Xenia Hotels & Resorts, Inc.

Good day and welcome to the Xenia Hotels and Resorts fourth quarter and full year 2020 results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one, on a touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Cameron Frosch, Senior Analyst, Finance. Please go ahead.

Thank you, Andrew. Good afternoon, and welcome to Xenia Hotels and Resorts' fourth quarter and four-year 2020 earnings call and webcast. I'm here with Marcel Verbas, our Chairman and Chief Executive Officer, Barry Bloom, our President and Chief Operating Officer, and Atish Shah, our Executive Vice President and Chief Financial Officer. Marcel will begin with a discussion of our operating results and our 2020 achievements. Barry will follow with more details about fourth quarter and four-year 2020 results and details on our capital expenditure projects. And Atish will conclude our remarks with a review of our balance sheet and outlook. We will then open the call for Q&A. Before we get started, let me remind everyone that certain statements made on this call are not historical facts and are considered forward-looking statements. These statements are subject to numerous risks and uncertainties as described in our annual report on Form 10-K and other SEC filings, which could cause our actual results to differ materially from those expressed then or implied by our comments. Forward-looking statements in the earnings release that we issued this morning, along with the comments on this call, are made only as of today, March 1st, 2021, and we undertake no obligation to publicly update any of these form-lifting statements as actual events unfold. You can find the reconciliation of non-GAAP financial measures to net income and definitions of certain items referred to in our remarks on this morning's earnings alerts. An archive of this call will be available on our website for 90 days. I'll now turn it over to Marcel to get started.

