Hersha Hospitality Trust (NYSE:HT) Q1 2023 Earnings Call Transcript

Hersha Hospitality Trust (NYSE:HT) Q1 2023 Earnings Call Transcript April 27, 2023

Hersha Hospitality Trust beats earnings expectations. Reported EPS is $-0.38, expectations were $-0.39.

Operator: Good morning. Thank you for attending today’s Hersha Hospitality Trust First Quarter 2023 Earnings Conference Call and Webcast. My name is Alicia, and I’ll be your moderator for today’s call. . I would now like to pass the conference over to your host, Andrew Tamaccio with Hersha Hospitality Trust. You may now proceed.

Andrew Tamaccio: Thank you, Alicia, and good morning to everyone joining us today. Welcome to the Hersha Hospitality Trust First Quarter 2023 Conference Call. Today’s call will be based on the first quarter 2023 earnings release, which we distributed yesterday afternoon. Before proceeding, I’d like to remind everyone that today’s conference call may contain forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties and other factors that may cause the company’s actual results, performance or financial positions to be considerably different from any future results, performance or financial positions. These factors are detailed within the company’s press release as well as within the company’s filings with the SEC. With that, it’s now my pleasure to turn the call over to Mr. Neil Shah, Hersha Hospitality Trust’s President and Chief Executive Officer. Neil, you may begin.

Neil Shah: Thank you, Andrew, and good morning, and thank you to all of you for being with us on today’s call. Joining me this morning is Ashish Parikh, our Chief Financial Officer. I will kick things off by covering the portfolio’s performance in the quarter before touching on our capital allocation outlook. Ash will talk through our second quarter guidance, discuss our margin outlook and provide an update on our balance sheet. From when we last spoke in mid-February, there has been increased volatility in the market, which has been felt by every sector but has had an outsized impact on the credit markets, banking sector and commercial real estate. We remain confident that lodging fundamentals are positive. And the current setup continues to point to a multiyear recovery ahead for our sector, while being cognizant of the possibility of continued market volatility and the potential for a more challenging economic landscape or recession in the back half of this year.

Many of the signs that led to our optimism in February have come to fruition. We recorded nearly 15% year-over-year RevPAR growth in the first quarter driven by more than 30% year-over-year growth in our urban portfolio. Our portfolio is generating cash flow and experienced significant acceleration in performance as the first quarter progressed, which is historically our slowest seasonally. With nearly $200 million in cash on hand and access to $100 million undrawn revolver and no meaningful debt maturities on the horizon, we can focus our efforts on driving cash flow through operations. In the first quarter, we executed several significant renovations across our portfolio. The common area upgrades at both of our Manhattan Hilton Garden Inns and a major guest room renovation at our Philadelphia Westin were completed in time for our spring season.

We also completed the first phase of upgrades at our Sanctuary Beach Resort in Monterey, California and are close to opening our new restaurant and bar, the Helmsman, at the Mystic Marriott Hotel and Spa in the coming weeks. These projects were strategically undertaken in the portfolio’s slowest season to minimize their financial impact but had a greater impact on our first quarter operating results than we originally forecasted largely due to weaker demand in those markets, some of which was related to weather impacts across the quarter. With the renovations behind us, we expect these newly renovated properties to perform at levels above their historical performance and drive organic cash flow growth for the remainder of this year and beyond and deliver an attractive return on investment in a similar manner to our pre-pandemic renovations at hotels like the Parrot Key Hotel and Villas, the Cadillac Hotel and Beach Club, the Ritz-Carlton Coconut Grove and the Annapolis Waterfront Hotel.

With that, I will jump to our performance in the quarter. Our comparable hotel portfolio generated approximately 68% occupancy and an ADR of $268, resulting in RevPAR of $182 for the first quarter 2023. This equates to 20% ADR growth, driving 2.8% RevPAR growth and a EBITDA expansion for the first quarter compared to 2019 despite disruption from our properties under renovation. Excluding our properties under renovation, our portfolio generated over 73% occupancy, just 600 basis points below 2019 and an ADR of $290, resulting in RevPAR of $212, an 11% increase to 2019. This subset of the portfolio generated EBITDA of just under $15 million, a 19% gain on the first quarter of 2019. EBITDA margin of 24.1% was approximately 200 basis points greater than 2019.

The disparity in the results illustrates the impact of the renovation disruption, and we are excited to move into the spring season with the projects completed. As I transition to our market performance, I’ll start off with our resort portfolio, which continued its robust performance in the first quarter, generating RevPAR of $242, an increase of nearly 25% to 2019. This growth was primarily the result of pricing power as resort ADR of $321 was nearly 27% ahead of 2019. Overall resort EBITDA of $13.1 million was nearly 43% greater than 2019 production, and EBITDA margins increased by 535 basis points. We remain confident in the demand for high-end, differentiated and experiential offerings and believe our resorts will benefit from their appeal to the modern traveler in both leisure and business segments.

