Hersha Hospitality Trust (HT) 2021 Q1 法說會逐字稿

Good day, and welcome to the Hersha Hospitality Trust First Quarter 2021 Earnings Call and Webcast. (Operator Instructions). Please note that today's event is being recorded. At this time, I would like to turn the conference over to Mr. Greg Costa with Investor Relations. Please go ahead, sir.

Thank you, Chris, and good morning to everyone joining us today. Welcome to the Hersha Hospitality Trust First Quarter 2021 Conference Call. Today's call will be based on the first quarter 2021 earnings release, which was distributed yesterday afternoon. Before proceeding, I'd like to remind everyone that today's conference call may contain forward-looking statements.

These forward-looking statements involve known and unknown risks and uncertainties and other factors that may cause the company's actual results, performance or financial positions to be considerably different from any future results, performance or financial positions. These factors are detailed within the company's press release as well as within the company's filings with the SEC.

With that, it is now my pleasure to turn the call over to Mr. Neil H. Shah, Hersha Hospitality Trust's President and Chief Operating Officer. Neil, you may begin.

Thank you, Greg, and good morning, everyone. Joining me here today are Jay Shah, our Chief Executive Officer; and Ashish Parikh, our Chief Financial Officer. Again, thank you all for joining our call today. What a difference 1 year makes. Last year, at this time, we were burning cash in a completely uncertain environment.

Today, there is positive momentum across the economic spectrum, and we can report a clear acceleration in year-to-date results and positive cash flow. We are grateful for the courage, hard work and commitment of our people, both our frontline staff and our regional teams.

They did right by all of our stakeholders, our guests, our investors, fellow team members and our hard hit community throughout this pandemic. Our first quarter results also underscore the quality of our portfolio, the effectiveness of our cluster operating strategy and the resilience of our locations. All of which provided the flexibility we needed to get through this pandemic.

These competitive advantages will continue to differentiate our portfolio's earnings growth profile as the economy recovers, and ascends its next peak. Let's start with the quarter. We'll then go market-by-market before Ash takes a deeper look at our cost controls and margin story. The first quarter is typically the softest quarter of the year.

But results from January to March surpassed results for the fourth quarter 2020. As occupancy for our comparable portfolio was higher by 1,300 basis points and ADR grew by 8%, leaving the quarter-over-quarter RevPAR growth of 50%. Despite growing case counts and lockdowns, January was more resilient than we anticipated for our portfolio, returning to greater than $60 RevPAR, which strengthen South Florida and Washington, D.C., offsetting lockdowns on the West Coast and the Northeast.

Absolute portfolio RevPAR sequentially improved throughout the quarter, increasing to $75 in February and surpassing $90 in March. And recent results indicate that we are approaching $100 for April. Occupancy for the first quarter eclipsed our internal forecast at the beginning of the year by more than 1,200 basis points. And our ability to hold rates during this demand influx led to a 34% higher absolute RevPAR than we initially expected in early January.

Results month-to-date in April that are similar to March. Our portfolio occupancy is approximately 55%, and we continue to drive ADR in South Florida and on the West Coast, with ADRs 10% and 7% higher, respectively, than we forecasted at the beginning of April. The shift in sentiment is remarkable. And forward bookings are providing more visibility than any time in the last year. The stimulus, holiday schedules and pent-up demand have clearly driven a robust spring travel season. And we are seeing positive momentum into the second quarter.

Leisure remains the primary source of portfolio demand, particularly in South Florida and along the California coast. Drive-to resorts have been our strongest performer since the inception of the pandemic. This portfolio of hotels, about 25% of our pre-pandemic EBITDA had a weighted average occupancy of 56% with similar daily rates for the first quarter 2021 compared to the first quarter of 2019.

Leisure demand is not proving to be price sensitive. Urban markets will take several more quarters to recover, but we are encouraged by accelerating demand in the hardest hit urban markets like Boston, New York and Seattle. Demand remains leisure driven, but in both transient and now the small group segments. The return of smaller social groups is beginning to accelerate. With collegiate and youth sports events taking place across our urban clusters, benefiting our select service assets in these markets.

