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spk10: Good day and welcome to the Xenia Hotels and Resorts Second Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then 2. Please note, this event is being recorded. I would now like to turn the conference over to Danielle Burgun, Vice President of Finance. Please go ahead.
spk05: Danielle Burgun Thank you, Andrew. Good afternoon, and welcome to Xenia Hotels and Resorts Second Quarter 2021 Earnings Call-In Webcast. I'm here with Marcel Verbaugh, 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 quarterly performance, industry fundamentals, and the positioning of our portfolio. Barry will follow with more details about our operating results, details on our capital expenditure projects, and the current operating environment. And Atish will conclude our remarks with an update on our recent capital market activities and balance sheet. 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 in 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, August 3, 2021, and we undertake no obligation to publicly update any of these forward-looking statements as actual events unfold. You can find a reconciliation of non-GAAP financial measures to net income and definitions of certain items referred to in our remarks in this morning's earnings release. An archive of this call will be available on our website for 90 days. I will now turn it over to Marcel to get started.
spk08: Thanks, Danielle, and good afternoon to all of you joining our call today. Since reaching an inflection point and turning cash flow positive at the end of the first quarter, the pace of recovery has accelerated. The quarter came in well ahead of our expectations. The results we reported this morning reflected positive momentum in demand across our portfolio and across each segment of business. During the second quarter, we recorded a net loss of $42 million. However, adjusted EBITRE and adjusted FFO per share were each positive at $27.4 million and 8 cents respectively. In addition to continuous sequential improvement in occupancy during the quarter, reaching 55.5 percent for our same property portfolio in June, our operating performance was fueled by strong rates and outstanding cost controls. Our June ADR was virtually equal to the ADR we achieved during June of 2019. Impressively, our same property hotel EBITDA margin was 24% for the quarter. The hotel EBITDA margin we achieved during the quarter was the result of not only excellent cost controls and lower staffing levels at the property level, but also a shift in the revenue mix generated at the hotels and the sequential improvement in ADR as the quarter progressed. With leisure transient demand continuing to be the majority of overall room demands, and group demand being a much smaller piece of the pie, food and beverage revenues continue to lag significantly behind pre-pandemic levels. This shift in revenue mix continues to be a driver of margin performance. On the rate side, the Delta to 2019 same property monthly ADR was reduced from 16% in March to only 0.3% in June. and 17 hotels and resorts, or half of our same property portfolio, achieved a higher ADR in June 2021 compared to June 2019. While the makeup and geographic mix of our current portfolio has historically caused the third quarter to be the portfolio's softest quarter, we are encouraged by a continuing improvement in top-level performance that we have witnessed thus far. Based on preliminary data, our July occupancy of approximately 59.2% and ADR of approximately $223 are the highest we have achieved since the beginning of the pandemic. The resulting red bar of $132.38 would be approximately 18% below July of 2019, continuing the sequential monthly improvement since January of this year, when our red bar was 73% below 2019 levels. Rates have been particularly strong, with July ADR exceeding July 2019 by 9 percent. The continued shrinking of the red bar variance to 2019 gives us reason for optimism for a continued recovery. As I mentioned previously, leader demand continues to drive short-term results in our portfolio and the U.S. logging industry as a whole. While the expectations for strong leader demand during the summer months were high, The actual demand generated by the leisure segment has not disappointed, and we are not seeing signs of a slowdown. While leisure has been the primary driver of the recovery, we have seen an uptick in business transient demand, with midweek occupancy showing significant improvement in recent weeks. Clearly, the recent resurgence of COVID-19 cases and the concern regarding the Delta variant will be a variable as the summer continues, and we prepare for a post-Labor-Day environment. Most signs are pointing to a strengthening of corporate transient and group demand this fall. However, it is unclear at this time how newly mandated or recommended social restrictions might impact the return to work, corporate travel, and meetings business. Despite an operating environment that continues to be difficult to forecast and subject to many uncertainties, we are optimistic about our medium and long-term growth prospects. Our strategy of owning a geographically diverse portfolio of high-quality luxury and upper upscale hotels and resorts has clearly benefited us as we have navigated the impact of the pandemic. Our operating results during this early phase of recovery, highlighted by generating positive monthly adjusted FFOs since March, are reflective of the desirability of our assets to diverse sources of demand and our longstanding focus on investing in Sunbelt and Drive-Thru leisure locations. While we have seen the short-term benefits of our strategy, we believe that we have further opportunities to drive differentiated internal growth. Two specific examples of embedded growth opportunities