Thanks, Cameron, and good afternoon to all of you joining our call today. Clearly, 2020 was an incredibly challenging year, and one that we will not forget anytime soon. As soon as the pandemic began to unfold, lodging demand collapsed. While the lodging industry continues to struggle due to the pandemic, we feel we have weathered the worst of this downturn, and we believe that Xenia is well-positioned for future growth. Similar to the third quarter, we saw encouraging levels of leisure demand during the fourth quarter. October occupancy was a high watermark since the beginning of the pandemic. after which we experienced a slight slowdown in November and December as a result of seasonality in demand and more significant restrictions that were enacted as COVID cases increased in many markets. Corporate transient and group demand continued to be limited, as it was throughout the upper upscale and luxury segments across the U.S. Our results for the quarter were reflective of the week overall industry fundamentals. During the quarter, we had net income attributable to common stockholders of $24.3 million, which was aided by gains on the dispositions we completed during the quarter. Adjusted EBITDA REIT was negative $10.1 million, and adjusted FFO per share was negative 24 cents. Encouragingly, our same property portfolio of 34 hotels achieved hotel EBITDA of only negative $2.9 million, a substantial improvement over the preceding two quarters during which a significant number of our properties were initially closed and then methodically reopened. All of our 34 same-property assets were opened during the quarter. With only Hyatt Regency Portland remaining closed, 94% of our total room count has been and continues to be open for business. Out of these 34 properties, 13 were able to achieve positive hotel EBITDA performance driven by excellent cost controls, thereby reducing our cash burn and limiting our operating losses compared to prior quarters. For the full year 2020, we had a net loss of $153.3 million. Our adjusted EBITRE was negative $51.7 million, and our adjusted FFO per share was negative 82 cents. Despite the difficult operating conditions and most of our properties being closed for some portion of the year, 40% of our properties achieved positive hotel EBITDA for the full year. The pillars of our company strategy were evident in the way we responded to the crisis in 2020. I would like to highlight these pillars again and review how they provided the company utility as we weathered the worst demand shock the logging industry has ever experienced. The first pillar of our strategy is a transaction-oriented mindset with a focus on diversification, quality, and portfolio enhancement. Since well before our public listing in February 2015, and continually so since that time, we have transformed our portfolio through transactions, and we were able to continue doing so in 2020. Early in the year, we had nine properties under contract to be sold, including our Kimpton portfolio, Renaissance Austin Hotel, and Renaissance Atlanta Waverly. While none of these sales close as agreed upon, we successfully retained approximately $29 million of deposits. Though initially disappointed that these transactions did not close, we pivoted quickly to evaluate different avenues to enhance the company's balance sheet and liquidity while keeping a firm gaze on the potential future growth profile for the company. With the experienced team we have in place, we completed four dispositions totaling almost $400 million. The sale of Renaissance Austin to a different buyer at a discount to its pre-pandemic valuation was reflective of its nature as a heavily group-dependent hotel with significant near-term capital needs that we expected to have a difficult road back to prior peak performance. The combined sale price for the three other hotels we sold, Residence Inn Cambridge, Marriott Napa, and Hotel Commonwealth, represented an 11 times multiple on 2019 Hotel EBITDA, an outstanding result considering market conditions. We believe that this pricing represents a minimal discount of pre-COVID valuations, particularly given specific market and property dynamics impacting these assets. Since the approximately six years since our listing, we have transformed our portfolio by selling 26 hotels for approximately $1.5 billion and acquiring 13 hotels for approximately the same amount, representing just over $500 million in average annual transaction volume. As a result of our robust transaction activity over the past several years, our portfolio now consists entirely of luxury and upper upscale hotels and resorts, compared to approximately 75% at listing. We have selectively acquired high-quality assets in primarily top 25 markets and key leader destinations, and decisively sold assets that we believe had limited upside and or significant capital expenditure needs with highly uncertain ROIs. We feel that this has enhanced the company's growth outlook considerably. One of the outcomes of our transaction strategy is that we have significant exposure to Sunbelt locations, where we believe demand growth and a more benign expense environment will aid our recovery. We also own properties in a variety of key leisure and drive-thru destinations, as this has been an important part of our investment strategy throughout our history. We believe that markets such as Orlando, San Diego, Savannah, Key West, Birmingham, Scottsdale, and Napa are set to have a quicker ramp-up to stabilization in the current environments. And we have seen a glimpse of this in the early days of the recovery. Our geographic exposure and diversity, as well as the appeal of our assets to different demand segments, certainly benefited us in 2020. as we were able to reopen our properties in a more expeditious manner than many of our peers during the year. Our initial and sustained occupancy levels have allowed us to reduce our losses significantly from the periods when a substantial portion of our properties were temporarily shuttered. Now turning to the second pillar of our strategy, an emphasis on a strong and flexible balance sheet. Coming into this crisis, we fortunately were well positioned with a strong balance sheet and manageable debt maturities. Faced with the crisis created by the pandemic, our team put significant time and energy into preserving the balance sheet. These actions included amending our debt agreements and raising $500 million through the issuance of senior notes. We addressed our near-term maturities and now have no debt maturities until 2023. Also, at year-end, we had approximately $750 million in total liquidity compared to approximately $450 million in total liquidity at year-end 2019. Our team has always put an emphasis on balance sheet health, and as a result, we've maintained our financial flexibility, allowing for growth in the years ahead. Lastly, the third pillar of our strategy is to have aggressive asset management initiatives and leveraging relationships with both brands and managers. We have some of the strongest relationships in the industry with the best brand and third-party management companies, with a particular emphasis on our relationships with Marriott and Hyatt. As we think about our deep and long-standing relationship with Marriott, I would be remiss to not mention how deeply saddened we are by the loss of Arnie Sorensen. As many in the industry have already said, Arnie was not only an outstanding leader and business partner, he was a remarkable man. who was a friend and mentor to many. While we mourn Arnie's passing, we know that Marriott is in good hands. We congratulate Tony Capuano on his appointment as CEO and Stephanie Lenartz on her promotion to president. We look forward to continuing our strong relationship with Tony, Stephanie, and the Marriott team. We believe that being aligned with best-in-class brands that provide a relevant brand promise to consumers is a significant advantage for a company due to the key attributes they offer, especially when market conditions like today's environment exist. These advantages include superior revenue channels, proven guest loyalty programs, the quick rollout of formal branded cleanliness programs, strength of marketing and advertising platforms, significant technology investments to quickly implement mobile check-in and other initiatives, and innovative changes to operating models and ancillary fee structures. In the early days of the pandemic, we formulated an aggressive action plan to help mitigate its impact on the company. Having strong and experienced asset managers allowed us to make swift, well-informed, and smart decisions. Our asset management initiatives and the expertise of the companies operating our assets allowed us to preserve company value with an emphasis on cost control initiatives. which has been a particular strength of our company throughout the years. Looking back on the decisions we made around closing and reopening our properties, we believe strongly that the right decisions were made, allowing us to minimize losses and prepare for the recovery. In addition to our asset management expertise, we have a highly experienced project management group that has been instrumental in us investing prudently and effectively into our portfolio. Over the past four years, we have invested well over $300 million in capital projects on hotels that we currently own. These projects included 16 full guest room renovations for 48 percent of our rooms. In addition, we added and or renovated large portions of meeting and public space throughout the portfolio. Through a combination of recent transactions and capital expenditures, we have significant revenue growth opportunities. We developed a new 25,000-square-foot ballroom and 32,000 square feet of pre-functional support space at High Regency Grand Cypress in 2019. In addition, last year we renovated the pre-existing ballroom and meeting space. The resort now features 100,000 square feet of brand-new state-of-the-art flexible meeting space, which will serve the property well as group business demand recovers over the next few years. Additionally, and as Barry will discuss, we have now largely completed the exciting transformational renovation at Park High Aviara Golf Club and Spa. We remain very bullish on the long-term growth prospects for many of the other hotels and resorts we acquired in recent years. We certainly expect to build a potential acquisition pipeline and hope to be an active acquirer during the next upcycle if appealing opportunities present themselves. as we have successfully done in prior cycles. However, we are incredibly pleased to have been able to acquire a number of tremendous properties that have attracted valuations over the past few years to help fuel our revenue and earnings growth in the years ahead. In addition to the high-agreedancy Grant Cypress and Clark Hyde Aviara, this includes high-quality assets such as high-agreedancy Scottsdale, Royal Palms Resort, Fairmont Pittsburgh, Ritz-Carlton Denver, Ritz-Carlton Pentagon City, and Waldorf Astoria Buckhead. We believe that our asset management oversight and well-executed renovation projects will allow us to fully capture embedded growth opportunities. The same principle applies to High Regency Portland as well. It is an outstanding property that we acquired at a very attractive basis in late 2019. We look forward to reopening the hotel at demand warrants as we remain strong believers in its long-term potential. Overall, we expect our portfolio to adapt very well during the recovery and as our business evolves. We believe we are poised to outperform relative to others coming out of this downturn. The pandemic has in many ways served as an economic reset for many industries, including the logging industry. Our industry has been forced to adapt, and we expect an overall better expense environment in the future, along with less supply growth than what was anticipated before the pandemic in a majority of our markets. To conclude my remarks, I am pleased with how our team and our operator's teams have persevered in the face of adversity. I would like to again thank them for their agility and resilience throughout the year and their continued dedication to the health and safety of guests and our operator's employees at our hotels and resorts. I will now turn the call over to Barry.