In our luxury and lifestyle hotels, weddings and other special occasions have begun in earnest, and deposits continue to be made for the rest of the year. The number of wedding blocks currently on the books for 2021 is more than 20% higher than wedding blocks we had on the books during the same period in 2019. Demand across the portfolio continues to be heavily weighted on weekends versus weekdays days.

Over key passing month, the number of weekdays days continues to increase. Year-to-date results for our portfolio show average weekday RevPAR growth of 56% and weekend RevPAR growth of 85%. Weekday occupancy has grown from 38% in January to 48% month-to-date in April, while weekend occupancy has increased from 46% in January, to 66% month-to-date in April. Over that same period, weekday and weekend ADRs have increased 25% and 30%, respectively.

When the high-rated business traveler returns and replaces government contract business, we would expect a meaningful leg up in weekday ADR. Corporate travel recovery has been slow, but steady. Airline sector reports that -- the airline sector reports that corporate volumes are accelerating and could reach prior peak by next year.

American Express expects travel and entertainment spending to recover to 70% of pre-pandemic levels by the end of this year. At our hotels, we continue to find small and medium enterprises, producing the most room rates to date, but we are beginning to see the larger enterprises mobilizing. While we expect continued improvements to business travel throughout the summer, we anticipate the next big leg up in the recovery to be after Labor Day when schools reopen in person and employers return to the office. Once the recovery of business transient and corporate group is underway, we expect to see a powerful cash and profitability driver for our business into the fourth quarter and accelerating into 2022.

For our markets, let's start in Miami and Key West. Our first ray of Sunshine in 2021 for the first quarter. Our largest asset, the Cadillac Hotel and Beach Club on Miami Beach saw continued demand from leisure travelers in the first quarter, generating over $3 million in EBITDA at a 73% occupancy.

Demand for South Florida built sequentially over the quarter with the strongest period from President's Day until Easter. When the Cadillac and our Parrot Key resort in Key West, generated weighted average occupancy of 83%, essentially flat versus the same period in 2019, with weighted average rate growth -- rate growth exceeding 5%. Despite only reopening in mid-January as an independent hotel, even the Blue Moon Hotel of Miami Beach generated positive cash flow for the quarter.

Demand at the Ritz-Carlton Coconut Grove is primarily driven by member rewards stays and MX packages today. But we are beginning to see some pickup in L&R business from financial services and aviation related companies. We have hosted several weddings and social events and are expecting more corporate group business in the fall.

Although performance year-to-date in South Florida is not indicative of the remainder of the year, there are a number of events, festivals and conventions returning to Miami in the coming quarters. The South Beach Food &Wine Festival, Art Basel this fall and then the recently awarded Formula One Grand Prix next year.

Beyond tourism, Miami has also announced several new corporate demand generators and new tenants to the market, including Blackstone, (inaudible), Icahn Enterprises, Thoma Bravo, and of late, venture and tech firms, like the PayPal, Founders Fund and SoftBank. The short, medium and long-term demand fundamentals in Miami are quite impressive.

Key West is similarly encouraging. Performance of the Parrot Key Hotel and Villas was strong for the second consecutive quarter, generating 76% occupancy and 24% ADR growth, which led to 10% higher RevPAR growth in the first -- 10% higher RevPAR growth than the first quarter of 2019. Performance in March highlighted the substantial demand witnessed in the Florida Keys as the Parrot Key Hotel and Villas ended the month with 91% occupancy and a $489 absolute ADR which equated to 27% growth in ADR and RevPAR versus March of 2019.

Key West began the pandemic as the prototypical drive-to resort market. Today, it continues to attract Floridians and South Eastern residents, but TSA data shows that airlift is now significantly higher than before the pandemic. The barriers to entry in Key West are nearly absolute. We're at the very least zero-sum. We reinvested approximately $27 million at a major upgrade of the resort in 2018, and like the Cadillac, we expect to achieve results well beyond prior peak performance on this hotel.

California and Seattle. Our coastal resorts in California all benefited from significant renovations in 2018. And we are enjoying strong early returns despite significant restrictions still in place during the quarter in California. The Sanctuary Beach Resort generated an absolute ADR of $410 during the first quarter.