are a higher-gradiency Portland, which had only been open for a few months when operations were suspended in early 2020, and our repositioned Park High La Vieira Resort, where post-renovation results have been highly encouraging, especially as it relates to room rates. In the second quarter, property ADR was up 64.5 percent relative to the second quarter of 2019, a clear indication of the successful reintroduction to the market of this significantly enhanced resort. Additionally, we expect to benefit from recent capital expenditure projects, with the most significant of these being the renovation of high-agreency Grand Cypress and the addition of the new meeting facilities at the resort. We believe this asset is particularly well-positioned as group demand starts to recover. Since the beginning of 2018, we have completed substantial renovation projects and an additional 16 properties in our current portfolio. We expect to experience the full benefits of these enhancements as the recovery continues. During last quarter's call, I discussed evaluating the portfolio for further ROI opportunities that may go beyond cyclic renovations. Two projects that we highlighted in our release this morning fall into that category, with both the scheduled renovation of Grand Bohemia in Orlando and the planned capital investment at Waldover Storia Atlanta Buckhead being more comprehensive than previously planned. We expect these projects to strengthen the competitive profile of each property and generate strong returns. Barry will provide more details on these projects shortly. We continue to evaluate a number of potential additional ROI projects and repositionings. Regarding potential dispositions, we have done the less heavy lifting over the past several years. However, we expect that we will continue to fine-tune the portfolio while we look to upgrade portfolio quality over time. As always, there will be a particular focus on assets with a lower RETBAR profile and what we believe are lower growth prospects. that have significant upcoming CapEx requirements. One of these hotels is our Marriott in Charleston, West Virginia, a legacy asset in a non-core market that we decided to take to market during the quarter. I will conclude with our thoughts on potential external growth opportunities. Through our most recent balance sheet activities and credit facility amendments, we now not only have more liquidity, but also substantial flexibility to complete transactions. We have analyzed an increasing number of marketed and potential off-market single property transactions. While we are hopeful that potential transactions could materialize in the quarters ahead, and our track record through the prior cycle gives us confidence, we are maintaining a disciplined approach to underwriting acquisition opportunities. Given the strong embedded growth and the expected ramp on assets that we acquired at attractive prices from 2017 to 2019, we can be patient. and act when we believe the transaction fits our strategy and return requirements. While the number of potential opportunities is slowly increasing, we remain of the belief that there will be more properties available as owners gain more clarity on each asset's recovery path, there are more available reference points on pricing, and financing issues are worked through. I will now turn the call over to Barry, as he will provide additional details on our second quarter performance, our capital projects, and the current operating environment.
spk13: Thank you, Marcel, and good afternoon, everyone. The portfolio information I will be speaking about today is reported on the same property basis for 34 hotels, which excludes the higher-end C Portland, which recommenced operations on May 24th. For the quarter, our same-property portfolio occupancy was 51.4 percent at an average daily rate of $215.01. resulting in rev par of $110.45. As a note, rev par in the second quarter of 2020 was $7.19, and in the second quarter of 2019, it was $180.05. We continue to be encouraged by the sequential improvement month over month during the quarter, as well as our continued strong performance in July, a testament to our portfolio mix and the performance of our individual assets. As of May 24th, all of our hotels and resorts were open and operating, we have been pleased with the ramp-up in market acceptance of the Hydrogen Sea Portland at the Oregon Convention Center. As we anticipated, there is significant leisure demand in Portland over the summer months that the hotel has been able to capture. For the quarter, portfolio performance exceeded our expectations, particularly due to strong June results, which continue to be a result of strength throughout the leisure segment and specifically in our drive-to leisure markets. April's occupancy was 48.9% at an ADR of $216.03, continuing to build on the strength we had seen in March when leisure demand at spring break filled many of our hotels. And the result continues a sequential growth trend as occupancy increased to 49.7%, with an ADR of $216.18, driven by increased corporate and group demand and healthy leisure demand over a very strong Memorial Day weekend. The layering of strong leisure vacation demand with full reopenings throughout California led to significant growth in June occupancy to 55.5%, with a modest decline in ADR to $213.03. We had 13 hotels achieve 60 percent or greater occupancy for the quarter, including five that exceeded 80 percent. These included properties in Key West, Birmingham, Charleston, South Carolina, and Savannah, continuing to reflect a number of our leisure-focused hotels in drive-thru markets. In terms of profit, 32 of our 35 properties achieved positive hotel EBITDA for the quarter, up from 17 in the prior quarter, with seven properties exceeding results compared to the second