All of our resorts are located on premium real estate. They’ve been well maintained and thoughtfully renovated and faced very low supply dynamics in the coming years. And we believe in the long-term fundamentals for growth in each of these markets. As a reminder, all but 2 of our resorts are located in markets that cater to additional travel segments aside from leisure. These markets benefit from multiple demand generators, including convention centers, corporate headquarters and universities. The 2 pure leisure resort markets of Key West and Monterey, California are coming off of 2 years of unprecedented performances in 2021 and 2022 and will face more challenging comparisons. The Parrot Key Hotel and Villas benefited from the extraordinary pricing power and demand in a time where international travel, particularly to the Caribbean and Europe, was limited.

This demand, coupled with an unsustainable staffing model, resulted in record EBITDA production at the resort, even in off-peak seasons. The performance in 2022 will result in difficult comps for 2023 with more normalized growth expected in 2024. But to be clear, we do not expect significant retracement to pre-COVID levels. In fact, in the first quarter of 2023, the Parrot Key Hotel and Villas generated RevPAR growth of 30% to 2019, driving EBITDA expansion of 70% to $2.9 million. The Parrot Key Hotel was our second largest EBITDA contributor in the first quarter, and we anticipate the resort to continue to be one of our top EBITDA-producing assets for many years to come. As I discussed, the Century Beach Resort was impacted by the renovation.

This disruption, coupled with economic headwinds in the Bay Area and severe weather flooding experienced in Northern California, impacted the resort’s first quarter performance. In addition, the unprecedented snowfall in the Western U.S. extended favorable ski conditions well into the first quarter and drew some of our typical travelers to alternative destinations. The first phase of the resort’s renovation has now been completed, and the remaining scope will be completed over the slow winter months in time for next year’s peak season. This renovation will reposition the property for another level of growth moving forward. The Miami market was the biggest EBITDA contributor, generating just over $8 million. The Cadillac and the Ritz-Carlton Coconut Grove were 2 of our top 3 EBITDA contributors, generating $4.9 million and $2.2 million, respectively.

We remain very optimistic on South Florida’s long-term prospects. Although missing our very bullish internal forecast for the first quarter, Miami did exceed 2022 RevPAR by over 11% and 2022 EBITDA by more than 2%. On the West Coast, our Hotel Ambrose generated just under $1 million in EBITDA for the quarter, surpassing both 2019 and 2022. In what is typically a very slow quarter, the Annapolis Waterfront Hotel’s 80% occupancy was nearly 800 basis points above pre-COVID levels. And the hotel’s EBITDA of $724,000 was 87% above 2019 production and 43% ahead of 2022. With that, I’ll transition to our urban portfolio. Q1 is typically the slowest quarter in our urban markets. And after surpassing 2019 RevPAR in Q4, which is one of our strongest urban quarters due to the strength of business travel in October and New York’s holiday surge in December, we are still recovering to pre-pandemic levels as of April in our urban portfolio.

That being said, Q1 2023 urban RevPAR was 31% ahead of 2022. And as the first quarter progressed, we experienced tremendous acceleration. Washington, D.C., Boston and Manhattan led the way for our urban markets as RevPAR increased 120%, 58% and 55% from January to March, respectively. The turnaround in D.C. was a welcome sign after being one of our laggard markets in 2022. Also of note, occupancy in our New York City cluster of 77% in March was just below the fourth quarter of 2022, which is seasonally much busier in the holiday season than the start of the year, and this is a great sign heading into the spring season. Thus far in April, month-to-date RevPAR is up more than 15% in each of these markets from March. To put that into perspective, April EBITDA is expected to exceed the entire first quarter production for these markets as our urban portfolio continues its acceleration into the second quarter.

This pickup has been driven by weekday demand in particular. To date in April, urban weekday RevPAR is up 80% for our urban portfolio versus the same time period in January with every market experiencing growth greater than 25%. Performance in Philadelphia was challenged in the first quarter. While much of this is attributable to the renovation disruption at the Westin that I touched on earlier, there was softness in the market, and we did not see pickup in the back half of the quarter that we had forecasted. But we are confident that given the new rooms product to the Westin, we will see improved performance moving forward. Meanwhile, our Rittenhouse Hotel was named the first and only independent Forbes Travel Guide’s 5-star hotel recipient in Philadelphia in 2023, which will meaningfully drive leisure, international and the group segment across the coming years.

We anticipate additional return of occupancy and demand in the urban markets and are encouraged by the acceleration from March to April, aided by an increase of group, business transient and international travel as markets around the globe continue to open up from pre-pandemic era restrictions. Transitioning to the corporate front. We are encouraged by our sector fundamentals, not only from the long runways for the return of business and international travel, but also the extremely low supply environment in the coming years due to a dearth in construction financing. We are confident in our market’s long-term outlook. And due to the significant cash on hand, access to an undrawn revolver and a lower leverage profile, we are very comfortable concentrating our focus on driving cash flow at our existing portfolio.

