RLJ Lodging Trust

Welcome to the RLJ Lodging Trust Second Quarter 2021 Earnings Conference Call. As a reminder, all participants are in the listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. I would now like to turn the call over to Nikhil Bala, RLJ's Vice President and Treasurer of Corporate Strategy and Investor Relations. Please go ahead.

Thank you, Operator. Good morning and welcome to RLG Lodging Trust 2021 Second Quarter Earnings Call. On today's call, Leslie Hale, our President and Chief Executive Officer, will discuss key highlights for the quarter. Sean Mahoney, our Executive Vice President and Chief Financial Officer, will discuss the company's financial results. Tom Bartnett, our Executive Vice President of Asset Management, will be available for Q&A. Forward-looking statements made on this call are subject to numerous risks and uncertainties that may lead the company's actual results to differ materially from what had been communicated. Factors that may impact the results of the company can be found in the company's 10-Q and other reports filed with the SEC. The company undertakes no obligation to update forward-looking statements. Also, as we discuss certain non-GAAP measures, it may be helpful to review the reconciliations to GAAP located in our press release from last night. I will now turn the call over to Leslie.

Thanks, Nikhil. Good morning, everyone, and thank you for joining us. We hope that you're having a great summer and contributing to the surge in leisure demand by taking the opportunity to travel yourself. Throughout the second quarter, the widely anticipated strong leisure demand not only materialized but also surpassed our expectations, while business transient and group demand also improved on a relative basis, all of which allowed our portfolio to meaningfully outperform. While the COVID variants are a risk, we are encouraged by the acceleration of demand trends so far into the third quarter. We are optimistic that pent-up demand will continue to drive improvements in fundamentals. We saw evidence of pent-up demand throughout the quarter. The industry achieved new highs in occupancy each month, with the second quarter recovering to 87% of 2019 levels. Our portfolio achieved occupancy in line with the industry and outperformed the top 25 markets as we gained market share. We believe we will continue to deliver strong performance relative to the industry as a return of business transient demand should benefit our urban-centric portfolio. During the second quarter, our strong top-line performance enabled our entire portfolio to generate positive hotel EBITDA, which came in ahead of our expectations. Additionally, we've been very active since our last call, executing on a number of initiatives to strengthen our balance sheet, recycle capital, and further enhance our growth profile. We have refinanced $600 million of debt, including issuing $500 million of high-yield bonds and amending our credit facilities. These transactions further laddered our debt maturities and extended our financing covenant waivers. We also continue to be active portfolio managers by selling a few additional non-core assets which represented less than 1% of our 2019 EBITDA. And we recycled capital by deploying disposition proceeds into a high-quality asset in the growth market of Atlanta. Additionally, we have made progress towards unlocking the value from the embedded growth catalyst within our portfolio and provided color on how our initiatives will enable us to drive incremental growth throughout this cycle. With respect to our operating results, our open hotels achieved second-quarter occupancy of 61%, representing the highest of any quarter since last year. Occupancy at our hotels improved each month, with April achieving 59.1%, May achieving 60.3%, and June achieving 63.6%. Underscoring the high quality and favorable construct of our portfolio, our hotels also gained approximately 600 basis points of market share during the second quarter. our strong performance was broad-based, with our resort properties achieving 83% occupancy, with ADR and REF PAR exceeding 2019 levels. Our drive-to markets achieved 67% occupancy, with many markets such as Austin, Charleston, and Orlando nearing 2019 occupancy levels. And our all-suite hotels achieved 63% occupancy, while gaining nine points of market share compared to 2019. With respect to segmentation, As we expected, our leisure-oriented drive-to markets such as Charleston and South Florida benefited from the surge in leisure demand and drove not only robust occupancy of 86% and 83% respectively, but also achieved 2019 REVPAR levels during the second quarter. Leisure demand drove our absolute weekend occupancy to 74% and our ADR to $155, both of which are 87% of 2019 levels. Our weekday occupancy was 55%, which improved by 13 points from the first quarter, and our weekday ADR of $134 increased by 17%, aided by an increase in business transient and group demand. While business transient remained significantly below 2019, we were encouraged to see a quarter-over-quarter increase of 65% in revenues as more employees turned to offices. We also saw group demand expand beyond primarily social groups. To now include more corporate meetings and training sessions, which led to a nearly 50% increase in our group revenues from the first quarter, our hotels will continue to be attractive to small groups as demand improves. The overall step-up in demand during the second quarter allowed our portfolio to drive ADR to 75% of 2019 levels. ADR for our open hotels increased by approximately 19% from the first quarter, with our urban markets seeing the strongest