quarter of 2019. Without a doubt, operating hotels in the current environment continues to be challenging. Overall, the management teams at our hotels have done an excellent job at managing expenses in a continually evolving environment with numerous cost headwinds, including the cost of food, operating supplies, and labor. Our hotels are continuing to experience challenges in sourcing labor, However, our management teams continue to implement innovative programs to attract and retain labor in order to satisfy the needs of our hotel's guests. In markets where supplemental unemployment has ended, we are seeing modest increases in interest and applications. For the second quarter, departmental expenses declined 44.9% compared to 2019, slightly exceeding the 42.1% decline in revenues, while undistributed expenses, often considered to be largely fixed in nature, declined by 28.8%, led by significant declines in administrative in general and sales and marketing expenses. Total payroll and employee benefits expenses declined by 46%. For individual hotels that performed well in the top line, achieved some remarkable performance in the bottom line, with 12 hotels achieving EBITDA margin greater than 30% for the quarter. This compares to only two hotels exceeding 30% EBITDA margin in the first quarter. As we expected, leisure booking windows have lengthened over the summer months, as guests are booking earlier in order to assure they can stay at their choice of property. This lengthening of the booking window has enabled many of our hotels to achieve significant rate increases. Our hotels continue to open restaurants and provide modified housekeeping services in response to guest demand. Services offered continue to vary based on property needs, specific locations, and demand patterns. Guests continue to extend stays beyond their typical profile, with guests blending business and leisure stays. Anecdotally, on our property visits, we continually see significant increases in guests using video conference services in our lobbies and other public spaces to conduct business meetings while on vacation. We continue to support and see results from our brand management company's marketing to this new and unique segment. On the corporate transient side, we continue to see improvement in volume. We are particularly pleased to be seeing growth from larger national corporate accounts whose volume is improving each month. Corporate transient business from large volume accounts grew over 90% from Q1 to Q2. Tuesday and Wednesday night occupancies each increased over 13% from Q1 to Q2. Group production grew by 133% from Q1 to Q2, with sequential improvement in each month this year. Professional sports teams, including NHL, NBA, and MLS business, continue to be notable in the group segment during the quarter, as did youth-related business. Smaller association and corporate meetings have notably improved, and we continue to see significantly more inquiries for business for the second half of 2021 and for 2022, with lead volume for all future dates increasing at our 15 largest group hotels by over 50 percent from March to June, with, again, sequential improvement each month. The largest increase in leads by far came from the corporate segment, with lead volume of nearly 75 percent. For the second half of 2021, Group Revenue Pace versus 2019 is down approximately 45 percent, with rate down just 3 percent. Looking ahead to 2022, Group Revenue Pace continues to increase steadily. At the end of June, Group Revenue Pace for 2022 was down about 33 percent compared with our position at the end of June 2018 for 2019, with rate up approximately 2 percent. I would now like to turn to a review of our capital projects in progress for the year. In the second quarter, we spent $4.6 million. In 2021, we continue to estimate spending approximately $40 million on capital expenditures. This includes the development of the Regency Court, a new outdoor social venue at High Regency Scottsdale, which is well underway, and a restaurant and lobby renovation at the Ritz-Carlton Pentagon City, which is just beginning. We expect to renovate and reposition the restaurant and lobby at Waldorf Astoria Atlanta Buckhead beginning in Q4, with completion early in the first quarter of 2022. In addition, we recently made the decision to move forward with a significant renovation of the guest rooms and guest quarters of this hotel during the same time period. Although originally not planned until 2023, we believe that providing a comprehensive renovation of the hotel to the market at one time will significantly enhance the hotel's market position and ability to continue to attract high-end corporate, group, and leisure trials. As we have mentioned previously, we continue to review opportunities for substantial internal growth within our existing portfolio. We are pleased to announce that we intend to engage in comprehensive hotel renovations at Canary Hotel and Grand Bohemian Hotel Orlando that will commence in Q4 of 2021 and Q1 of 2022, respectively. The renovations of both hotels will consist of significant upgrades to the guest rooms, lobbies and bars, meeting space, restaurants, and rooftop pool areas. At Grand Bohemian Orlando, we will be making significant modifications and enhancements to the 20-plus-year-old design, resulting in a lighter and more contemporary-looking feel. At Canary, we will work to enhance the property's existing Mediterranean design with more contemporary design features. Each of these hotels has been and continues to be a market leader, and we expect these enhancements to ensure their premium positioning, enable the hotels to attract additional business, and position their food and beverage offerings at the top of their respective markets. With that, I will turn the call over to Adish.