The debt and transaction markets are muted. And due to these market conditions, we are unlikely to be acquisitive in the near term. We are more likely to use our capital to pay down a portion of floating rate debt, which in today’s interest rate environment is immediately accretive. We will remain flexible and entrepreneurial in our approach. Given our financial flexibility in a time of economic uncertainty, we are very well positioned to act swiftly when the right opportunities do present themselves. We firmly believe now more than ever that we trade in an outsized discount to our private market value and are focused on closing that gap without diluting our shareholders. With that, let me turn it over to Ash to discuss in more detail our financial outlook, margin performance and our updated guidance for the quarter.

Ashish Parikh: Thanks, Neil, and good morning to everyone joining us on today’s call. Let me begin by discussing the margin performance of our portfolio. As I’ve mentioned before, our pandemic era staffing models and modified offerings were borne out of necessity. And many of these changes were not sustainable in the long term nor intended to be permanent. With our current staffing protocols, a reduced headcount and technology deployment, we’ve achieved numerous long-term efficiencies that will allow us to offset wage pressure. Staffing remains at approximately 85% of pre-pandemic levels, and we now consider this to be a normalized offering environment. We can operate our hotels at these headcount while maintaining the high-quality guest experience that our customers have grown accustomed to.

Wages, along with almost all other line items such as property insurance and utilities, have also risen. But we’ve taken steps to mitigate these rising costs with a portfolio-wide strategic approach, and our asset managers are laser-focused on expense control measures. We have also looked at cost-cutting measures and profitability at our restaurants and bars and recently entered into new third-party tenant leases at the Hyatt Union Square and our Hilton Garden in Tribeca to drive improved profitability and margins. Based on our forecast, these leases should be in place and operational during the third quarter, and we anticipate immediate growth in cash flow from both. As we move forward, we’re confident that our franchise operating model and close alignment with our affiliated management company will continue to generate industry-leading margins and cash flows.

In the first quarter, our comparable portfolio recorded GOP margin loss of 9 basis points and EBITDA margin growth of 5 basis points while exceeding 2019 EBITDA by just over 1%. These results were significantly impacted by the renovations undertaken throughout our portfolio. As Neil mentioned, we’re confident in the growth that will be driven as a result of these investments and are pleased to have completed these meaningful enhancements in our portfolio’s seasonally slowest quarter. We were also pleased that our nondisrupted assets within the portfolio were still able to achieve margin growth within the range that we have been anticipating for 2023 as that portfolio generated GOP and EBITDA margin growth of approximately 170 and 200 basis points, respectively, for the quarter and generated 19% higher EBITDA compared to 2019.

Our resort markets had a particularly strong margin story in the first quarter as GOP and EBITDA margins of 44.3% and 34.4% translated to margin growth of 592 basis points and 535 basis points, respectively. As we look forward to the remainder of the year, we anticipate the resort portfolio will still have strong margin comparisons to 2019, while our urban markets margin performance will accelerate. One final note related to CapEx. After significantly reducing CapEx spend in the last few years, we anticipate approximately $30 million to $35 million in CapEx spend in 2023 and 2024 and project a lower CapEx spend in the outyears after we get fully caught up. We do not anticipate additional disruption to our portfolio until the fourth quarter of this year and are confident that the improvements will generate growth at each asset in a similar fashion to the growth experienced at assets we’ve renovated in the years leading up to 2019.

Moving on to the balance sheet. As part of our ’22 refinancing, we used an existing swap to hedge $300 million of the new term loan at a fixed rate of approximately 3.93%. As of quarter end, 73% of our outstanding debt is either fixed or hedged. And despite the continuation of interest rate hikes from the Fed, our first quarter weighted average interest rate was approximately 5.22% with a weighted average life to maturity of approximately 2.1 years. Since the onset of the pandemic, management has been focused on reducing our leverage and creating additional financial flexibility with a stated goal of 3x to 4x debt to EBITDA. Our strategic activity in 2022 allowed us to achieve this goal as we ended the quarter at 3.7x net debt to EBITDA on a TTM basis.

As a result of our reduced debt profile, we were able to save nearly $4.8 million in interest expense in the first quarter compared to 2022 despite the rising rate environment. We ended the quarter with approximately $194 million in cash on hand in addition to our $100 million undrawn revolver capacity. All of our cash is held with large national or super regional banks with no threat of liquidity issues. As of quarter close, approximately 65% of our cash was held in short-term deposits, accruing interest above 4% and likely to move higher as these time deposits mature imminently. Approximately 12.5% of the cash was considered working capital, and the remainder was held in a variety of accounts accruing between 3% to 4% with no maturity restrictions.