improvements. Our ADR also improved each month with nearly 20% of our hotels exceeding 2019 levels in June. We remain encouraged by our industry's ability to maintain rate discipline, which also has positive implications for ADR growth throughout the cycle. The combination of strong ADR performance and our ability to manage costs led our hotel EBITDA to grow significantly ahead of our revenues, enabling us to achieve positive cash flow sooner than most of our peers. Assuming current trends do not wane, we expect to remain cash flow positive moving forward. Now turning to capital allocation, we believe that our strong balance sheet provides RLJ with a competitive advantage to drive both external and internal growth. Relative to external growth, we recently acquired the newly built Hampton Inn & Suites in Midtown Atlanta for $58 million in an off-market transaction. Atlanta is expected to be one of the top growth markets throughout this lodging cycle. The Midtown Atlanta submarket is seeing significant new development activity and an influx of new companies, including Google, which is currently building a new office just three blocks from our hotel. We are confident that the hotel will achieve a stabilized NOI yield of 8% to 8.5%. This acquisition aligns with all of our objectives of owning rooms-oriented, high-margin, premium-branded hotels located in the heart of demand while generating accretive red par and margins relative to our portfolio. Our acquisition pipeline of attractive opportunities is growing, and we are confident in our team's ability to continue sourcing additional accretive acquisition targets while maintaining price discipline. With respect to internal growth, our embedded catalysts are unique and compelling, given the magnitude to which they have the potential to drive incremental EBITDA growth throughout this cycle. In June, we provided an update highlighting our portfolio's specific initiatives which are expected to generate incremental hotel EBITDA of $23 to $28 million. These initiatives are well underway and include a conversion of the Wyndham Santa Monica into an independent lifestyle hotel and the transition of the Wyndham Charleston and the Embassy Suites Mandalay Beach to Hilton's Curio Collection. These three conversions are expected to generate $7 to $10 million of incremental EBITDA on a stabilized basis. These projects remain on track to be completed and relaunched in 2022. Our initiatives also include revenue enhancement projects, such as space reconfigurations related to guest rooms, F&B outlets, and other underutilized areas, which only require small investments while generating significant returns and are expected to generate $9 to $11 million of incremental stabilized EBITDA. And we have margin improvement opportunities, which are primarily derived from contract amendments to reduce management fees, These amendments are expected to create 50 basis points of margin improvement or $7 million of incremental stabilized EBITDA. It is important to note that our margin opportunity of 50 basis points is in addition to any industry-wide post-COVID margin expansion. We believe that our ability to drive external growth and our value creation opportunities will elevate our performance throughout this cycle. Looking ahead, although the strong momentum for the second quarter continued into July, We recognize that the COVID variants create some uncertainty with respect to the near-term trajectory of the lodging recovery. While it is too early to draw firm conclusions, it is worth noting that we have not seen a meaningful impact to our portfolio. We believe that in the absence of a pullback in demand caused by the variants, the positive economic backdrop we have with a strong consumer and healthy corporate profits should continue to lead to improving fundamentals. As we get past Labor Day, Taking into consideration normal seasonality, we expect that leisure demand will come off of the summer peak but remain healthy in light of the continuing flexibility in hybrid work environments. We believe that the next leg of the lodging recovery will be driven by business transit, which we anticipate will see a step change at some point post the Jewish holidays, the order of magnitude of which will be predicated on the pace of offices reopening and children returning to schools. With respect to group, we are continuing to see relative improvement in bookings, which should gain further momentum in 2022. Putting any uncertainty aside, the dynamics of the early phase of the recovery thus far demonstrate that when a sustained recovery takes hold, it will be stronger and faster than originally expected. Overall, we cannot be more pleased with our relative positioning, which we believe will allow RLJ to outperform in each phase of the cycle. As the lodging recovery enters its next leg, which will be driven by an acceleration in business transient, our urban-centric portfolio will benefit given the appeal of our hotels to business travelers and our traditional exposure to this segment. Additionally, our portfolio is poised to deliver EBITDA growth that is above and beyond the growth that is derived from the recovery to pre-COVID levels. This will come from the deployment of our balance sheet capacity towards acquisitions in high-growth markets, and the incremental EBITDA generated from our embedded value creation initiatives. Finally, our strong liquidity, lean operating model, and our ability to generate incremental growth will drive significant free cash flow and NAV appreciation, enabling us to create meaningful shareholder value long-term. I will now turn the call over to Sean. Sean.