spk09: Thanks, Barry. I will provide an update on our balance sheet. Overall, our balance sheet is stronger than it was pre-pandemic. We have less net debt, more liquidity, and extended maturity ladder. We have achieved this without increasing our share count and without increasing the risk of future dilution. As a result of the successful high-yield offering we completed in May, our liquidity increased by approximately $300 million since the end of the first quarter. Our liquidity is over $1 billion at present. It reflects approximately $500 million of unrestricted cash and a fully undrawn $523 million line of credit. We continue to have a well diversified balance sheet and an attractive weighted average cost of debt of just over 5%. The average duration of our debt is 5.3 years, up from about four years pre-pandemic. And we have no debt maturities for the next two and a half years. As Marcel mentioned, we have amended our corporate credit facilities in May. We have already announced the details around those amendments. Overall, we are pleased as the amendments provide the company with more operational and transactional flexibility. And they reflect the continued positive relations we have with our bank syndicate. As we look to the second half of this year and into 2022, our outlook continues to be positive. From a corporate profit measures perspective and assuming a continuation of the demand trends we've seen in recent months, we expect adjusted EBITDA and FFO to be positive going forward. More importantly, since the pandemic began, the moves we have made and the moves we haven't made have positioned the company to manage through a variety of near-term scenarios and to eventually return to growing long-term shareholder value, no matter the exact near-term trajectory of the recovery. Our portfolio is positioned superior relative to other high-end lodging portfolios. Owning branded hotels that are located in higher-growth markets, that are not overly focused on either citywide convention demand or international inbound demand, and that have shown strong recovery momentum to date, will allow us to drive relative outperformance. And with that, we will turn to our Q&A session. Andrew, may we please have our first question?
spk10: Thank you. 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. If at any time your question has been addressed and you would like 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.
spk06: Hi, afternoon, everyone. Look, I think, you know, at some point we've expected that there might be, you know, some set of distressed opportunities, right? And when we've had discussions in the past about it, not necessarily with you, but, you know, that as the recovery wore on, there would be opportunities that bubble up for, you know, a variety of reasons. Is that still... a fair way to think about it, or is this just not going to be, is distress just not going to be a driver here?
spk08: David Chambers- Definitely, David. Well, from our perspective, and I mentioned this in our prepared remarks, we do think that over time there should be more properties coming to market and more opportunities than what we necessarily see today. I think we're seeing the early stages of that would certainly be some more properties being out to market. You know, I think part of it is people still need to really understand where the long-term trajectory is going with some assets. And we talked about it a little bit as far as having a little clearer direction on where things are going to go. Certainly a number of lenders that have been willing to be very accommodating in the short term that may change over time as well. And I think we're still kind of in the early stages of that. So you've seen some transactions happening that clearly haven't been distressed type of transactions. And you just haven't seen that much of that. But I think we're still really early on in this part of the cycle. And from our perspective, it certainly makes sense to be patient and wait for those better opportunities to materialize.
spk06: So, if I'm hearing correctly, you know, as we get later this year and into next year is when those kinds of things start to present themselves. Is that fair?
spk08: Well, it's obviously, to my point, it's hard to say whether you're going to see a large number of distressed situations. I do think you're going to see more products hitting the market, which will presumably create some more opportunity because, you know, currently you're in a situation with a good amount of capital chasing a relatively small number of interesting deals where the pricing ends up being pretty aggressive. So we think that's, and like I said, we're currently underwriting transactions too, and and analyzing a lot more than we did, you know, three or six months ago. But we're willing to be patient and willing to wait for those deals that are absolutely on strategy for us and that can meet our return requirements.
spk06: Right. And can we just double back, and if this is repetitive, I apologize, but I just want to make sure we have what is your sort of steady state target leverage range that you'd like to sit in, Satish?
spk09: Yeah, long-term, we've talked about sub-five times through the cycle. So we have been running the company kind of low three to low four times debt-to-EVITDA range over the last five years. And I think that is the appropriate range for our business long-term. So we'd like to get sub-five times certainly as soon as possible. And then long-term, you know, kind of low threes to low fours is the right leverage range for us in terms of . Okay.
spk06: Thanks very much. You're welcome.
spk10: The next question comes from Bill Crow with Raymond James. Please go ahead.