Thank you, Marcel. I will be discussing our property performance for the fourth quarter, our continued success in operating our hotels in this difficult environment, and an update on our recent and upcoming capital expenditures. On the same property basis for the quarter, occupancy was 27.8 percent, and an average daily rate of $182.64, resulting in rent bar of $50.82. This same property basis includes 34 of the 35 hotels owned as of quarter end, which excludes High Regency Portland. These 34 hotels were fully operational throughout the entire quarter. This reflects a decline in rent bar of 68.5% as a result of a 45-point decrease in occupancy and a 17.5% decrease in rate compared to the same time last year. Rent bar was down 66.1% in October, 71.6% in November, and 68.3% in December. For the following operating metrics, I will be referring to our 34 same-property hotels. These metrics are based on the number of days individual properties were open and operating. Since Q2, near the start of the COVID pandemic, when we performed rigorous hotel-by-hotel analysis and made the hard decision to temporarily suspend operations at the majority of our hotels to year-end, our hotels achieved 28.5% occupancy and an average daily rate of $169.60, resulting in a rep for $48.41. While the absolute amounts continue to remain unprecedented, we were pleased overall with our proposed performance as our hotels exceeded our anticipated performance levels, through the fall and holiday season. October's occupancy was 33.8%, at an ADR of $192.82, hit significantly by the 18-day buyout by Major League Baseball at Park High at Aviara. As a result, November saw a decline in occupancy to 25.9%, at an ADR of $176.71. December occupancy declined over November to 23.7%, with a slight decline in rate to $174.37. A strong performance over the holiday weeks was not enough to offset seasonal softness in early December and increased travel restrictions in California and other locations throughout the month. Currently estimate that for the month of January, our 34 open and operating hotels will perform in line with our expectations, running approximately 24.5% occupancy and an ADR of $170.41. But Fed were expected to achieve significantly better performance approximately 33% occupancy, with an ADR of approximately $183, reflecting significant leisure demand over the President's Day weekend, along with continued improvement across all segments. As we've done over the past few quarters, we wanted to share with you some of the items we continue to track closely as business and consumer confidence shift from week to week. Overall, we continue to see strong performance in the portfolio from our drive-to leisure market hotels and our resort hotels. we had 17 hotels representing half of the portfolio achieve 30% or greater occupancy for the quarter, including six that exceeded 50%. These included properties in Birmingham, Charleston, South Carolina, Key West, Alexandria, and both of our hotels in Savannah. As I mentioned, our California hotels were impacted during the quarter as curfews, travel advisories, quarantines, and stay-at-home orders impacted our various markets from late November through late January. As mentioned last quarter, her customer mix continues to evolve. Despite, in many cases, as a result of the Q4 challenges in California, there's now little doubt that there continues to be pent-up leisure demand that we saw in February and that we expect to continue on an ongoing basis as vaccination availability continues to increase. All of our hotels, especially boutique hotels and resorts, become experts in creative uses of social media platforms. One of the ways we track this is by looking at our hotel's collective Instagram followers, which were up 32%, over the past year. Booking windows to the leisure segment, particularly at our larger properties, have started to expand for March and April as consumers are learning that booking early ensures them a room at the most desirable hotels in a given market. We expect this trend to continue, and when combined with the component of business that has a very short booking window, we'll afford many of our hotels with the opportunity to yield higher rates on later booking business. We expect March occupancy at our three largest resorts to collectively grow at least 10 occupancy points over February levels, with strong increases in ADR as well. On the corporate transient side, we continue to see improvement in volume, particularly from regional firms where employees have returned to their offices and are excited about being back on the road calling on customers. Average length of stay in the segment is extended due, in part, to corporate travelers combining business and leisure trips. Our portfolio, given its significant Sunbelt orientation, has certainly been aided by this phenomenon. On the group side, our hotels continue to enjoy business in 2021 from professional sports teams, including NHL, NBA, MLS, and LPGA-related business, reflecting a continuation of our significant success in the fourth quarter with MLB, NFL, and PGA Tour-related business. Our hotels are hosting smaller association and corporate meetings on a regular basis, and we are building significantly more inquiries for business for the second half of 2021 and for 2022. We're pleased to note that since the end of Q3 2020, our group room nights on the books for the second half of 2021 have increased by approximately 35%, marking what we hope is the end of cancellations outnumbering new bookings. We continue to see group demand from youth dance, pageant, and sporting events, and we are fortunate to have a portfolio which is not overly reliant on citywide conventions due to our specific hotel locations and markets. Wedding and social business. It continues to be strong at our boutique hotels and resorts, as many events originally scheduled for 2020 are now taking place, albeit with fewer attendees. Our hotels and their sales teams have all the tools in place to aggressively pursue and capture this business, which often has a virtual component in addition to the in-person event. Our outdoor venues, which total over 400,000 square feet across our three resorts in Orlando, Scottsdale, and San Diego, are seeing unprecedented demand as are our unique rooftop and other outdoor spaces across the portfolio. About 90% of our properties have outdoor food and beverage or event space, all of which is being utilized at unprecedented levels. As we and our management companies continue operating in this new environment, we're refining the balance between services offered and cost structure. His efforts have supported a continually expanding EBITDA profile with 13 of our hotels, representing over one-third of our portfolio, generating positive hotel EBITDA for the quarter. He's largely tracked the higher occupancy hotels that I referenced earlier and include hotels in Birmingham, Key West, Charleston, South Carolina, and both of our hotels in Savannah from our high occupancy list, as well as hotels in San Diego, Houston, Atlanta, Phoenix, Orlando, Napa, Salt Lake City, and Santa Barbara. I would now like to turn to a review of our capital projects completed last year. In 2020, we spent $69 million on capital projects, including $11 million in the fourth quarter. At our largest project, the transformation of Park Hyatt Aviara, we have completed virtually all of this transformational renovation. As a reminder, we reopened the resort on September 30th. During the fourth quarter, we completed the renovation and additions to the pool area and water amenities, including the addition of dueling water slides and an innovative splash pad, as well as the creation of six freestanding cabanas. The existing specialty restaurant, formerly a dinner-only outlet, was transformed into a new three-meal dining concept featuring Baja California-inspired cuisine, while the existing breakfast-only outlet was turned into a highly functional meeting space. The renovation of the golf clubhouse, including a new restaurant concept, is on track to be completed later this month. As mentioned last quarter, we are excited that Richard Blaze, a renowned celebrity chef and former Top Chef All-Stars winner with a strong San Diego and national presence, will be spearheading this innovative outlet named Ember and Rye. The effectiveness of the design, quality of construction, and the new flow throughout the resort Each exceeded our expectations, and we continue to believe that it is extremely well-positioned to capture precisely the type and quality of business for which it has been created and which we envisioned when we acquired it at the end of 2018. Equally important, we completed the project within budget at a cost of approximately $51 million. The reception from the leisure guests and response from the meeting planner community both continue to be outstanding. Each of these audiences has been accepting of the new revenue structure we've put in place. The increased rates we are achieving better reflect the resort's five-star and five-diamond status, outstanding level of service, and transformed physical atmosphere that is now comparable to the best resorts along the California coast. In the second half of the year, we completed the guest room renovation at Merritt Woodland's Waterway Hotel and Convention Center and the renovation of the existing ballroom and meeting space at High Regency Grand Cypress. In 2021, we currently estimate spending approximately $40 million on capital expenditures. Several of these projects were originally scheduled for 2020 and were deferred, but we now intend to move forward with them in the second and third quarters, given their strong return profiles. These include the development of the Regency Court, a new outdoor social venue at High Regency Scottsdale, and a restaurant and lobby renovation at Ritz-Carlton Panacon City. We expect to renovate and reposition the restaurant and lobby at Waldorf Astoria Atlanta Buckhead in the fourth quarter. In addition, planning work is underway on three significant rooms renovations, and one significant resort pool area renovation, which could begin as early as the fourth quarter, depending on business conditions. Our in-house project management team continues to oversee the design, planning, and construction of these projects. In addition, we plan to continue ongoing building systems and infrastructure work, accomplishing significant projects across 15 properties in 2021. With that, I will turn the call over to Atish.