During the first quarter, which represents 51% growth versus the first quarter of 2019. Our hotel Milo in Santa Barbara, also saw significant rate growth last quarter, with increased demand in March around spring break, ending the quarter with 28% ADR growth versus the first quarter of 2019. The Santa Monica, Ambrose weekends, performed well in the quarter, but weekdays remained weak with the area technology companies still not back in the office. Next quarter, we expect elective medical procedures to resume and have begun to build some small part of business at the Ambrose.

Our more business-oriented hotels in Seattle, Silicon Valley and Los Angeles continued to improve steadily from an admittedly low base. There are the home -- these are the homes of the largest technology companies in the world, also absorbing new office space during this pandemic. In Seattle, in South Lake Union, Apple recently announced a new office location close to our hotel with plans to double over the next several years.

Amazon reaffirmed its commitment to Seattle and signaled a return to the office in September. While life science and office space are renting and selling for higher than pre pandemic levels. Multifamily absorption has also spiked in Seattle and the South Lake Union submarket. Until corporate travel returns, the Pan Pacific has had some success booking entertainment, film related groups, residential and corporate relocation and leisure business.

TSA data for Seattle has shown a notable acceleration since the start of the year and throughout the last several months in particular. In Silicon Valley, our top clients are Facebook, Google and Apple. Most have reopened offices but have extended remote work directives through the third quarter.

Facebook appears to be a first mover in the valley and is expecting travel to return to prior levels. All 3 companies have been hiring new talent and expect to remobilize training and other traditional activities in the fall. Until then, our team has been scrappy. By booking construction and nursing crews to generate some revenue, and the team remains poised to capture early business from our key accounts.

Our Los Angeles Courtyard is in Culver City, a booming submarket with newly developed and leased studio, tech and life science buildings. Very little business travel yet. But we are capitalizing on our convenient location for college sports, while the hotel's meeting space is being used as a COVID vaccination site. Whether it be on the West Coast or the East Coast, we assembled our urban portfolio one by one, targeting locations in innovation markets that have proved to be the most resilient.

We would include our Hyatt Union Square Hotel, well-located in Silicon Ally, New York's tech submarket and the Boston Seaport, which continues to draw pharmaceutical technology and research and development centers near our Envoy hotel. It is noteworthy to highlight that in March, there were approximately 76,000 tech job openings across the country, the highest monthly total over the past 3 years.

During the month, 11 markets had higher tech job postings than their 2019 levels. With 4 of the top 5 being in Seattle, Washington, D.C., Los Angeles and New York City. And then zooming out by state, California has grown employment the most since the pandemic. New York. In New York, traditional sources of demand remain weak.

But our teams have been entrepreneurial in their approach, and it has allowed us to serve the community. Our teams continue to contract with first responders and other government groups to build revenue leading our portfolio to end the first quarter with 53% occupancy in New York, resulting in absolute RevPAR for the portfolio, more than 20% higher than our forecast at the beginning of this year.

Continued stays by first responders, traveling nurses and the New York fire department resulted in portfolio occupancy approximately 1,500 basis points higher than our initial expectations for the quarter. New York City, which was the hardest hit city for travel during the pandemic, is beginning to see leisure travelers return to the market.

As daily visitors to Times Square, eclipsed $110,000 per day in March, up 23% month-over-month. While the MoMA is getting close to 7,000 visitors per day, up from $4,000 per day when it reopened towards the end of last summer. Returning visitors to New York are welcomed to new gateway improvements like Moynihan Station, for Amtrak and Transit, or the new terminals at LaGuardia Airport.

In several of our locations in the final weeks of March on Saturdays, we reached 70% to 80% occupancy. And this comes ahead of the city's announcement of committing $30 million to its tourism campaign beginning in June. There were also some great announcements this morning, if you may have caught them.

In addition to leisure returning to the city, we are seeing more data on the return of workers to the market. Major financial firms, such as Goldman Sachs, JPMorgan and Barclays have already begun to mobilize staff to return to the office this summer, and each firm intends to get close to full capacity before the end of the year.

Additionally, Mayor De Blasio has disclosed intentions to bring an estimated 80,000 municipal workers back to the office by early May, which will help increase transit ridership and availability. And sizable leases by notable tech firms in Manhattan have continued in droves.

Facebook, taking down 730,000 square feet in Manhattan. TikTok 232,000 square feet in Times Square and Apple's 336,000 square foot Manhattan sublease. Just to highlight a few. These are all signs that show that the resiliency of New York City and travelers desire to return for both business and pleasure.