Thanks, Leslie. We were pleased with the second quarter results. which accelerated throughout the quarter and have continued to improve so far during the third quarter. Our pro forma hotel operating results include the 99 hotels that we owned as of June 30th. Our reported corporate adjusted EBITDA and FFO include operating results from all sold hotels during RLJ's ownership period. Pro forma numbers for the 99 hotels exclude the residents in Indianapolis Fishers and residents in Chicago Naperville. which were both sold during the quarter. Additionally, our pro forma numbers have not been adjusted to reflect the impact of the acquisition of the Hampton Inn & Suites Atlanta Midtown or the sales of the three non-core hotels in Hammond, Indiana, since these transactions closed after the end of the quarter. These transactions will be incorporated into our pro forma numbers starting in the third quarter. Our second quarter portfolio occupancy of 57.9% represented a 15 percentage point improvement from the first quarter. Our portfolio's occupancy was strong throughout the quarter, ending at nearly 70% of 2019, while accelerating throughout the quarter from 55.2% in April, 57.5% in May, and 60.8% in June. These results were better than we expected and provide further evidence that our portfolio is well positioned to capture demand in the current environment. Finally, as we expected, our hotel portfolio outperformed as demand returned and gained approximately 600 basis points of market share during the second quarter. The improving demand provided our hotel operators with the ability to yield rates, resulting in average daily rate growing over 19% from $119 in the first quarter to $142 in the second quarter, including $150 in June. Approximately 20% of our hotels generated ADRs in excess of 2019 in June, including markets with the highest demand, such as Key West, Charleston, Fort Lauderdale, and Miami. Our hotel pricing power throughout the quarter provides us with confidence that we will be able to continue increasing pricing as demand normalizes. The improving operating trends during the second quarter led our entire portfolio to achieve hotel EBITDA of $49.9 million, which represented the second consecutive quarter of positive hotel EBITDA. With respect to our 97 open hotels, these properties achieved occupancy of 61%, average daily rate of $142, and $54.4 million of hotel EBITDA. representing the fourth consecutive quarter of positive hotel EBITDA. We are encouraged that this momentum has continued and the third quarter started off stronger than our expectations. During July, our portfolio is expected to generate occupancy of approximately 66% and ADR of approximately $163, representing a 17.5% increase in REVPAR from June. Turning to the bottom line, Our second quarter adjusted EBITDA was $43.6 million and adjusted FFO per share was 7 cents. We were pleased that our portfolio was able to generate positive FFO per share for the first time since the start of the pandemic, which affirmed our assertion that ROJ would be one of the earliest to return to profitability due to our lean operating model and portfolio construct. As Leslie mentioned, while demand accelerated throughout the second quarter, we remained vigilant in monitoring operator compliance with the appropriate cost containment initiatives for the current demand environment. Underscoring our continued focus on controlling costs, our second quarter total operating costs remained approximately 40% below the comparable period of 2019. Our team also remained vigilant in controlling variable costs during the quarter, including operating with 47% lower wages and benefits compared to the second quarter of 2019. The value of our cost control measures are also evident in our quarter over quarter performance. While our second quarter revenues increased 67% from the first quarter, our operating costs only increased approximately 34%, which allowed our portfolio to increase the bottom line by approximately $39 million. With all that being said, we are closely monitoring the industry-wide challenges to attract and retain associates. We continue to focus on implementing best practices to remain competitive in our local markets. On a relative basis, our portfolio is better positioned to operate in the current environment as a result of fewer FTEs required in our hotels given our lean operating model, smaller physical footprints, and limited F&B operations. We do expect the labor issues to begin to wane as the market begins to normalize during the fourth quarter. We have been very active managing the balance sheet to create additional flexibility and further improve our cost of capital. These activities include completed a five-year high-yield bond offering that was oversubscribed and upsized to $500 million with an annual coupon of 3.75%, representing the tightest pricing ever for a non-investment-grade lodging REIT. extended the maturity date of a $100 million term loan from January 2022 to June 2024, and completed new amendments to our corporate credit agreements to extend covenant waivers through the first quarter of 2022, increase our acquisition capacity to $300 million, and add flexibility to retain certain proceeds for general corporate purposes. These transactions are a testament to our strong lender relationships and favorable credit profile. We have achieved our 2021 financing strategic objectives, which included addressing 2022 and 2023 debt maturities, diversifying our debt sources, extending maturities, and increasing flexibility on our corporate credit agreements. Turning to liquidity, we entered the quarter with approximately $658 million of unrestricted cash $400 million of availability on our corporate revolver, $2.4 billion of debt, and no debt maturities until 2023. We continue to maintain significant flexibility on our balance sheet. Currently, 100% of our debt is fixed or hedged, and 83 of our 97 hotels are unencumbered. We were encouraged that our second quarter monthly cash burn was significantly lower than expected. which was driven by the portfolio's profitability throughout the quarter. Our second quarter average monthly cash burn was approximately $2 million, which was materially below the low end of our prior estimated range. Normalizing for the $14 million semiannual interest payment on our Felcor Senior Notes, our portfolio generated positive corporate cash flow during the second quarter. On an annualized basis, our second quarter hotel EBITDA of $49.9 million is sufficient to generate positive corporate cash flow, achieving a critical milestone in the recovery. Looking ahead, assuming the current trends and logic fundamentals continue, we expect to generate positive corporate cash flow for both the third and fourth quarters of 2021. Even as fundamentals are improving, our efforts continue to be focused on maintaining adequate liquidity while making prudent capital allocation decisions to position our portfolio to drive out performance during the recovery and beyond. We remain among the best positioned lodging REITs to take advantage of ROI investment and external growth opportunities, which we demonstrated through the acquisition of the Hampton Inn & Suites Midtown Atlanta. Additionally, we are continuing to prioritize less capital intensive, high value revenue enhancement and margin expansion initiatives, such as space reconfigurations, parking and contract renegotiations, in addition to executing on our three 2022 conversions. Finally, we continue to estimate RLJ-funded capital expenditures will be between $75 and $85 million during 2021. In closing, RLJ remains well-positioned with a flexible balance sheet, ample liquidity, lean operating model, and a transient-oriented portfolio with many embedded catalysts. For the remainder of 2021, we will continue to monitor the financing markets to identify additional opportunities to improve the laddering of our maturities, reduce our weighted average cost of debt, and increase our overall balance sheet flexibility. Thank you, and this concludes our prepared remarks. We will now open up the line for Q&A. Operator?

Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask a question, you may press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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 key. Our first question comes from the line of Austin Werschmitt with KeyBank Capital Markets. Please proceed with your question.

Great. Good morning, everybody. Sean, I was wondering if you could share how the $163 ADR in July that you mentioned, how that stacks up versus the same period in 2019. And then given some of the confidence you highlighted about being able to increase pricing as demand continues to improve, coupled with the expense savings you highlighted versus 2019, Do you expect margins could reach or even exceed 2019 level in the back half of this year?

Great, Austin. So I'll start with the July ADR. So we're within – our July ADR was within about 9% of 2019 levels. And so we were obviously happy with that result and see our ability to drive rate, you know, specifically – We've drawn down a little bit into that. Our weekend was actually at over 100% of rate for July as well, so just further bolstering the strong leisure demand out there. On the margin side, we would expect margins to continue to improve throughout the year. For example, in July specifically, you know, we're expecting our margins to be around a little under, or sorry, approaching 200 basis points below 2019 levels in July, which is a, you know, a terrific result in light of the fact that total revenues are projected to be, you know, around 30% below 2019. And so our ability to cost contain and manage those costs and get close to that level of adjusted EBITDA margins is impressive. We also saw you know, strong results there on the second quarter as well, where we saw our departmental profit margins actually exceed 2019 levels in the second quarter as well. So, you know, our ability to cost contain in an appropriate manner for this environment, you know, and particularly around wages and benefits is a, you know, is a strong testament to the asset management team.

That's very helpful. And then just switching gears, either Leslie or Sean, You know, we've seen many of the lodging rates active under their ATMs recently, and you guys have certainly been ramping various investment initiatives. So while, you know, completely understand you have significant liquidity today, you know, just curious about your thoughts, you know, whether you view your common equity to be attractive to you, and would you consider utilizing the ATM if other, you know, acquisition or other investment opportunities emerge?

Sure. Well, I mean, first and foremost, we actually don't have an ATM – program at RLJ, but it's a theoretical question, but I think it is a good cost to capital question, a capital allocation question specifically. I think with our liquidity and sort of the way we see our acquisition pipeline building relative to other alternatives that we have, which using existing capacity would be first and foremost, we don't believe there's any near-term need for us not to be able to use existing capacity for acquisitions. Under our line of credit, we have $300 million of acquisitions that can be allowed just with existing capacity. We think our balance sheet today provides us plenty of liquidity to be able to fund that level with just existing cash. And so we think that when we think about capital allocation, Obviously, when the stock price hits a level that is above NAV, as capital allocators, you would expect us to want to use that currency. But at current levels and at current acquisition expectations, that's not something on our near-term horizon.

Great. Appreciate all the thoughts.

Our next question comes from the line of Michael Belisario with Robert W. Baird. Please proceed with your questions.

Thanks. Good morning, everyone. Leslie, I just want a first question on the Atlanta transaction. How long does a deal like this take to get across the finish line? When did you guys lock in pricing? And then kind of how do you think about pricing today versus estimated replacement costs?

Yeah. First of all, you know, I do want to just give, you know, kudos to our acquisition team who has been, you know, working hard to advance our discussions on a number of off-market transactions. And so, you know, As we've talked about before, you know, off-market transactions take a little while to germinate, and so we've had discussions on this asset since sort of late first quarter, and we were able to, you know, move forward on that transaction throughout the quarter. And I would say that, you know, in general, we feel pretty comfortable on how the pricing for this asset has advanced, even in that short period of time, you know, relative to where we locked it in. Mike, what was the second half of your question?

About replacement costs.

Yeah, we're very confident in the value of this asset being below replacement costs. Land value has significantly improved, or increased rather, given the scarcity in the Midtown Atlanta and given the amount of construction that's going on there. This particular seller had been amassing land since 2007, So you can imagine, you know, that, you know, that obviously land values have improved, increased dramatically since that period of time. Additionally, we all know that construction costs and labor has moved dramatically as well the last couple of years, and particularly since this transaction broke ground. So we're very confident, you know, in the fact that, you know, we were able to get this asset below replacement costs. We think the, you know, the 8, 8.5 yield in this asset speaks, you know, to the high quality of the asset and speaks to, you know, our underwriting and our ability to get this on an off-market transaction. We also believe that this asset is accretive on all of our metrics, you know, rev par, margin. And, you know, keep in mind, too, that we recycled capital, you know, out of the suburbs of Chicago into a high-growth market of Atlanta.

That's helpful detail. And then one for Tom. Maybe can you help us understand or just give us any detail on what you're seeing on BT bookings for the fall? And have you seen any change in the booking window in terms of it extending at all at this point yet?

Yeah, good morning, Mike. Yeah, so as far as the booking window, I'll start with that. What we're seeing is, if you recall, we were at a zero to three for a long time. And what we've been enjoying now is everything's moving out to seven to 14 days. which is giving us more confidence in our pricing, first and foremost, in regards to the booking window, because people are putting their toe in the water and getting out and traveling. And then when we look at BT in general, we have continued to see a step up in the amount of companies that are traveling, even before offices completely coming back, which is encouraging, because we're seeing companies that are national accounts. We enjoyed regional and local travel, but now we're seeing more of the national accounts, which we're seeing on Tuesday, Wednesday, the occupancies start to grow because of that type of travel prior to offices completely coming back and reopening in the late fall timeframe. So I would say that BT is stepping up. Even though it's continuing to be below 19 levels, the real opportunity for us is when that does come back, rate typically comes back with it at the same amount when the volume starts to improve. So that gives you a little bit of color of what's happening in the BT process.

Thank you.

Our next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.

Hi, good morning. Just a question on your conversion announcements that you made in June. I'm just curious if you have revised your ROI expectations on those given the strong leisure demand we've seen in all three of the relevant markets.