In total, we were able to generate approximately $1.7 million in interest income on our cash reserves in the quarter. As Neil mentioned, we’re unlikely to be acquisitive at this time and are far more likely to use our cash on hand to further reduce our most expensive floating rate debt, which in the current interest rate environment is immediately accretive. We’ve spoken about the valuation gap of the public market value of our portfolio and individual assets. And our cash balance of approximately $5 per share is further evidence of this current and significant disconnect in our public market valuation. We have once again provided financial guidance. And looking ahead to the second quarter of 2023, the acceleration experienced in the first quarter has continued in several of our markets through the end of April, and we continue to see a pickup in our booking pace for the remainder of the quarter.

Our current plan is to start providing comparable 2023 results versus our comparable 2022 results starting with the second quarter and to only utilize 2019 comparables when relevant and meaningful. As we move forward, forecast varies as to how the economy will unfold as the year progresses. But we remain optimistic about the long-term growth prospects for our sector and our markets, including the runway remaining in the return of international and business travel and most notably, the low supply environment we forecast over the next few years, which is a significant differentiator to other periods when we went into those downturn with high supply deliveries on the horizon. Due to our low leverage profile and significant liquidity, we can focus on driving operational cash flow as well as reducing our floating rate debt exposure to further mitigate costs within our portfolio.

And we will continue to review all corporate activities through a lens of maximizing shareholder value while striving to maintain low leverage and flexibility. Our liquidity will allow us to remain nimble, and as strategic opportunities present themselves, we are prepared to act quickly. So this concludes my portion of the call, and we’re happy to address any questions that you may have. Operator?

Q&A Session

Operator: . The first question comes from the line of Aryeh Klein with BMO Capital Markets.

Aryeh Klein: Can you unpack a little bit more on the softer Q1 results? There were obviously the renovation headwinds, but it sounds like maybe some other markets were softer as well. What do you think maybe changed between when you provided that initial guidance, I guess, it was mid-February through the end of March? What was weaker, I suppose?

Neil Shah: Thanks, Aryeh. Yes, absolutely. It was the — from mid-February and then all of March was significantly weaker in a handful of our markets. They corresponded with some of our renovation properties, so it was kind of doubly impactful, but it was Philadelphia and Northern California, in particular. In Northern California, in addition to kind of the SVB crisis and the impact on tech, really, what was more significant at the Monterey — our resort in Monterey was just the amount of rainfall. It was — in fact, it was 15x more rain than the prior quarter. It was just — it was something that was — hadn’t been seen, and it had a really disruptive impact on weekend travel. During the week, we — there was some softness just from the economic headwinds in the valley.

That also had an impact. On one hand, we’re glad we got the renovation done during this weak period because things — the pace is looking much better as we go into the second quarter, but that had a significant impact. Second was Philadelphia. The Philadelphia market just didn’t develop as expected primarily on the group side, but there was also leisure softness and some corporate softness. The lack of kind of — we were aware and knew that we didn’t have a good backdrop of citywide conventions in Philadelphia for the first half of this year. But there was anticipated group bookings that just didn’t come in. The Philadelphia market remains a bit soft as we look forward. May is a particularly good month, but April has been a little mixed. And we are starting to adjust our staffing models again in this market to try to adjust to a slower pace of recovery, continue to have very strong fundamentals as we look further out across the next year or 2 as the convention calendar picks back up and we have more return to the office here in Philadelphia, which has been a laggard relative to our other Northeastern markets, but we do expect that to come back.

So it was those 2 markets. I’d also mention that South Florida, we talked about how Miami actually came in pretty well relative to 2022 as well as 2019. But we had very strong ADR performance in December and January at the Cadillac, and that led us to expect a higher ADR than really came to fruition. So still strong compared to prior year, strong compared to several years ago. But compared to our budgeted expectation for the quarter, we lost ADR. So those were the big drivers. I’d also just mention that we — this was a quarter that we were opening and staffing up all of our restaurants and bars, a lot of the amenities that have been closed for many years now. And so there are additional expenses that if you don’t have the revenue come in can be pretty — can have a pretty significant impact on margins.

So I put it in that area. Is that helpful, Aryeh?

Aryeh Klein: Yes, absolutely. And then, Ashish, you mentioned the elevated CapEx this year or next. For some of the upcoming projects, can you just provide a little bit color on what they are, what entails — where they are.

Ashish Parikh: Sure. I think as I mentioned, really finishing up everything in Q2, the last remaining project is the Mystic — the Marriott Mystic restaurant that we are launching. That should be done by the end of May. And then we expect a fairly clean calendar as we go through the rest of Q2 and Q3. In Q4, we will start up and be at the Sanctuary Beach Resort, the actual guestroom renovation. We did a lot of exterior work for all of the bungalows during the first quarter. We’re doing some work at the Winter Haven Hotel in Miami as well, which will be finishing up in the fourth quarter. As we look into next year, it’s really more product improvement plans at hotels like the Hilton Garden in JFK, Holiday Inn Express, Chelsea. And these are primarily 7-year or 12-year refreshes.