spk12: Yeah, thanks. Good afternoon, guys. Any difference you're seeing in the September cancellation rate relative to August a month ago? In other words, any impact from the Delta variants or just simply more cancellations because we're transitioning into business from leisure?
spk13: Hey, Bill. We have not, and obviously we're watching it very, very carefully. We had a couple of smallish cancellations over the last week for kind of two weeks out, so obviously keeping a very careful eye on that, but certainly not seeing deep cancellations into September at this point.
spk12: What are you watching from a larger group event calendar basis to kind of be a harbinger of attendance? Hopefully it's not Alice. We didn't hear great things about that. But as you look into September, October, November, give us a few conferences that you're watching to be indicative of trends.
spk13: Yeah, so... In large part, we don't have a significant number of city-wise in our portfolio in general, which is not in those markets and those types of properties. But we have a few, I guess without divulging exactly who they are and what properties they're at, a few bellwether groups that we kind of look at within each segment. So we're obviously focused, we look very carefully at the pharma business, which when it materializes is a very strong business for us, and we're watching that. very closely because they often have the ability to make decisions to book short-term, but once they have, they can push business off, even in normal times, depending on when they do product launches and things like that. So we've been very careful on that. We're looking at business where we have a large, a relatively large number of international attendees. In general, in our internal forecast, we have washed much of that out, or the hotels have washed much of that out because we know that international attendance is certainly not assured at this point. So if that gets to particularly challenging points, and we saw this in the early days of COVID as well, companies may cancel their meetings if they're not going to get the international attendees they want. And that goes for both corporate groups, but that's particularly notable, I think, for larger association groups that draw internationally. I think those are two good examples of things we're keeping in careful eye.
spk12: And then finally, for me, if I could, one more. Just any incremental change in the ability to hire at the property level over the last month or two?
spk13: Yeah, and I think I mentioned this in prepared remarks. In markets where they're no longer getting supplemental unemployment, we have seen increases in number of applicants and ultimately a number of hires. So when that happens, we've gone in immediately with job fairs, and we are seeing more than what we would have seen a month prior. It's not exponential, but it is notable and has helped fill the ranks in a number of our hotels, particularly in the Sunbelt markets, Florida and Texas. Great.
spk10: Thank you. The next question comes from Dori Keston with Wells Fargo. Please go ahead.
spk04: Thanks. Good afternoon, everyone. Somewhat of a follow-up question to Bill's labor question. So if we were sitting here today, Barry, under a pre-COVID model, how many FTEs would you have at these demand levels? And then just compare that to what you actually have today.
spk13: Yeah, so one of the things that we, coming into this, as you know, had by virtue of our property optimization process, we had developed always kind of within traditional operation levels kind of target FTEs. FT metrics, and then we went back last year in the depth of COVID, and particularly as hotels were closed, looking at what staffing models would look like at every occupancy decile to get back to that. What I can tell you is we're very reticent to put that number out there in total, and obviously it changes every day in our hotels as they hire employees, as employees leave, things like that. We are, it's very fair to say that we have no hotels in the portfolio that wouldn't take more staff if they could get them right now. And I think they're clearly trying to balance a couple things. One of which is making sure that we're not increasing the overall wage model over time by hiring more employees today than we can comfortably take on and changing the entire wage structure of of our hotels and, quite frankly, of our industry. That's one. Two, that we're also balancing and have always tried to balance to ensure that we don't get staffing ahead of where demand levels are. Because in this environment, we want to make sure that we're not overstaffing. Again, that's not to say we wouldn't take more employees in any of our hotels. Our managers are constantly looking for more and better employees. But I think to put an FTE number to that is really a challenge and, quite frankly, across the portfolio, The variances we have between outperforming hotels and hotels that are still way, way, way off in terms of their business levels, it's a tough number to make sense of in the portfolio as a whole.
spk04: Okay. Thank you.
spk10: The next question comes from Brian Maher with B Reilly FBR. Please go ahead.
spk01: Great. Thank you. Two questions for me. One on the food and beverage. I know it's not up to the level that you would expect or hope for. It was above what we were looking for. Can you give us a little bit of the dynamic of the leisure traveler and their potential over propensity to spend on F&B? I mean, how is that dynamic working relative to what you would normally see with, you know, group using a lot of F&B?