Our Manhattan select service portfolio is particularly well-located and built to the taste and preferences of today's travelers, high-quality corner locations in the most important submarkets, markets that are seeing successful new technology tenants absorbing new office near our hotels. Our Hilton Garden Inn Tribeca near Disney's new location in Hudson Square. Our Hilton Garden Inn Midtown East, near the iconic New Tower One Vanderbilt or JPMorgan's new building or our Express at 29th and 8th Avenue, a gateway to Penn District in Manhattan West.

When the higher-rated weekday business returns to occupy these new buildings later this year, we will be able to drive margins and cash flow meaningfully. Outside of the city, the white house -- the Hyatt House White Plains produced over $500,000 of EBITDA as it continues to benefit from social and sports groups, letting blocks and some early corporate L&R production.

Not to mention its recent renovation and additional key count. Finally, Boston, Washington, Philadelphia. Most of these cities, like most around the U.S., were essentially shut down from March to September 2020. But as demand generators began to reopen and restrictions eased we have seen increasing leisure demand in all of our cities. Here in Philadelphia, our offices literally overlook independence hall in the Liberty Bell. Where lines have grown longer and longer by the day, growing more than 225% from February to March.

In Washington, D.C., we saw travelers' slope to the region for the annual Cherry Blossoms. Despite heavy restrictions and less than welcoming messages from the city. In both Washington and Philadelphia, weekend RevPAR has been 2x the weekday RevPAR levels, the widest margin in our portfolio. In Philadelphia, our sales teams are having success with university and professional sports teams and the entertainment segment at several of our hotels.

The Hampton Inn has hosted several university and high school sports tournaments and the Weston is once again working with major league baseball. The hotel continues to book some entertainment and small group weddings with our first board meetings and corporate events slated for the fall.

On still very low occupancy, the Rittenhouse has pushed ADR higher than 2019 to $441 for the quarter. Evidence of less price-sensitive luxury consumers and a preference for our well-known suites within the inventory. On the Chesapeake Bay at the Annapolis Waterfront Hotel, another Autograph Collection hotel we recently upgraded substantially. We are enjoying better weekends than before the pandemic.

And have had some success with social, corporate and state legislative groups. By next quarter, we should be close to second quarter 2019 performance. In the district in Washington, our team was able to book National Guard and Capital Police to provide base occupancy in the first quarter at our Hampton and Hilton Garden inn properties, which offset weakness in the market more broadly.

The St. Gregory is capturing some law firm demand, but most legal and diplomatic business is expected to return in the third quarter. In Washington, despite persistent local restrictions, we have seen a sharp increase in TSA volumes across the last several months that we expect to lead to more lodging demand.

A new presidential administration, particularly one with as large of an agenda and spending plan, as this one leads to substantial legislative, lobbying, federal contracting and foreign policy, all big drivers for lodging demand.

The Ritz-Carlton Georgetown may be the biggest flow through beneficiary next quarter as occupancy is already over 50% and our ADR at $380 is within 15% of pre-pandemic levels. In Boston, spring comes late, the Governor Baker on Tuesday announced changes to restrictions in the city for events. Weddings, live sports, concerts and other social events will now be permissible in May.

Although graduations remain limited in scope again this year, we do suspect that many parents will travel to still be with their children, if only to help pack them up. For the Envoy, the start of federal courts and the first trials beginning in June will be a strong generator of midweek demand that should allow us to double REVPAR. Our locations in the Seaport, The Boxer Hotel in the West End and the courtyard in Coolidge Corner of Brookline, are attractive to leisure, university related demand and ultimately, week-day corporate when it does return A few words on capital allocation before I turn it over. As we outlined on our previous earnings call, we entered into binding sales agreements on 6 hotels that represent total proceeds of $216 million.

5 of those 6 hotel sales have closed, and we expect the Duane Street Hotel sale to close this quarter. We were able to transact at attractive pricing, highlighting the high-valued real estate of our purpose-built portfolio. We sold the oldest, most stabilized hotels in each of our market clusters, for a $54 million gain and a 7.5% cap rate on 2019 NOI.