Operator: The next question comes from the line of Tyler Batory with Oppenheimer.

Tyler Batory: My first question is on the Q2 RevPAR guide. Can you talk a little bit more from a market perspective in Q2 which markets do you think could be outperformers, which ones you’re a little bit more optimistic on and then perhaps what markets might be a little bit on the softer side?

Ashish Parikh: Sure. Yes. Tyler, I think the markets we’re looking at and I’m comparing to sort of 2019 at this point that we feel will be positive would be Boston, our West Coast markets, the Ambrose and Sanctuary. South Florida will remain significantly higher than 2019 and Washington, D.C., which is really and Annapolis propelling that market. I think markets that will be slightly — still slightly below 2019, New York and Manhattan. We are approaching 2019 RevPAR, which is really amazing at this point because I think everybody believed New York would be more of a ’24, ’25 story. We exceeded NYC RevPAR from ’19 in the fourth quarter. As we continue to see more business transient in second quarter, more international in third, we do believe we’ll continue to exceed 2019 RevPAR. I think as Neil mentioned, Philadelphia is probably the one market that we are now projecting to be above ’19 in the second quarter.

Tyler Batory: Okay. Great. And then in the prepared remarks, I know you talked about the discount to the private market values, working to close that gap. I think in the past, you had talked about a NAV or net asset value for the portfolio in the low 20s. I think that was before. You’ve made a number of these asset sales here. I mean, any update to kind of how you’re thinking about that number, perhaps maybe a price per key could be a little bit more accurate just in terms of trying to determine what the private market valuation really is for the portfolio right now?

Neil Shah: Sure, Tyler. Tyler, we are — I think we’re in a place in the kind of markets and — where there’s a real question about value. When interest rates have moved so quickly, there’s still not enough kind of consensus around the forward curve. And so there’s just not a lot of transactions happening today. We — what we — last year, we sold $650 million of hotels. And we sold the urban select kind of more commoditized portfolio first. And then we sold assets on the West Coast towards the end of the year. We sold those at $450,000 per key. We think of what we sold last year as the lower-quality assets in our portfolio, ones that required more capital to remain competitive and assets that we felt were going to be difficult to — that didn’t have the same growth profile as the portfolio that we have today.

And so we believe that this portfolio today at a stabilized and a normal market environment is worth around $500,000 per key. Where we’re trading today, I don’t think has any of kind of rate. So it’s — I think we are — we feel like in the short term, in the next couple of quarters, we have to just keep our focus on driving cash flow and driving the best results from the hotels we have. And as the world stabilizes, as there’s more consensus on where the interest rate environment is going to be, when lenders are lending again, right today, you see a lot of refinancings and things like that, but very little kind of real transaction activity, I think that’s when we can expect to be able to either close the gap through trading more assets or finding opportunities to create value on the acquisition side or realizing value through some kind of strategic transaction for the company.

And so we remain very open. We remain very clear that we’re trading at a very heavy discount. But considering what has happened in the world across the last several months, not that surprising.

Operator: The next question comes from the line of Dori Kesten with Wells Fargo.

Dori Kesten: I guess do you think that your labor costs have likely stabilized at this point? And I guess I’m trying to figure out if you’re forecasting a reduction in FTEs as the year progresses? Or is your assumption that a recession won’t likely warrant that?

Ashish Parikh: Dori, we are forecasting growth in labor expense to be more similar to sort of pre-pandemic level. So let’s say, maybe 4% on an hourly basis, 4% to 5%. But we are actually in the mode of reducing FTE counts right now at several of our properties. As we discussed in our prepared remarks, we feel as though it’s the right time. We probably have the optimal staffing model. There are positions that we may have brought back that we don’t feel like we need them anymore. So I think our overall view is probably less FTEs, but it’s hard to forecast lower wages at this point.

Dori Kesten: Okay. And you were noting international travel. How much at your hotels of international demand has returned? And when would you forecast that it would return to prior peak?

Neil Shah: We probably — when we look at — I think when we look at our New York City hotels in particular, where we can get pretty granular on an asset-by-asset basis, we’re still about 40% off of 2019 levels of international contribution. So we’ve made up 60%, but we have 40% to go. When we kind of double click into the contributing kind of travelers within that, we’ve seen a good recovery from Europe. In fact, like Germany, Italy and France are actually up to 2019 slightly. But other parts of Europe, even the U.K. is still significantly down. And then most notably, there has been no Asian travel, nearly 0 international travel — Asian travel. And that is the — that is a significant runway ahead. That accounted for 15%, 20% of kind of international travel in New York in pre-pandemic.