Thank you, Barry. I will cover three topics today. First, I'll provide an update on our liquidity and balance sheet, Second, I will discuss our monthly cash burn. And lastly, I'll provide some thoughts on our business outlook as we look forward. Starting with our liquidity and balance sheet, having balance sheet strength has always been a key focus for the company. Through the variety of actions we undertook last year, we further enhanced our balance sheet. As mentioned before, we have no near-term debt maturities. We diversified the balance sheet by adding high-yield debt to our mix. Now we have this tool available as another source of debt capital for future growth. Having amended our corporate credit agreements three times over the last year, we enhanced our relationships with existing lenders. We are confident in our ability to work with them going forward. We have approximately $710 million of current liquidity, which represents years of runway at current business levels. Turning to my next topic, our monthly cash burn. During the fourth quarter, our average monthly cash burn was lower than expected. Recall that our expectations for average monthly cash burn was in the $13.5 million range at the end of October when we reported third quarter earnings. We estimate that our fourth quarter average monthly cash burn was approximately $9.5 million, inclusive of debt service and cash G&A expense. Drilling down a bit, we estimate that our average monthly cash burn at the hotel level was approximately $2 million in the fourth quarter. These cash burn figures exclude capital expenditures, and in addition, these figures reflect normalizing the timing of certain expenses. We estimate that the four dispositions reduced our cash burn by several million dollars during the fourth quarter. A portion of that reduction reflects our estimate of what hotel-level cash burn would have been had we not sold those properties each quarter, and a portion reflects lower debt service as a result of using sales proceeds to pay down debt. Looking ahead, we expect first quarter average monthly cash burn to be higher than it was in the fourth quarter. We expect a greater hotel EBITDA loss in the first quarter as compared to the fourth quarter. This is due to restrictions on activity in certain states during the winter, as well as lower levels of leisure demand during the first half of the first quarter. By the second quarter, we expect cash burn to moderate. With 34 of our 35 properties open and operating, we are poised to capture demand as it increases. As to the 35th hotel, Hyatt Regency Portland is expected to recommence operations in the second quarter. The exact timing is subject to our assessment of whether we are economically better off by recommencing operations. Moving ahead to my final topic, I would like to offer some thoughts on the year ahead. We're increasingly optimistic about the second half of the year. Based on the rollout of the vaccines and the continued downward trend in COVID cases, we expect more business activity. We expect portfolio hotel EBITDA to be positive by mid-year. There may be months in which we have positive hotel EBITDA prior to then as we did in October of 2020, but think it will likely take until mid-year to be more consistently positive in terms of monthly portfolio hotel EBITDA. We expect our corporate profit measures to follow. And as such, we expect FFO to be positive by the third quarter. We did not provide earnings guidance in our release issued this morning, but expect to provide it once we have more clarity on fundamentals and trends within the industry. We did, however, provide guidance on certain corporate expenses that are more within our control. I will now discuss each of these three items. First, as to cash G&A expense, recall that during 2020, We reduced this expense by about 25% from what we had anticipated at the beginning of the year. For 2021, we expect to keep it approximately in line with 2020 levels. We are forecasting approximately $19 million. Second, we expect cash interest expense to be approximately $16 million. This estimate is a step up from last year, reflecting the CMU notes issuance. As to capital expenditures, we have already discussed $40 million of anticipated projects. We expect one quarter of the spend to be in the first half and three quarters to be in the back half of the year. Both the outlay and the timing could change based on market conditions, meaning we could advance or push projects. In closing, over the last 12 months, we preserved value, enhanced liquidity, and positioned the company for the future. We remain focused on creating value over the long term. And with that, we will turn the call back over to Andrew for our Q&A session.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from David Katz with Jefferies. Please go ahead.