spk13: Yeah, it's a great question, Brian, and it's obviously different in, it's a different kind of spend, so I'll put it in a couple buckets. One, in our resort hotels, we're seeing significant pool bar expenditures and food and beverage that serves pool bars. They're literally at the pool all day in a lot of these cases and are buying food and beverage from us. Similarly, we've seen something we've not traditionally experienced in the resort hotels either, which is a propensity of guests to stay on property and eat on property more times rather than go off property. Some of that has to do with difficulty in getting reservations, things like that. But our kind of three-meal restaurants in our resorts are doing better business than they have ever done, not just because we have more leisure guests and therefore more people in the restaurants. They're just in the restaurants more, and they're eating three meals a day sometimes in the property over multiple days. So we're seeing that. We're also on the food and beverage side, on the banquet food and beverage side, where we have had banquets. The banquet spend per group room is fairly comparable to what it has been historically. We're not seeing significant reductions in that at all. And then the last piece, which is universal across the portfolios, we're seeing unbelievable business in our markets or cafes or coffee shops, not in the restaurants per se, but in the grab-and-go outlets we've always had. The volume in those is tremendous. is, in many cases, double or triple what it would have been in a typical year. Again, leisure is driving a good bit of that. They're not having the same kind of breakfast that a corporate travel would have. We're not capturing them in a banquet breakfast-related meeting. But all of those are what is helping us sustain Higher levels, I think, than even we might have expected. But those pieces, if you think about those, those are also part of what is driving what we consider to be departmental profit in gluten beverage, probably better than, again, what we would have expected or underwritten in this type of environment.
spk01: Thanks. And then maybe for Marcel, you know, as you think about acquisitions, it seems like everybody wants to chase after, you know, the Hotel du Jour, you know, Sunbelt, Leisure Drive-Thru. What are your thoughts about going after northern urban assets if you could pick them up at a significant discount and either reposition those properties or wait for an eventual recovery? How are you thinking about the two different buckets to buy in?
spk08: From our perspective, as you know, we've always focused on having our strategy be primarily top 25 markets, key leisure destinations, so You're absolutely correct that a lot of the hotels and resorts that people are particularly attracted to these days are the type of assets that we've also bought over time. As you know, we've never said we don't want to be in gateway markets. There's a time and a place to invest in those type of markets, and we absolutely felt that the last five years or so was not a great setup in those type of markets because of many factors that we're well aware of. Over time, we absolutely will continue to look at those type of markets. And the challenge, of course, and New York is obviously a poster child for this, is that even if you buy a hotel where you feel that your discounts or replacement costs might be pretty attractive, it's still a very difficult operating environment in some of those markets. And we're clearly looking for opportunities where we can drive long-term value increases, but also make some operational cash flow and be able to really affect those cash flows. And in some of those markets, that's just really tough to accomplish. So we will continue to look at kind of a wide variety of markets. And the good thing about our strategy has always been and will continue to be that we can be pretty opportunistic within that strategy. And we'll look to find deals that, you know, that are actually on strategy for us. And again, Dr. Wright kind of returned for us. I was long for him. Thank you.
spk10: The next question comes from Ari Klein with BMO Capital Markets. Please go ahead.
spk03: Thank you. You know, maybe just on the services front, how are you thinking about bringing some of those back? You mentioned kind of the modified services in certain hotels and markets. And, you know, what if any customer pushback have you seen or heard?
spk13: Thanks, Ari. Appreciate the question. So, obviously, our hotels follow the leadership of and direction from their brands. And as you know, Hilton has come out with a pretty rigorous standard on housekeeping or formal standard on housekeeping. Marriott is still working through that, as is Hyatt. So, let me start by saying that. And our hotels, in general, comply with their brand standards. What we have seen is In some cases, some of our hotels have moved to what we would call a modified housekeeping model, which is really where we're getting in rooms most days, particularly in the resorts that have heavy, heavy usage and have lots of use of towels and lots of people in them and lots of garbage generated, that it started making sense to go into rooms every day and do what we call a light touch cleaning, where we're really taking care of the garbage, taking care of towels, but not necessarily doing the clean, do what historically do every day. And that's gone a long way. towards increasing guest satisfaction in the hotels and resorts that have been planted, that system. I will tell you that most of our hotels, if a guest wants housekeeping on a daily basis, our hotels are not necessarily declining that opportunity. Our hotels are obviously in business of satisfying guests. So even though the standard may be to go in that room every second or third or fourth day, depending on what each individual brand and each individual company has kind of set as a standard, we're doing whatever it takes to satisfy those guests in terms of what they want. We've seen what's interesting is that when you look across the portfolio, our highest guest satisfaction scores are in properties that are actually achieving the highest average daily rates. And so in those hotels, I think we're obviously doing a good job of giving guests what they want and what they expect, particularly when they're paying rates that are significantly in excess of what they have historically. Hope that helps.