And today, it’s at less than 2%, 3%. And we expect that to continue. It’s going to be — it’s not going to be an instantaneous kind of return because there are some impediments or some friction in terms of our visa process today, which is taking a very long time for people to get visas to travel here. But we do see it improving just very slowly. China, Japan, Thailand, India are all starting to pick up. We expect second, third quarter to really benefit from that, but we probably don’t expect it to get back to pre-pandemic levels until we’re well into 2024.

Operator: The next question comes from the line of Bill Crow with Raymond James.

William Crow: Neil, I’ll preface this by it may not even be an answerable question, but I think it’s interesting to think that and maybe what are the chances that the outliers in the first quarter were not really Northern California, Philly and South Florida, but maybe in the rest of the markets. And is it reasonable to expect that ahead of what appears to be a growing recession that the rest of the markets start coming back to those markets? And how do you think the prospects and how do you operate your company based on that uncertain macro backdrop?

Neil Shah: Bill, just to be clear, I guess, you mean our expectations around the more kind of — like the urban recovery markets like New York, Boston, D.C.?

William Crow: Yes. Your guidance for the second quarter is fairly aggressive, however you want to look at it. But I think you’ve missed kind of 3 quarters in a row here on Street expectations. And I’m just wondering if maybe this is not a little bit of a canary in the coal mine sort of situation where pricing resistance in Miami, maybe the activity levels in Philly are weaker. You talked about weather in Northern California. I’m just wondering whether some of those things are more likely to spread to other markets as opposed to those markets start to heal.

Neil Shah: I think the most significant weakness that we’re seeing or weakness or kind of the challenges is on ADR in leisure-oriented markets. Some of that is — some of that, we believe, is just 2022 was overearned. It was a level that just wasn’t sustainable as more alternatives come up. There is less likely to push ADR even further than we got in 2022 in some of these markets. But some of it is also the consumer. I mean, you can’t — we suspect and believe that — and just in kind of daily conversations with people, people are more uncertain. They have less money. They are paying higher interest rates for their homes and their credit cards and their student loans. And they have a little less kind of disposable income to travel with.

So what we’ve seen so far is more on the leisure side, where we’re seeing some price sensitivity. On the urban markets across March, April and as we look out to May, June, the pace is very strong still. Corporate L&Rs are kind of locally negotiated rates are still significantly higher than 2022 and way higher than 2019. So we’re not seeing that much pressure on pricing there. But to your point, if you — we are prepared for if there was just a big pullback in demand. And — but we’re just not seeing that at this stage. As we go through our major kind of corporate users, the consulting firms, McKinsey, Deloitte, continue to travel and continue to utilize our properties at our expected levels at rates that are higher than they were in the past.

In financial services, we do a lot of work with Citi and JPMorgan and Citadel. They’ve also continued to travel and are driving our outlook in Manhattan in New York and in other markets. In Boston, we’re seeing very strong pace as well in our hotels. So on the corporate side, we just haven’t seen that kind of weakness at least as we look out to the second quarter. We’re not yet — we’re not comfortable enough to provide third and fourth quarter guidance because there is this level of uncertainty out there. But as we look forward today, we continue to believe that the recovery in — and the normalization of kind of corporate demand has yet to come. Will it be — will that recovery slow because of the recession? It very well could be a little bit slower, but just there is still a lot of recovery to go, as you can see from our occupancy levels in these kits.

But to your point, Bill, it is a little bit unanswerable. We are — it’s an uncertain world. As the year ended, we started to see — last year, we saw really good momentum in September, October, November and December throughout our portfolio. In January, we saw very strong performance even our resort markets. But 6 to 9 months of kind of discussions and kind of fear of a recession, seeing interest rates go from 0% to 5% and then to have a month like March, where we had 2 bank collapses, the third one almost collapsed, merged into it, you — it’s hard not to expect. It’s hard not to believe that there would be an impact on performance in March and April. But we’ve now reflected that in our outlook for the quarter. And we’ll remain nimble and willing to kind of make the tough cost cuts if we need to.

But at this stage, we feel like we’ve kind of rightsized the business model for what we are seeing today.

Operator: The next question comes from the line of David Katz with Jefferies.

David Katz: You covered a lot already, but I was hoping we could maybe discuss the circumstances in the landscape under which there might be some M&A opportunities on either the buy side or the sell side, expecting that the refinancing climate may drive some properties to come to market of interest. And I should ask whether anything could potentially be sold and whether that — or that’s just kind of off the table or unlikely at this point?