David Katz Hi. Good afternoon, everyone. Thanks for all of your detail. We appreciate it. Look, what I would like to do, I mean, we are a bit on in this earnings cycle. We've heard so much positive commentary around the back half of this year and optimism for it, as well as next year. And we'd like to try and put it in context and be balanced about it. Can you just put a little bit more sort of substance or detail around the back half of this year and early next year in terms of bookings and how we might evaluate their sincerity as best we can today.

Sure, David. So one of the things that gives us a good bit of optimism, actually, for the back half in terms of group is what we're seeing on the rate side. And in fact, sitting here today, our group rate on the books for the back half of 2021 is actually higher than it was for 2019. So I think in light of what we've been through, we view that as a pretty remarkable statistic. And what I can tell you is that as new bookings are being made, we're not seeing the ultra-competitive price environment that you might have thought we would see given that groups have a lot of options and a lot of hotels with availability for them. And I think part of that is that the groups that are booking right now are a lot of rebookings. So it's groups that may be didn't move right away, but now they canceled the program, now they know they want to have it. So they've chosen their hotel and they want to rebook at that hotel. And we're also seeing a lot of groups that I think are getting a lot of confidence around just where they want to be. And so as opposed to in a market like Orlando where we might have seen historically a group come and look at four or five or a half dozen hotels, we're seeing them look at a couple of hotels. and I think that has certainly changed the rate profile. From an absolute standpoint in terms of what room nights are on the books, they're down, and they're down fairly significantly. We're looking at group pace to what we had at the same time last year for 2020. The back half down around the a 40% level, but given our particular portfolio, we do not, the large majority of the group business in our portfolio is corporate-driven. It's not citywide-driven, and it's not necessarily large association-driven. It's exactly the kind of business that we would expect to book short-term, and what we're seeing in terms of how that's grown over time has been significant. I made a comment in the prepared remarks that from the end of Q3 to the end of Q4, we saw back half 2021 bookings increased by 35 percent. We think that's significant. And we've certainly seen that trend continue in January and February, and hope to report an even stronger profile as it relates to that metric by the end of Q1. Michael Heaney Right.

And if I may sort of follow up, I know there's been so much discussion about, you know, creating efficiencies and cutting costs. You know, I heard someone, you know, adopt the expression recently about a lifestyle change rather than just being on a diet. How confident, and Barry, I'm guessing this is right up your alley, are you that this is going to be, a lot of this will be a lifestyle change, not just a diet?

I think that's actually a great analogy, particularly as we've seen, all of us have seen friends and family, some of whom whose physical presence reacted well to COVID and some of whose didn't in terms of the number of snacks they had while they were working from home. So I think that's a really appropriate analogy. I'd love to give credit to the author. But there's no doubt that we will come out of this when we're fully stabilized with a lower expense structure in place. The cadence to get to that I think is going to be really interesting. And one of the things that that we look at really every day in the portfolio is what are the FTEs in the hotel? What business are they serving? How is that going to step up month over month as hotels in the portfolio go from 30 to 40 to 50 to, in some cases in our portfolio now, 70, 80, 90% occupancies we're seeing in some hotels? And are we able to maintain that level of employment if business, does not maintain at those levels. And that's going to create an interesting challenge, I think, if there are any peaks and valleys to how business kind of unfolds. And when you look at potentially, depending on the market, soft or seasonal months, in some cases that may be May, in some cases that may be summer. It's going to be interesting to see how that happens. I think, but I do think, a lifestyle change is what we've gone through. And we have figured out how to combine services in the hotels, have people do more, have working managers rather than just managing managers. And we certainly have a tremendous amount of respected admiration for our managers in the hotels that are working shifts. How long we can perpetuate that, I think, is going to depend in part on how rapidly business comes back. We feel very good about the expense structure when we come out of this, obviously. And I think both in terms of number of bodies, but as well in terms of what we're doing and the services we're providing. Having said that, we are very focused on making sure that particularly in our upper upscale luxury hotels that we are providing services that guests want. We have a fundamental belief that one of the reasons why many of our hotels are doing well and why we're being our comp sets is because we have a restaurant open where other hotels may not. And that's driving guest business right now. The restaurant may not profitable in the traditional sense, but we know that we're driving additional rooms revenue because we're offering service and amenities that other hotels in our competitive markets may not be.

Perfect. Thank you very much.

The next question comes from Michael Bellisario with Baird. Please go ahead.

Good afternoon, everyone. Good afternoon. Barry, just one more for you on the group front. Can you maybe give us a sense of where the bookings are actually occurring and how some of your bigger assets are actually performing? Are you seeing any differentiation? And I know you mentioned Orlando, but Houston versus Portland, which is still closed, and maybe Santa Clara, that's a little bit more impacted from a fundamental perspective. Any added color there would be helpful.

Sure. You know, it's actually interesting. For the most part, if you look at the entire year of 2021, there's not a huge amount of differentiation in the performance among the hotels. Many of them, in fact, most of them are down relatively the same amounts. And that's true even as we look out into Q3 and Q4. There are a few pockets of hotels that are down a little less, but there's not in the case of our portfolio right now, meaningful trends in markets that are doing better at grouping books than others. And that actually gives us a lot of confidence because, again, going back to the way I answered the question for David, is that our group portfolio and our Delta II group primarily book corporate group. That's by far the largest segment. So we would not, so the fact that we're not seeing much differentiation now among hotels, actually tells us that's likely to be, in fact, true and consistent. And what we're seeing in terms of new leads and new bookings from that segment has also been relatively spread evenly through the portfolio. Obviously not on a case-by-case basis, right, which I'm looking at different hotels in the portfolio, but we are seeing kind of consistency through the portfolio, both in terms of where we are and in terms of where we think we're going.