No, I mean, Anthony, obviously we launched this, you know, update where we put numbers in June, and so we've taken into consideration the leisure-centric cycle that we're seeing, you know, relative to our returns as we sort of updated our underwriting. What I would say here, though, just, you know, we have been foreshadowing the value creation within our portfolio, and we've now put numbers to this. significant numbers in $23 to $28 million of incremental EBITDA. We think this is real and tangible value that we can point to where it's coming from. The work is underway, and some of it's already complete. This is going to provide above-cycle recovery growth for us, and we have confidence in our ability to achieve the EBITDA numbers that we provided within the three buckets. On the conversion side, to your point, these are in very strong, high-demand markets with great locations. You know, the markets are, you know, demonstrating that they can achieve very high rates, and our assets are underpenetrating, you know, relative to, you know, currently where they're operating. So we've got the right brand program. We've got a strong renovation program we put together, and we're going to be able to re-rate that customer, you know, on that side. On the revenue enhancement side, we feel very good about the space reconfigurations that we've instituted. We've done them in markets with strong demand dynamics, for example, adding meeting space in the high-growth market of Atlanta. And then on the margin side, we already have locked in 30 basis points of that pickup by the contracts of already being negotiated, and we have a clear line of sight on the incremental 20 basis points. You know, this is just one channel of growth that we have within our LJ. In addition to, obviously, the internal growth that we've articulated, clearly you've seen us start executing on the external growth as well, and our performance has been in the top quartile. So we feel very good about all of those components allowing us to be in a position to outperform throughout the cycle, but we feel very strong about our ability to achieve the EBITDA on not only the conversions, but all of the value creation that we articulated.

And you talked about additional conversion opportunities, I think, in a slide. You said 20% of your portfolio could be converted. We've seen pretty strong independent performance in some of these leisure markets. I'm curious, could you convert more of your branded properties to independence in some of these strong leisure markets that you have?

I mean, look, we evaluate each asset in each market on a case-by-case basis. Our general investment thesis is centered on having premium brands, and we, by and large, believe in that pretty strongly. You've seen that with the acquisition of Atlanta. We are converting Santa Monica to an independent, but that's a unique market and a unique asset. Where it sits, it's 132 keys. And so we think that that asset can punch above its weight and not have a rate ceiling and that it deserves to be an independent. But by and large, we think that brands are the right direction to go.

All right. Thank you.

Our next question comes from the line of Dory Keston with Wells Fargo. Please proceed with your question.

Thanks. Good morning, everyone. Sean, can you compare leisure and business transient demand versus 19 as you moved from April to July, please?

Sure, Dori. So, you know, what we've seen on, you know, they continue to obviously pick up on all segments from the first quarter to the second quarter. You know, on sequential month-on-month growth, You know, you've seen on the BT side, you know, our revenues increased 65% from the first quarter with volume up 40% and ADR up 18%. And so on a month-on-month basis, what you've seen is every single month got better and better on the BT side. I will say that, you know, I think Business Transit, although we're happy with the quarter-on-quarter growth, we are still – sub-30% of 2019 levels, and we really view for our portfolio that is the upside potential. For us, as our urban-centric portfolio has a lot of room to run on the growth side, and so that's the business transient. On the group side, once again, group increased a little under 50% from the first quarter, and that was on 37% higher volume and ADR up about 7%. similar to the business transient, our group is only at about 25% at 2019 levels. You would expect that to be another avenue of growth for us within our portfolio. Interestingly enough, our booking activity was strong during the quarter. We booked You know, for 2022, for example, you know, our average rate was north of $200 for the, you know, could call it, you know, $15 million roughly of revenue that was booked, you know, in the quarter, for the quarter for next year. You know, our 2022 bookings, you know, comp to where they would have been in 19 leading into 20 is at about two-thirds of the level of bookings. So we have We are beginning to pick up, but there's still a lot of room to go there. But what's encouraging to us is that the rates that we're booking that business up is at big premiums to where we are today and really gives us confidence about the trajectory of the recovery.

Sorry, so you said BTN Group is 25% to 30% of 19 levels, and where did you say leisure was?

Leisure is about a little under 70% of 2019 levels. Okay, thanks.

Our next question comes from the line of Gregory Miller with SunTrust. Please proceed with your question.

Thanks. Good morning, all. Actually, tourist securities these days for our company. My first question is also on the Atlanta acquisition. We have investors who are trying to understand the relevancy of a Hampton Inn flag versus a Hampton Inn and Suites flag, especially relating to your headline purchase price. Could you provide some perspective on the materiality of this branding difference?

Sure. First, let me just say, you know, that the Hampton Inn and Hampton Inn and Suites is a top Hilton brand. It's a category killer, and this asset is in a great location. I'll let Tom provide some color on your question.

Good morning, Greg. So the Hampton Inn and Suites typically punches about $15 above the Hampton Inn when you look at it on a totality. when you think about how you compare Hampton Inn to Hampton Inn Suites. And the reason for that is you get a premium for the suites. And quite honestly, many of them were more new builds as we look at how Hampton's evolved throughout the years. This particular asset, what we're most excited about, this is a 20-story building in Midtown Atlanta, which is a thriving market with office building construction at about 17 projects that Leslie mentioned earlier. with Google being literally toe-to-toe, 19 stories, three blocks down. So we're excited about not only the brand being a Hampton Inn & Suites because we think it's a seven-day type of demand traveler that's attracted to this. You get the benefits of BT during the week because it's a strong Hilton brand and Hilton Honors members. And then on weekends, because you have a variety of different type of business, not only education... film crew production. And then the Midtown area is really an evolving market where it's a population growth compared to the city of Atlanta itself. So you've got professional, tech, science, and various different types of companies moving into that area. So we think at this particular location with the Hampton Inn and Suites, with a 20-story Sky Lobby rooftop bar, this thing is going to really perform comparatively because of the premium it gets over Hampton and But predominantly in the location we're at, we think it's going to be very attractive.