Neil Shah: Yes. David, I think where we stand like right now, where the world is right now, the transactions market is really cooled. And there just isn’t a lot of interest on sellers’ part to be sellers at where buyers are willing to have conviction. I think it’s just a cost of capital issue. Like it is for us, it is also for private equity. It’s — you’re borrowing it today at 8% to 10% versus 5% a year ago, and that is shooting up their equity return requirements, and there just aren’t sellers at that level today. I think where we’re seeing private equity spend real-time where you’re starting to see some transactions to get done is in the debt markets. There, you have willing sellers. You have banks that want to get loans off their books and the like.

And so I think you’ll see some transactions on that side. We’ve also heard from some private equity firms that similar to like those first 6 months of the pandemic, we’re seeing some private equity actually buy REIT stocks because you can’t get control at these prices, but you can trade these prices. And so I think that’s where we’re seeing some activity today. As we move forward through the year, I think it’s just a matter of lending, catalyzing, having a little bit more certainty around the forward curve for investors to think through when they’ll be able to refinance acquisitions that they may do with more equity today. So that’s in the next, say, the next 3 to 6 months, we continue to think of this as a pretty slow transactions market. But longer term or looking towards the end of the year and into 2024, we feel like lodging is going to be very attractive.

On — the fundamentals in this space are better than nearly any other real estate asset class. Supply has come to near standstill. We’re going to be at kind of 1% to 1.5% supply nationally for the next several years. When that’s happened in prior times like 2003 to 2006 or 2010 to 2014, those were days, those were periods of time where hospitality valuations went up quite a bit, and it attracted a lot of new investors to our space. And so we expect that to come. Until that comes, though, it’s hard for us to think of being a seller of assets. We don’t have any need for capital as it were. We have enough cash on hand to pay down debt and to get refinancings done in the portfolio. We have good, strong growth expected nearly most — nearly all of our hotels today.

And so we’re not willing to take major discounts to trade assets on the sell side. On the buy side, I think that as the year develops and as we look forward, we will see opportunities. There is going to be — on one hand, this hasn’t been a demand shock for our sector. So it’s been — so it’s unlike the last several downturns, but there is a liability shock, and lenders are going to require very significant paydowns even if interest rates come down to 6%, 7%, like just the debt yield is pretty significant and painful for existing owners. So we’re going to see lender-driven kinds of dispositions, and we’re going to be CapEx-driven dispositions. As you’ve heard from us, these — the projects that we are doing, they are more expensive than they’ve ever been.

They are disruptive. And when those — when brands push owners to do it, which is happening across the last year and will continue to happen this year, we’ll see more assets come to market. So I think later in this year and into 2024, we think there will be very significant acquisition opportunities. There will be a kind of meeting of the bid-ask spread, but today, we’re just not there.

Operator: The next question comes from the line of Chris Woronka with Deutsche Bank.

Chris Woronka: So I guess I’m trying to square the commentary up a little bit. I mean, you’re talking pretty bullishly especially about urban markets, but then comment about reducing some FTE positions in certain hotels. Is this — I mean, if I triangulate that properly, is this basically saying weekend occupancy has hit a wall, it’s very strong. And in some of the resort markets, you need to offset a little bit of loss of rate with lower expenses. I mean, is there a way to kind of get a little bit more granular on why you would be cutting FTEs or where you’re cutting them versus where you’re still growing or staying flat?

Neil Shah: I think it’s in markets, Chris. I think in the resort markets, it is harder to push ADR than it’s been. And that has a meaningful impact on margins. And so that — we are definitely looking at all of those resort markets to see where we can tighten our business model so that lower ADR doesn’t lead to as much deterioration on the margin side. On the urban markets, it’s really — the focus is really on Philadelphia right now. That’s the only market that we’re seeing this level of softness that as we staffed up and as we opened restaurants and bars, as we got our hotels fully staffed throughout this quarter, as we look forward in the second quarter, it’s still seeing some weakness. And so that’s — I think our comments on FTEs in urban markets is really focused on Philadelphia.

In New York, in Boston and in D.C. or even in — on the West Coast at Ambrose, those 4 markets are delivering the kind of growth that we were expecting in terms of corporate, government and small group and corporate group kind of business. And so we’ll continue to grow in those areas, but we are a little bit more cautious in Florida, in Northern California and in Philadelphia today.

Chris Woronka: Okay. Very helpful. And then I guess as a follow-up, I know you’re not — we’re not doing kind of annual guidance. But as you look out to the back half and putting everything into the — into your thinking economically and otherwise, I mean, do you think it’s likely or positive that we’ll still see year-over-year growth in RevPAR in the back half? And I know it’s very tough to answer for Q4 particularly at this point. But yes, just the way you see it now, is there anything out there in the transient trends that suggest booking windows are shrinking or cancellations are up, anything like that?

