occupancies in most of these markets to be below 2019 levels, so not anticipating that our staffing levels go up too much from where we are today. Was there another part to that question, Tyler?
spk05: I'm just unsure if I can move the follow-up offline. I'm just not sure. The contract labor, what percentage of your employee base is contract labor right now and how that compares with pre-COVID?
spk08: Yes. I don't have that offhand. I know that in some markets we use a lot more contract labor than others. We generally try not to, but just with the availability of housekeeping, we are probably using more contract labor today than we did in 2019. Okay.
spk05: Very helpful. Thank you for the detail. That's all from me.
spk01: Thank you. Our final question comes from Anthony Powell of Barclays. Your line is now open. Please go ahead.
spk04: Hi, good morning. Thanks for taking the question. I guess another margin question. Over the long run, I guess, what Red Park growth do you think you need to maintain margins, not necessarily this year, but going forward? I think people used to say it was 3% to 4%. Is that still the case? And how is that compared to what it was pre-COVID?
spk08: I think it's a good baseline, Anthony. I mean, you have to look at where it's coming from, right? If all of that 3% to 4% is coming from occupancy, I think it would be tough to get consistent margins. I think even if you have a balance of ADR and OCC, or certainly the more you can push the ADRs, yeah, I think at 3% to 4%, you could definitely have margin growth. But if it's primarily occupancy, I think that makes it challenging.
spk04: That leads to my second follow-up, I guess. Is it the main, I guess, opportunity for you and, I guess, a lot of peers, occupancy growth? I think most hotel REITs are 10% or below, kind of 19 levels, and if that's the case, does it make it harder to push margins if you're really gaining back business travelers and whatnot who are coming in midweek and really pushing up that midweek occupancy?
spk08: Yeah, it does. It does make it harder, but If you can maintain your rates and push rates because of that occupancy, you're really bringing back just variable labor. You know, if you're going from 70% to 80%, you're not bringing back any managerial staff. You're really bringing back a few desk agents and housekeeping. So the flow on that isn't too bad. And that's really what we're looking at for this year. is absolutely occupancy is going to be the driver of a lot of the rep car, but the cost associated with those incremental room sales shouldn't make us go backwards on the market.
spk04: Got it. Thanks. Maybe one more quick one, and sorry if you talked about this before. What's your updated outlook on leisure pricing? I think it's remained pretty robust, but there's things to be worried about leisure pricing throughout the balance of the year. What are you seeing right now? What is your expectation for the rest of the year?
spk07: Leisure pricing, we have not seen a retracement at this time. We mentioned that in the fourth quarter and even into the first quarter, we have a little bit of softness in two resorts, our Key West, Parakeet Hotel and Villas, and the Sanctuary Beach Resort. They have gone backwards on RevPar from 2022. ADR has held pretty close in both cases. And as we look forward in the couple quarters ahead, we are still projecting and pushing ADR growth in our pace in those markets. And so it is hard to keep pushing ADR, but with certain assets and with the right business mix, we are able to drive it in the vast majority of our portfolio in leisure assets. I made the example of Annapolis. You are able to push transient ADR if you have a significant base of business. And if that base of business is coming in at ADR levels that are higher than two, three years ago, we are able to continue to push that kind of level of ADR growth. I think it is specific to various portfolios and various assets. But ADR growth in the end is a function of an asset being differentiated and being a target for this premium customer that is demonstrating in all sectors of the economy willingness to pay more than they have in the past. And we are seeing that in our luxury hotels. We're seeing it in our lifestyle hotels, both in the resort space as well as the urban space. All right. We can only share what we've seen so far. Thanks, Anthony.
spk04: Understood. Thanks.
spk01: Thank you. As there are no additional questions waiting at this time, I will pass the conference back over to Neil Shaw for closing remarks.
spk07: Great. Well, thank you all for your time today. I know there's a couple of other calls today that may take people offline, but feel free to give us a ring throughout the day today and in the coming weeks. We look forward to speaking to everyone after the end of the first quarter, if not at some investor meetings in between. But thank you for your time.
spk01: Ladies and gentlemen, this concludes today's Hershey Hospitality Trust conference call. Have a great day ahead. You may now disconnect your line.
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