spk03: Yeah, no, thanks for that. And then just, you talked about a little bit earlier the trends you've seen in July. Can you maybe provide a little more granularity on what you're seeing in some of the urban or business-oriented markets that have maybe been a little bit slower to recover and how that's progressing?
spk13: I think, you know, obviously July ended two days ago or three days ago, and we're still sort of filtering through that information to understand what it really means in terms of the portfolio. So, I think we'll probably, if we can, take a pass on that for now until we can really sort through what the trends really are and which markets are seeing that performance. We can certainly, as we noted, obviously rate has moved significantly across the board in the portfolio in July over June, but I think getting an individual market conversation is probably We're not ready to do that today. All right.
spk03: Thank you.
spk10: The next question comes from Austin Rerschmitt with KeyBank. Please go ahead.
spk11: Great. Thanks, and good afternoon, everyone. Barry, you mentioned group lead volumes were up 50% between March and June, and sorry if I missed this, but is that based sort of on room night? demand or number of inquiries? And I'm curious if those trends continued into July, kind of the sequential improvement.
spk13: The 50% I mentioned was actually lead volume from where it was at the end of March to the end of June. So, obviously, that's incoming business. It doesn't reflect necessarily what was booked, which is harder to look at and process. And we're still processing July data, so there's really no update on that at this point.
spk11: Gotcha. And so what percent, I guess, of revenue is on the books that you typically target for, you know, either the back half of the year or 2022? Can you give us just some sense at this point?
spk13: Yeah, so for 2021, For the full second half of the year, at the end of June, we were down 43% in group room nights, with rate down about 3%. But it does vary by quarter. Q3, the revenue pace is down about 50%. Q4 revenue pace is down 35%. And we've always kind of known and seen that the group business for this year continues to be backloaded, literally not just quarter by quarter, but month by month, with the exception of December, which obviously is always an outlier.
spk11: And anything for 2022 at this point that's worth noting?
spk13: No, we talked about being down right now compared to 2018 for 2019. So, you know, compared to a more normal year. Right now, room nights are down 33%, and rate is up 2%. And we also see there in Q1 and Q2, kind of Q2 down less than Q1 is down. So, again, which gives us a lot of confidence that this is all going to fill in at some point. It's just a matter of when it fills in.
spk11: That's very helpful. And then, Marcel, you talked about kind of continuing to evaluate ROI investment opportunities. And I'm just curious, you know, with some of these new projects that, you know, the two new ones that you announced, and as you think about additional spend, I mean, how do we think about kind of the pace of spend as you get into 2022 versus what you have planned for this year?
spk08: Yeah. We don't have an exact number to talk about there yet, but clearly it will be a number that we expect to be higher than where we are this year. As you know, we last year deferred a good number of projects. Some of those kind of rolled into this year. But being at about $40 million for this year, that's obviously kind of the low wire mark for us historically. So we certainly expect it to be a little bit more normal going into next year. But it's a little bit early to talk about that because we – We don't want to get too far ahead of ourselves as we continue to work through some of these potential ROI opportunities that could swing a bit. So I don't really want to get too far ahead of ourselves on that yet.
spk11: Fair enough. Thank you.
spk10: The next question comes from Michael Bellisario with Baird. Please go ahead.
spk07: Hi. Good afternoon, everyone. Barry, first one for you. Just on ADR overall, maybe can you dig a little deeper here? What are you seeing by segment? Are you really just seeing ADR increases from leisure transient travelers and any impact from more loyalty redemptions at your resource? Just any more detail on the segmentation breakdown for ADR would be helpful.
spk13: Yeah, so no question that the primary driver of of ADR is on the leisure side because our hotels, as you know, are primarily capturing leisure guests at this point. In fact, what we've seen, and it's a little bit disappointing, is that because we're not necessarily getting to peak occupancies, we're actually absorbing a lower redemption rate from the programs than we would if we were getting those occupancies up into the the 80s and 90s where we might typically have been during a peak demand period. So, there is actually some downward pressure on the actual rate transistor paying that you see in the overall rate because of the blending of kind of the contracted, if you will, redemption rate from the brands. And we're getting substantial redemption demand, particularly at the resorts. One of the interesting things is we are seeing improvement month over month in corporate rate. Some of that is due to just the customer that we're getting, but it's also a lot of those rates are driven off of the best available rate or bar. And because the bar rates, because we've done a good job in the hotels of maintaining higher bar rates, where corporate demand is choosing to stay with us, we're actually producing pretty good corporate rates because we kept that bar rate at a higher level. And many, many of the kind of not necessarily the very top accounts, but the second-tier accounts are all priced at a discount off the bar. And we're seeing production, we think, in line with where the rest of the market is on those.