I think that has a little bit to do, too, with when you think about the geography of our portfolio and the exposure that we have to certain markets that are probably not behaving too terribly differently from each other. You know, we own significant group hotels in markets like New York, Chicago, you know, some of the markets that you can think of that obviously are probably going to be a little bit close, going to take a little longer to get back to stabilization. I think you would see much more of a disparity in what we're seeing from other portfolios. I think it has to do a lot with our exposure to, as we talked about, some known locations, a lot of these kind of drive-through leisure locations, and just have to be a little bit more homogeneous within the portfolio.

Got it. That's helpful. And then just one more from me on the capital allocation and capital deployment front. I think you said you hope to be an acquirer as the cycle progresses? What's your latest thinking on maybe when you'll be able to put money to work and then how are you thinking about the different sources of capital that are available to you today?

Yeah, sure. Obviously, we have a good amount of liquidity available to us today. As we did kind of throughout this pandemic, we're obviously looking at managing two various scenarios and various ways of how things stabilize and how quickly things stabilize. So I would say that our continued immediate focus obviously remains on the operations of our hotels, getting to break even, hopefully getting cash flow positive as a company sooner rather than later. And clearly, we have been very active throughout various cycles, throughout our history, as you know very well. So it's something that we will absolutely look at. We'll be looking to be an active participant to the extent that the next up cycle provides some interesting acquisition opportunities. And I think that there are various levers we can pull to have the type of liquidity available to us that will need to be an active acquirer. On that being said, you know, we, and I highlighted this a little bit in my comments, there certainly don't appear to be a tremendous number of assets out there on the markets that are, A, very appealing, great strategic fits, and B, would come at a price that you would view as, you know, a discounted price, if you will. There just isn't that much of that kind of stuff out there. And I think you've certainly, through some of the rumored potential deals that are currently out there, you're seeing that pricing for attractive hotels remains, you know, remains pretty aggressive, frankly. So I don't think there's any need for us to be, you know, overly jumpy as it relates to acquisitions. I think we can sit back, we can see, kind of comes our way as we start to building a pipeline coming out of this. But we feel really good about not having sat on our hands over the last couple years and really continue to transform the portfolio and have a portfolio now where there still are a lot of embedded growth opportunities within the assets that we bought up last, you know, say, three to four years.

Thank you very much.

The next question comes from Thomas Allen with Morgan Stanley. Please go ahead.

Thanks. Just following up on the last question, how are you thinking about dispositions right now?

Not dissimilarly to how we've always figured dispositions, which is, you know, we'll continue to look very closely at where we think potential values for assets are versus where we think long-term growth potential is for a particular asset. And We will continue to, you know, to be very diligent in the way that we're evaluating both our existing properties within our portfolio and potential additions out there in the market. So that means, you know, particularly when there are some bigger CapEx needs coming up for some of our assets, we'll take a very close look at whether we think that there's a good enough market out there to potentially sell an asset as opposed to making an additional investment. If we don't feel like the right kind of ROI opportunities is available by doing that project. So I would say that we've obviously done a lot of heavy lifting in the way that we transformed our portfolio. And I see a lot of growth potential within our portfolio, even with some of those assets where we do think that we might be doing some CapEx projects over the next few years. So at this point, I'd say that it's a little bit more around the margin as we sit here today with some additional dispositions that we might be doing.

Thanks, Marcel. And then just your commentary around thinking through 2021 and the comments that you're kind of increasingly optimistic about getting to, you know, positive EBITDA or positive free cash flow by 3Q sounds a little bit more optimistic than peers, who I feel like mostly committed to like a second half of 21 improvement. Yeah. Was that on purpose? Do you feel like it's because your portfolio is better positioned to turn profitable before peers or other things that drive you to, in my eyes, kind of come off more optimistic? Thank you.

Yeah, thanks, Thomas. It's a good question. You know, to be frank with you, I don't think we kind of – went through exactly what each of the peers were saying. I mean, our view is that we've got some momentum and traction on booking activity. So that's a positive. And then just looking at the portfolio, you know, as we pointed out, you know, the markets where we're strong, a lot of these Sunbelt markets, you know, seem to be doing better. So I think that's that performance expectation that we have is relative to what we're seeing in the business and our mix of geographic locations. So that's really what's informing it. Renaud, Marcel, if you have anything to add on that.

Yeah, I'll just add, too, and I think Atish highlighted this in his comments, too. We certainly could foresee some months coming up where we think we will be breaking even where it may not be as structurally yet as a little bit later in the year. So we saw that, obviously, in a month like October, there was... you know, positive hotel EBITDA side. Maybe you look at where we finished the quarter, the fourth quarter, with, you know, negative hotel EBITDA of less than $3 million for the 34 hotels in our same property portfolio. We're obviously not tremendously far off from getting to a point where you can envision breaking even at that level. So I do view some of the momentum that we have to Atisha's point would lead us to believe that As we enter the second half of the year, we will have the opportunity to get to that level.

Thank you.

The next question comes from Brian Marr of B. Riley FBR. Please go ahead.

Good afternoon. Maybe for Marcel and Barry, you guys have been at this for a long time. And, you know, the Wall Street Journal ran a piece, I think it was early December, suggesting a permanent impairment of business travel to the tune of 20 or 30 percent. What are your thoughts on that? Do you think that's a bit of a stretch? Do you think there's some truth to that? Do you think the Zoom environment is going to hedge, you know, business travel by some degree? Can you expand upon that?