Great. Thanks very much. One other question. This may be quite ignorant on my end, but I'll ask anyways. How material is Canadian inbound demand to your hotels in normal times? And I'm thinking, you know, as the borders reopen, what the implications might be for your portfolio? Yeah.

Yeah, what we find, and I'll give you an example of where we see a significant amount of travel, and it's predominantly down in the south Florida and west coast of Florida where we see significant Canadians who travel. And no surprise, during the wintertime, they like to come down and get a little bit warmer weather. So first and foremost, it's a pretty significant driver of business. But again, based on what's happened this year with domestic leisure, Obviously, we've been able to fill in with rates even higher in 2019 throughout South Florida as an example of our beach locations and where people will travel. I would also say that they do come across on the northern side. When you think about Boston, New York, there's a significant amount of Canadian travelers that will visit those bigger cities for a variety of events. Obviously, professional baseball teams travel as well as the fans that come across, and we do see a fair amount of Canadian travel in those locations. We don't have too much out west. That would be the other location that I would say, Greg, out in Seattle, as well as Portland, where you get significant Canadian travelers. But those are the areas that I would say are having the most influx. I do think, though, in 2022, there'll be pent-up demand for Canadian travelers to come down again to South Florida. And that'll add to our first quarter, which, quite honestly, we had a second season in Florida this year. based on the pent-up demand with leisure and then the vaccination rates and the restrictions being loosened down there.

Thanks. I appreciate all that.

Our next question comes from the line of Chris Wawonka with Deutsche Bank. Please proceed with your question.

Hey, good morning, everyone. Wanted to go back to the acquisition discussion. you know, the Hampton, it makes a lot of sense to me, but is this, a lot of your competitors are running kind of to resort markets and generally full service. Is this kind of a view on your part that in certain markets, you know, select services is going to be competitive with full service? And I guess the question being, you know, would you do this acquisition if it was a full service hotel with similar economics in the same exact market?

Chris, we don't do traditional full-service hotels. This asset represents what we focus on. We have great conviction in our traditional hotels. you know, investment thesis here. We like premium branded assets where revenue comes from, you know, 80% of the revenue comes from rooms. It has a limited amount of F&B, a small amount of meeting space, and it's high margins and a strong transient distribution within the hotel. So the characteristics of what you just described doesn't even fit within our box of what we would focus in. You know, we think about our investment thesis long term. There's nothing about the pandemic that has changed our view on, you know, what we want to buy. You know, we're not focused on themes. You know, we think that, you know, buying an asset in a market that has multiple demand drivers, you know, Atlanta has the strong business component, business travel component. Midtown is the art and culture center of Atlanta, and obviously it's well-known for its sports within Atlanta, and it's got a strong convention center. So all of the legs of demand are in Atlanta, and that's what we focus on, legs of demand, high-margin assets, rooms-oriented premium brand assets. That's what we focus on. You know, even, you know, we can also look at lifestyle brands. There's a wide spectrum of lifestyle brands in terms of how they're executed, but we generally like, you know, lifestyle brands that have a thoughtful F&B, you know, meeting space that's less than 10,000 square feet, but still fits in with a sort of a select service profile, if you will. So that's what we look for. Those are the characteristics.

Okay. Appreciate all the color. Thanks, Leslie. And then, On the ROI projects that you're working on, I know a lot of them are already underway or even almost complete, but several more to go. Is there any risk there on construction costs and labor costs and how you've underwritten the projected returns?

Yeah. So, Chris, we factored in the current environment for both materials costs, but as well as construction costs, labor, et cetera. So, know the numbers we published you know that was happening real time and so that was factored into uh in into our numbers okay great appreciate it thanks our next question comes from the line of neil malkin with capital one securities please proceed with your question hey everyone good morning um first question on acquisitions overall um you know

Happy to see, delighted to see you guys talk about that as another growth lever for your company, given the pretty enviable cash position you have with your 19 sales. You talked about your pipeline and you talked about, Leslie, pursuing growth markets. And I think we can all agree that growth markets, just look at what's going on in this cycle, are the sunbelt. So can you just maybe talk about some color into, like, the pipeline, what kind of deals you're going after, and maybe, you know, are they more – are you casting a wider net, you know, away from the coast and including some of the, you know, higher growth of Sunbelt markets where you're seeing tremendous amount of in-migration and corporate relocation?

Yeah. So, Neil, what I would say, just sort of piggybacking off of Chris's previous question – I think Atlanta represents a perfect example of the type of asset and the type of market that we want to focus on. Obviously, markets that are showing strong growth have multiple legs, and we want assets that are located within that market in the heart of demand and not compression-type locations. Markets that have characteristics that we would be interested in, I think Austin is an example of that, Phoenix, and then parts of Denver as well. would be other examples of kind of where we would see the opportunity to get similar characteristics of what we saw in Atlanta.