spk07: That's helpful. And then just one for Marcel, just back to the transaction market. way you're kind of underwriting deals today at least the fact you said you're underwriting more deals how much of that is there's one more deals to be underwritten two do the deals look more attractive to you and that's why you're underwriting more and then three how much of it is you now have more flexibility to spend money and invest post bond deal and maybe that's the reason why you're looking at more deals can you maybe break those three down for us yeah clearly and
spk08: Based on the way you're asking the question, I think you somewhat know the answer. It's a combination of all three, right? We are definitely seeing some more properties hit the market. There's no question about that. Clearly, when the short-term focus was much more on reducing monthly losses and having monthly cash burn, you look at things a little bit differently than when you're starting to stabilize from an operating perspective. And you obviously start turning a little bit more from defense towards offense. So that's certainly a component of it. And as we think about the attractiveness of potential acquisitions, clearly some of them become more attractive. So you're not dealing with short-term cash flow losses and those type of things. But that all being said, we're being fairly cautious in the way that we're underwriting things and we're just maintaining a really disciplined approach in potentially adding assets. You mentioned, and we mentioned earlier, having the flexibility now under our credit agreements, which obviously changes things a little bit too. But that doesn't mean that we just feel like there's this money burning a hole in our pockets. We were very active coming into the pandemic. We've got a number of hotels that we are very excited about the growth that we can still get out of those. So We really feel like we're not behind in the game, if you will, because we were so active coming into the pandemic and have so many opportunities to grow coming out of this as a result of that. But we would love to find some interesting opportunities that we think are going to be good drivers and good drivers for growth for Portolio going forward. And certainly with the track record that we've had over the last couple of cycles, I'm pretty optimistic we'll find those opportunities. But we're going to maintain a lot of discipline as we're looking at that.
spk07: Got it. And then just a follow-up there, given what's happened over the last 18 months or so, any change in your view or at least maybe how you underwrite branded versus independent hotels today?
spk08: No, really not. If anything, we feel strengthened in our overall strategy that we have coming into this. We like being affiliated with some of the biggest brands in the business, and we've talked many times about some of the benefits we see in working with those stronger brands and and certainly the way that they were able to react to the pandemic and the way that we think they will be very helpful in building back the customer base on both the group side and the corporate side going forward will be very important to our portfolio. We feel good about, obviously, the geographic diversification that we had, and that certainly helped us. If you think about the occupancy that we have, that it actually is on our basically entire portfolio, and we don't have anything closed anymore. We're able to open everything, you know, as quickly as we possibly could. You know, we feel very good about that overall strategy and how it sets us up both in times when times aren't so good, like we've obviously seen here recently, and also during our recovery phase. So we really don't see any kind of reason to stray from that strategy, and we're very happy with that.
spk07: Got it. Thank you.
spk10: The next question comes from Tyler Batori with Janney Capital Markets. Please go ahead.
spk02: Good morning. This is Jonathan on for Tyler. Thanks for taking our questions. Just one quick one for me today, Barry. I wanted to follow up on the rate discussion. Any additional color on your expectation for corporate rates moving through the fall and into next year? And I guess the crux of the question is how sustainable do you think those higher rates that you were talking about are in the medium and near term?
spk13: You know, I think that's really probably a question best directed at the brands who lead the large majority of those discussions, particularly for their very largest corporate accounts. I think we are certainly – the feedback we're getting and also the feedback we're providing is that the discounts off of VAR seem to make a lot more sense. necessarily than taking low rates in a market that we don't – potentially taking low rates in markets, many multiple markets, that we don't know exactly what the supply-demand equation is going to look like on your typical business pattern for next year.
spk02: Okay, great. Thank you for all the detail. That's all from me.
spk10: This concludes our question and answer session. I would like to turn the conference back over to Marcel Verbas for any closing remarks.
spk08: Thanks, Andrew. Thanks for everyone joining us today. We are certainly very optimistic about what the medium and long-term growth prospect looks like for our company and aren't closing our eyes to some of the shorter-term challenges that I'm sure we and many other people in the industry will be dealing with. but we feel very well positioned with our portfolio and look forward to continuing to update you over the quarter's end.
spk10: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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