Sure. I'll start us off and then Barry jump in because he's got even more experience than I do. answering your question. So, you know, the way we view it, from my personal perspective, I think that sounds particularly excessive. I don't believe that there is that much of a fundamental shift that we'll see in the business. Certainly, you know, shorter term, there are some challenges to overcome as far as people getting back out on the road. But I think a lot of it is being driven by We need to see the office environment improving, people getting back to the office, working together. And I'll steal a little bit of Barry's thunder because I know it's something that we've talked about a lot and that he brings up a lot is the fact that there's going to be no greater push for people to start traveling again besides when they see their competitor traveling and meeting customers and being out on the road again. So I do not believe that we're going to see a truly fundamental change long-term shift. Now, could there be situations where people are saying, you know, look, do I really want to take this trip because I might just get on the Zoom call with someone? You know, I think there will be some of that. There's other things that will be at play, too, such as what are the long-term ramifications of maybe some more working-from-home environments versus going to an office? Does that actually create more travel for people having to travel to their home offices if they don't live in the place anymore where their job is really based? I think there's a lot of ins and outs and pluses and minuses that are just, as you sit here today, are truly kind of impossible to predict. But I'm not a believer that there's going to be just this fundamental real negative shock to what business travel looks like over time.

Thank you.

The next question comes from Ari Klein with BMO Capital Markets. Please go ahead.

Thank you. Maybe on the CapEx front, can you expand how you're thinking about spending over the next few years? Have there been significant deferrals, and are there a handful of potential ROI opportunities that you're looking at beyond the ones that you've highlighted for 2021?

Sure. Last year, we came into the year with a budget of about $120 million and cut that. Over the course of the year, the ultimate spending was $69 million. We had always expected 2021 to be a little bit lighter year in terms of CapEx, knowing how good a shape the portfolio was in, and really the projects that I mentioned were all things that would have been either executed or deep into the planning stages for 2021. One of the things, and we are very rigorous, and one of the great benefits of having our in-house project management team is how much are we going to put around our five-year planning process, but we're constantly looking at the next five years. What projects make sense? What can we afford? What are the returns going to be on those projects? And as we went through that process this year, I think we were, again, pretty pleased with what the portfolio was and not feeling that there was a lot of urgency to spend, to do a lot of projects in 2021. but there were projects that we thought have some substantial returns. We are, this year, as part of our overall planning and strategy, going back and doing some deep dives on some of the assets we've had that have been in the portfolio for a more extended period of time, and really looking at are there things that we can do to those assets, either from a physical perspective or from a brand and management perspective, that can significantly change some of those assets. So to the extent We identify opportunities there. Those are things that, in some cases, we have placeholders for them in the five-year plan. In some cases, we don't. But those are things that could provide and re-trigger the plan. I think we've talked for quite a while kind of about a normalized run rate on the portfolio, and this is at a little larger size. We've talked about a normalized run rate on CapEx around the $60 million level and have kind of tried to, in our five-year plan, balance to that. So when last year was a little over that, this year may be a little bit under that. But we think that's the right dollars to keep the portfolio in really good shape and do the projects that we need to do to keep the properties both fresh from a guest perspective, but also, as I mentioned, make sure that we're spending the dollars, which we've always done a very good job of in terms of back-of-the-house infrastructure building systems spending as well.

And one of the, and not that I want to necessarily put a rosy spin on anything related to the pandemic, because obviously there's a lot of negatives that came out of the pandemic. And it's a big hole that the whole industry is trying to work its way out of. But one of the silver linings as it related to the CapEx piece, particularly for us, is that it allowed us to almost pause a little bit again and to look very closely at our entire portfolio and say, Where do we think the appropriate money should be spent in the next few years? And that really goes to the point that Barry was making as it relates to some of those assets that have been in portfolio a little bit longer to see, say, when do we want to do this? How deeply do we want to do some of these renovations? And to do a lot of planning around some of those things. I'll also say that the four assets that we sold universally, they were going to be requiring some pretty significant capex in the coming years. So there's actually a fair amount of capex that we're avoiding as a result of having sold those four assets as well.

Got it. Thanks for that. And then maybe just looking at your portfolio from a supply growth standpoint in your major markets, do you have any sense of how that may have changed pre and post COVID?

Yeah, sure, Ari. So, you know, pre-COVID, Our weighted supply for 2020 was 2.7%, and it was 3.6% for 2021. Post-COVID, a year in 2020, supply growth came in at about 1.6%, and is at 3.2% for 2021. So a couple reasons in our view on why that came down. One, selling the assets we did. I'll lower that a bit. Secondly, would be delays and cancellations in projects. We would expect that 2021 number will continue to come down during the course of the year, and as projects continue to get pushed out. And obviously, not much is being added in the way of new supply for, you know, 21, 22, and beyond at this stage. From a supply growth perspective, I think we're likely in a much better position than we were a couple of years ago, and we'll reap the benefits of that over the next several years. And it's a combination of really what's happened and how that's changed the ability for projects to get done in terms of financing, as well as our shift in the portfolio to just better markets for growth through our transaction activities.

Thanks for the call.

Again, if you have a question, please press star then one. The next question comes from Austin Verschmidt with KeyBank. Please go ahead.

Hi, good afternoon, everybody. So, Marcel, you've referenced the Sunbelt exposure, you know, is really an outcome of the dispositions you've done and You know, you highlighted that some of these markets are going to ramp quicker than the overall portfolio. And so when you kind of overlay, you know, the market view, you know, with the first pillar, you know, the transaction oriented mindset, particularly the diversification piece, you know, how does that affect your view on how you allocate, you know, the next, you know, the next, you know, dollars either on the CapEx side or acquisitions for that matter moving forward versus sort of broadening your geographic exposure?