Makes a lot of sense. Then in terms of just the Delta variant and the sort of delays we're seeing now in return to work from some of the largest companies, you know, in the country, just talking that maybe just With that framework, looking at your California, particularly Northern California, Chicago and New York assets or portfolios, how are you, I guess, what is the commentary from the property managers, people on the ground, in terms of maybe just seeing potential booking windows or the amount of demand maybe become less than or not materialized or potential cancellations? and how much of a worry is the potential for reimplementation of restrictions, especially, again, in those markets I just talked about, given the propensity for the leaders in those cities to do so?

Yeah. So, you know, obviously, you know, we acknowledge that the variant is a risk, and any incremental restrictions that are put on in any market, you know, in addition to the ones that you named, would have some potential level of impact you know, on demand. But what I would say is that in the near term, we haven't seen any evidence of that. You know, the most recent data that we have today is July, which Sean mentioned came in at 65% of occupancy. And if you look at the last week of July, our occupancy for open hotels was actually 70% occupancy. So in that – and, you know, keep in mind, we're achieving that while the news about the variant is out there. You know, our booking window is, as Tom mentioned, you know, still relatively short, although it's expanding. You know, about 65% of our demand comes in sort of zero to seven days. And so we're not really kind of, you know, in that window where we're sort of seeing it drop off right now. We expect leisure to continue to be strong through, you know, through August and then seasonality to kick in. I'm sorry, not through August, mid-August. And we expect seasonality to drop off in the latter part of August and through Labor Day. you know, to occur. So, you know, what I would say is that we're not seeing any evidence in the short run. I think people are taking sort of a wait-and-see, you know, approach. I would also say that, you know, on the group side that we really haven't seen any cancellations there at all. We've seen some delays, but we aren't seeing any evidence today that suggests that the news on the variants is dampering demand, but we recognize that it is a risk. The reality of it is that, you know, we expect to see some level of a pickup in business transient demand, assuming that trends continue from the second quarter. But, you know, it's highly predicated on the momentum that we're seeing in offices reopening. And so there's a correlation there, and I think it's too early to make a prediction on what that implication is going to be.

The last thing that I would add, Neal, because I know you mentioned Chicago and California as examples. You know, just this past weekend, even though it was an outdoor event, one of the major festivals, you know, we did about 100% occupancy for three consecutive nights as an example. So even in the face of the Delta variant, people are going to get out and travel. It's just going to have, you know, the opportunity to wear a mask indoors and be able to travel differently. And the same thing when I looked at, you know, California, we have 12 events that are actually going to be at the convention center. We'll have to see how attendance goes. picks up, but the events at the convention centers and group bookings are going to continue. The question is, how will they drive attendance? And we'll monitor that, obviously, as this thing evolves. But we're encouraged at this early time that we haven't seen, because of the booking window, Leslie mentioned, a significant drop-off in pace outside of the seasonality of the last couple weeks of August and the Jewish holidays in September, as she mentioned.

Yeah, and the last thing, just to reaffirm sort of Leslie's comments within the script, is that the traveler has been extremely resilient thus far during the pandemic. And although the Delta variant obviously is another risk, the behavior we've seen from the travelers has been extremely resilient in the face of just continuous pivots, if you will, on the health side.

Yeah, no, I appreciate that. If I could just get clarification on one topic you talked about, I think with Austin, and you talked about margins potentially increasing increasing as we go on in the year, talking about, you know, BT, you know, post Labor Day and Jewish holidays. But then, you know, but then also, you have that sort of, I guess, maybe pickup in, especially in the coastal markets where they're still getting the unemployment benefits, you know, the pickup in FTS, and, you know, various other things that come with the core customer returning. And so to me, that incremental growth in FTE would imply some relative pressure in margins just because of the, you know, again, added labor force. Are you saying because you think margins are going to continue to go up that you're closer to your long-term run rate sort of FTE staffing model per hotel? Is that what you're implying or? Maybe if you can comment on that, just understand where you guys are in terms of the operating staffing model going forward.

Yeah, so I'll start sort of with high-level margins, and then Tom can give some sort of color around specifics around wages and benefits. I mean, our confidence around the ability to drive incremental margins from where we are today is around the fact that we expect rate to continue along the current trends, which is to increase throughout the year, which is as the remixing of the hotels happen, it's remixing with higher-rated customers. As we mentioned earlier, you know, we're still significantly below both business transient and group, which are our traditionally higher rated customers. And so we would expect as we're able to continue driving rate, you know, throughout, you know, as the year progresses, we would expect that to drive margin. And what you've seen, you know, each month, you know, our rates continue to improve, revenues go up as the recovery unfolds and margins get better. The other factor on margin is is that, you know, a bigger percentage of our total revenues is coming out of the rooms today, which is our highest rated business relative to, you know, both F&B as well as others. So, you know, as that business continues to progress, you know, we're seeing margins are strong. I know F&B, you know, specifically, you know, margins in F&B were 750 basis points higher on, you know, on a third of the revenues in the second quarter, which is a function of of the reinvention of the F&B model within our portfolio. And so all those factors give us confidence.