Ashish Parikh: Chris, as we go into the back half of the year at least for our portfolio, it’s really driven by the urban markets. I mean, it’s primarily Q1 that we have a lot of reliance on South Florida, and that drives the majority of our EBITDA. So as you think about 2022, most of these urban markets were just recovering starting in the second quarter. And it didn’t really perform that well in Q3 or Q4 because there was just still a lot of — there was no international travel. BT was just coming back. The group business still wasn’t there. So as we think about the acceleration for the remainder of the year, for us, it’s really urban markets where we think we’ll continue to have a stronger overall profile than the resort market. And we’re just not that dependent on resorts as you get past really April.

Operator: The next question comes from the line of Michael Bellisario with Baird.

Michael Bellisario: Two questions from me today. First, just on expenses and expectations for the year. I know you talked about headcount already, but what about property taxes, insurance, utilities, some of the other items that might be a headwind throughout the year? And what might that do to margins as the year progresses?

Ashish Parikh: Yes. For us, we would imagine that they go up more at the cost of — just cost of living type of adjustments. I think insurance is an area where we feel as though markets not in parking-prone areas or wildfire areas aren’t going to be impacted that much, but we are cognizant that Florida is going to go through a pretty heavy insurance adjustments for the back half of the year. We’ve built that into our models. It’s — we weren’t affected over the last 2 or 3 years. So ours should be a little more manageable. Properties that have had a big impact from hurricanes in the last few years and have had claims, you’re hearing some pretty staggering growth numbers. And utilities are actually an area where they have come down.

And we’ve done a lot of hedging and a lot of fixing of utilities contracts. So we don’t anticipate any increases from the level that we’re at today on our utilities costs for the rest of the year. Natural gas is down significantly, and we took advantage of that in January.

Michael Bellisario: Got it. Helpful. And then in the supplemental, you guys gave a lot new — a lot more information on property-specific performance in details. This was, one, what was the rationale for that? And two, any areas of focus that you think analysts and investors should be taking a closer look at with those numbers?

Neil Shah: Michael, I think we — I think this portfolio has been transformed so significantly across the last several years that we felt like providing more detailed disclosure on an asset-by-asset basis across the last 2 to 3 years would help investors and the investment community better understand the seasonality and — of the portfolio and to highlight kind of property-specific issues like renovations that you can then see and model through. I think, ultimately, it also helps investors better understand the value of our hotels on an individual basis, but that was the idea. We’ve spent — we know that all the dispositions and transformative upgrades we’ve made to our existing hotels has created a new growth profile for our portfolio. And we think that this level of added disclosure will help investors predict our performance a little bit more.

Operator: The next question comes from the line of .

Unidentified Analyst: Yes. I was wondering if you can comment a little more about the sharp discount in your stock price. And years ago, you used to buy back a lot of stock at significantly higher prices than where they are today. I was wondering if you can talk about that a little and see what can be done to drive shareholder value.

Neil Shah: stock buyback side, we discussed that with our Board quite a bit along with our dividend policy. And on the buyback front, a couple of reasons for hesitation on that. One, just leverage profile. It has a pretty significant impact on leverage to buy back stock. And we have just spent across the last couple of years so much time, effort and really good sales to allow us to reduce our leverage to a level that is below our peer average and gives us a lot more flexibility as we look forward to whatever may come in the coming year or 2 ahead. So — and two — so one, it’s just kind of leverage levels and financial flexibility that would be constrained by using our excess cash for buying back stock. The second reason is that we have meaningfully reduced our equity cap across the last 3 to 5 years, partly because of the stock we bought back that you remember.

We bought back nearly 20% of our float before the pandemic when we were trading at levels below our NAV. And so it’s something that we were recently — I think I’m not sure in February and March or it was probably early March, we were removed from the small-cap index because of our equity cap. And that led to a very significant impact on our stock price. We would have expected it to kind of stabilize in 2, 3 weeks. Usually when you drop from an index, it takes a little bit of time for it to come back. But this time, 2 to 3 weeks later, SVB collapsed, and the world got even more volatile. And so we’re in a time today that we hear from many investors that shrinking our equity cap will make it harder for them to take positions just for liquidity and the stock and the like.

And so those are the 2 main reasons why our Board has, to date, determined that it’s not the right use of our capital. It will continue to be a discussion point at our Board meetings. But right now, we’re leaning more towards paying off floating rate debt that is between 8%, 9%, doing that immediately accretive, reduces our leverage profile and increases our financial flexibility. For today’s market environment, we believe the financial flexibility is the most important thing that we should be focused on.

Operator: . No further questions have been registered. So at this time, I’ll pass the conference back to management for closing remarks.

Neil Shah: Thank you. We would like to take a moment to thank all of you for your time this morning. We’re going to be around here in the office. If anyone has any further questions, please do call on us. But thank you for your time. And we look forward to speaking again in a few months. But in the meantime, please reach out if we can be helpful. Thank you.

Operator: That concludes today’s conference call. Thank you for your participation. You may now disconnect your lines.