Yeah, that's a great question, Austin. Obviously, we continue to say and we're firm believers long term that we will primarily be investing in top 25 U.S. launching markets and key leader destinations. And an outgrowth of what our strategy has been over the past few years has been exactly with the type of exposure that we currently have in the portfolio. We think that, as we've always done, we always have a very open mind to potential acquisitions, and I've always wanted to cast a little bit wider net than particularly what you saw a few years ago from a lot of our peers, which was a little bit narrower focus on the smaller set of markets, which to us also provided a much more set of acquisition opportunities. So we're going to continue to kind of have that wider lens and continue to look at a lot of different markets. We like the characteristics of a lot of the markets that we're concentrated in now because of the things I mentioned, you know, long-term demand characteristics, certainly a little bit more of a benign expensive environment. So I think that's that's where our primary focus will remain. That doesn't mean that there will come a time where you say, look, there are just these great acquisition opportunities because it's obviously going to be driven by the supply of potential deals that are out there, what happens with pricing, and we think that there is just a great return to be made on a market where we currently don't have a lot of exposure, then we're not going to shy away from that. So it's really a long-winded way of saying, look, we're going to be We're going to be opportunistic. We're going to keep an eye really on the same kind of characteristics that we've always liked, which is not an over-reliance on one particular demand segment, having a good level of leisure exposure in our portfolio, and just look at where the opportunities will come our way.

I appreciate that. And then just there's been a lot hit on on the group side, but I'm just curious, as these groups rebook and others sort of look to get – you know, bookings on the calendar, any change in the F&B side and level of spend or types of items they're willing to spend on today. And then I'd also be curious, you know, specifically on the Hyatt Regency Portland, if you could give an idea of what the, you know, group bookings or even the convention calendar look like in that market, just given some of the challenges it's facing. Yeah.

Sure, Austin. Let me talk about food and beverage groups. So it's interesting. Where groups are meeting today, we're seeing very good food and beverage contributions, but the hotels are having to work differently to figure out how to deliver that, right? So it's the question of is the group and is the hotel, and it varies, willing to do a buffet, which obviously is lower cost, more efficient versus doing something plated. We continue to see a lot of groups, particularly if it's not their big meal, you know, doing, wanting, you know, more boxed lunches and things like that. So it's been a little bit different. Certainly depending on the market, you're seeing, you know, some groups that might have done cocktail parties are not doing those where they do before. So it's going to be a slow comeback, I think, to get back to the, group food and beverage spend that we've seen historically. And again, that does vary a lot market by market, right? I mean, in California, other than one of our hotels, we're still not able to do indoor dining. So that obviously has a big impact on what we're able to offer a group and how we're able to offer it.

Got it. And then just as it relates to the Hyatt Regency Portland, if you can give an idea of what the group calendar and the convention calendar looks like for that market, we'd appreciate it.

Yeah. So the market as a whole, the overall market, when you look at city-wise, of which we will be the most likely beneficiary of those, in the back half of the year, the numbers are significantly greater in terms of definite events on the books than they ever have been. So we're keeping a very careful eye on those and when those show up and making sure that those are actually good pieces of business for us. The very first time that kind of changes, so I mentioned the entire back half, literally every month the back half, you start seeing some real transition into that starting in June. So when we talk about having an eye toward reopening the hotel in Q2, that's really what we're focused on. Right now, the number of citywide, there were some citywide on the books for the first quarter and early second quarter that kind of went away on us. So that's why we're keeping a careful eye on it. But it's part of what gives us, again, a lot of long-term confidence in the hotel and certainly in the market as a whole. We still think Portland is a great, convention alternative for Pacific Northwest business and giving Seattle a real run for its money now that there's a dedicated convention center hotel in Portland. But also we think from the entire West Coast and California in particular, Portland can serve as a much lower cost alternative for those groups to a California-driven convention. And you have a terrific airport in Portland, continually ranked as one of the best airports in the country with a significant Alaska airline hub And as Alaska has extended their reach beyond their traditional west coast to a lot more east coast destinations, that opens up a lot of opportunities for larger city-wide in Portland.

Great. Appreciate it. Thank you.

The next question comes from Tyler Vittori with Janney Capital Markets. Please go ahead.

Hi, good afternoon. This is Jonathan on for Tyler. Thanks for fitting us in. One quick one on international demand. Do you have any sense to when that demand will return? And how much of a headwind is that for markets that are more tilted towards international?

We're pretty fortunate. We have a very low percentage of international travel in our portfolio overall, given that we have relatively low exposure to major gateway cities. We have seen significant international business at our Westin Oaks and Galleria in Houston that the South American and Central American travelers are traveling. And when they do travel, Houston in general and the Galleria Mall in particular as a shopping destination is a very frequent destination. We've done quite well there. Our other hotel that has traditionally had a fairly large component of international business is our Marriott San Francisco Airport. And we are starting to see international flights, international crew business come back, and that's probably the best indication of when, if you're curious when business will come back, we're keeping a very careful eye on the international flights and international crew business, in particular that hotel, as a marker for when the international traveler will be making inbound business.

Okay, I appreciate all the detail. That's all from me. Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Marcel Verbas for any closing remarks.

Thanks, Andrew. Thank you everyone again for joining us on our call today. I know we're at the end of earnings season, so I appreciate everyone's attention and insightful questions. Certainly, there's some light at the end of the tunnel with vaccinations increasing, Business appears to be slowly rebuilding, particularly on the leisure side, obviously, and we look forward to updating you again in the quarters ahead. So thanks again for joining us today.

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