Let me address the other part of your question around kind of on the labor front. You're currently running at about 50, low 50s of labor relative to our 2019 levels on the 60% occupancy. You know, we recognize that, you know, there's a labor issue, which is well documented, and that we're going to have to put some labor back in as occupancy continues to rise. But we do have, you know, some level of confidence that we're not going to need to go back to all the way back to 2019 levels of occupancy. You know, a good example of that is that, you know, us and a number of our peers have articulated that how we have a number of properties, particularly in the leisure and Sunbelt markets, that are running occupancies in the 80% to 95%. And, you know, for example, for us, you know, South Florida, you know, our portfolio there is running 80% to 95%, but we only have 75% of our 2019 labor. Now, we recognize that we have to put some of that back, but we're pretty confident based on the way that we're operating today and the occupancies that we're running and efficiencies that we've learned that we will not have to go back to 2019 levels of labor.

No, I got you. Thank you. I appreciate that.

Our next question comes from the line of Bill Crow with Raymond James. Please proceed with your question.

Hey, good morning. Leslie, I'm going to follow that path that you just went down. I was going to go a different direction, but, you know, we've seen some down cycles, some downturns. And every time we emerge from what we find new efficiencies and we do things differently and we get better. But, you know, are the people good at running hotels? I mean, were we overstaffed? Were we fat and happy in 2019 that we can cut that much labor? It just seems like we get back into the same old traps every time.

Yeah, I would say, you know... You know, Bill, with any industry, you evolve over time and little things get added and little things get added. It's called brand creep. And, you know, and so there is opportunity to sort of pull back on some of that. And I think there are kind of three areas in which we have a general confidence in around on the expense side. And, you know, the first category is on F&B. And the brands have provided thought leadership around this area. So they're engaged around this. And so we think that whether it's hours of operations or the food offering or the labor model related to F&B, all of that's going to improve. And what I would say, though, relative to our portfolio, the ability for the stickiness around the cost savings on the labor side to stick, we think that in a model where you have a fixed service model, like in the NBC Suites and the Residence Inn, It's easier to control the labor model, the offering, and the hours of operation relative to, you know, your traditional full-service hotels that have a, you know, a menu and a variety, and the customers expect something differently. The other area on housekeeping, which obviously has gotten a lot of commentary around it, you know, I don't think that we're going to go back to the old model. You know, we, you know, we're moving into an opt-in structure, which you obviously have heard Hilton come out and publicly state. And, you know, clearly that's going to be predicated on the take rate, and that's still evolving, you know, over time, particularly as the BT customer comes back. But even if we move to a light, clean structure, which is taking out trash, refreshing towels, et cetera, that still allows a housekeeper to clean almost 2X, I mean more than 2X, what she was cleaning before. And so there is opportunity there. And what I would say relative to our portfolio to housekeeping, we have a high exposure to Hilton, a little over 40% in our portfolio. The segmentation in which we play in, it has a higher ability to stick to this housekeeping model relative to if you move up the segmentation chain, the higher end. And additionally, the length of stay of our portfolio, given the extended stay of our portfolio, also aids us in being able to maintain sort of this housekeeping savings. The third area that we have confidence in is on the clustering side. You know, we've always clustered within our portfolio, but what we've learned during this pandemic is that we can cluster across a wider spectrum of assets, meaning greater distance between the assets because we always generally clustered close proximity. And then we've clustered deeper within the organization, which we hadn't done before. And, again, if you sort of think about the footprint and average size of our assets, the number of assets we have in our portfolio, which gives us greater opportunity to do that, Those are the things that I have the greatest amount of confidence in, and I think that brands are supporting the ability to maintain that, and we think that our portfolio construct gives us greater confidence and the ability to achieve the benefits of that.

All right.

I appreciate that.

If I could just follow up with a question on cancellations, any change in the cancellation rate, and based on your discussions with Hilton and other brands, You know, we killed a lot of brain cells trying to change cancellation policies in 18 and 19 and all that kind of went out the window. When do we bring back stricter cancellation policies?

Yeah, good morning, Bill. What I would say is first and foremost, when I looked at how we're collecting on cancellation rates, I started there before we get into the policy change and what we're doing. we're actually collecting at similar levels to 2019, even in the face of the flexibility that the traveler's having. And what is critical to the beginning process is the shelf space for advance purchase. So for instance, with people trying to travel in the booking window that we talked about, you're having the opportunity now to book in advance and people are, you know, obviously with the pent up demand, trying to get in early for some of these locations. That's assisting on the cancellation because they're booking in advance, knowing that they're tying up. They have to go if they're going to book. The second thing, which is your question in regards to the policy, I firmly believe the moment we have the opportunity to be able to have that yielding on midweek is where the cancellation policy will shift. As Leslie mentioned in July, for the last three weeks, we've seen Tuesday, Wednesday start to get into the mid-60s in occupancy, which is chasing the 70s on the weekends. That's going to be the driver of the cancellation because you want to protect those two nights where your highest demand and compression dates exist. So I truly believe the brands will come through and make that change and go back to where we were, which will help us. But again, because we're collecting at similar levels, I'm not as concerned as maybe you are with your question in regards to what's going on on the ground as far as the ability to collect. Great.

Thanks for the insights. I appreciate it.

That's all the time we have for questions. I'd like to turn it back to Leslie Hale for closing remarks.

Thank you, everybody, for joining us today. We hope that you enjoy the rest of your summer. And as I said at the beginning, I hope that you're contributing to the surge in leisure by traveling yourself with your family. Please stay safe, and we look forward to hearing you on the next call. Thanks.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.