Several of the assets that were sold represented hotels with capital-intensive projects on the horizon. And the successful completion of these sales will lower our CapEx budget by approximately $20 million over the coming years. We are not anticipating any additional sales this year. We also closed on our strategic financing with affiliates of Goldman Sachs Merchant Bank, providing a $150 million unsecured term loan, which can be expanded to $200 million. And notably with flexible prepayment terms. This notes facility, in conjunction with the aforementioned asset sales led to the successful amendment of our credit facility, extending our covenant waivers until June '22 and eliminating term loan maturities in 2021 without a change in our rate.

Inclusive of the GS notes and our other bank or mortgages, inclusive of the GS notes and our other banking mortgages, our total cost of borrowing on $1.1 billion of debt is 4.4% with an over 3 years life to maturity. We are pleased to have forged a strong relationship with Goldman Sachs Merchant Bank that provides us with a well-capitalized partner to seek out strategic opportunities.

And to have been provided the financial flexibility to clear the runway and focus on the ramp of our portfolio in the coming quarters. This year has gotten off to a very strong start and a robust economic recovery appears underway. Of course, there are still risks and uncertainties. When our portfolio gets beyond breakeven and cities and states ease restrictions our operating and financial leverage can drive outsized returns.

As we kick start, what we anticipate to be a multiyear recovery, we remain bullish on the cities where we operate, innovation oriented, urban gateway markets with regional resorts just a short drive away. Drive to resorts and leisure destinations will continue to enjoy demand, but we believe the top U.S. cities will see a swift recovery beginning in the second half of this year and extending for the next several years.

Our innovation districts provided strong results prior to the pandemic and these markets have the most to recover as we make strides towards returning to a more normalized operating environment. And this summer, we remind everyone that New York, Boston, Washington and Los Angeles, are among the greatest tourist destinations in the world. Extraordinary richness comprised of every culture on earth, world-class art, music, bars, restaurants, public parks and sports. We hope to see all of you out.

With that, let me turn it over to Ashish.

All right. Thanks, Neil, and good morning, everyone. I'll provide further detail on what we witnessed from a portfolio operating standpoint as the quarter progressed. Its impact on our cash burn and breakeven levels before closing with an update on current performance in the month of April and our balance sheet. Demand fundamentals at our properties rose significantly on the balance sheet this quarter. And ultimately led to the validation of our property level breakeven forecast. In what is typically the slowest quarter of the year, historically accounting for less than 15% of full year EBITDA. Our properties generated positive property level cash flow of $4.8 million on 45% occupancy, with RevPAR levels, 54% below the first quarter 2019.

We held firm on our strategy of maintaining rate integrity and capturing the significant pent-up demand to resort assets during the quarter. We were able to generate more than 20% ADR growth compared to first quarter 2019 at both the Parrot Key and Key West, and the Hotel Milo in Santa Barbara. While at the Sanctuary Beach Resort in Monterey, our absolute ADR exceeded $400 and was more than 50% higher compared to the first quarter 2019.

In March, 24 of our sales of the operational hotels break even on the GOP line with 19 achieving EBITDA breakeven level. Representing 58% of open hotels breaking moving on the EBITDA line versus just 28% in December of 2020 and 39% in January of '21. The results in March represent a 90% increase in properties achieving breakeven EBITDA levels compared to December of 2020.

Performance this quarter cemented that we are comfortable forecasting positive hotel level EBITDA moving forward. And our approaching levels needed to breakeven at the corporate level, which we believe occurs at approximately 60% occupancy with a 40% RevPAR decline from 2019 levels. Throughout the pandemic, our franchise operating model has afforded us the flexibility to run our hotels at current staffing levels at breakeven occupancies of approximately 35%.

But what we have now seen is that we can run most of these hotels at similar staffing levels even as occupancies approach 60%. With this operating model, as occupancies increase across the portfolio, we're seeing flow through as high as 75% on the GOP line. And as we push both rate and occupancy, we anticipate maintaining them for the remainder of the year.

The asset management initiatives we implemented in 2020, in conjunction with our flexible operating model, showed early signs that our margin improvement goal following the pandemic is beginning to take shape. As GOP margins of 36% during the first quarter were essentially the same as our first quarter 2019 GOP. Despite a RevPAR decline of over 50% to 2019 levels. Much of the first quarter's operational improvement was realized in March and was led by our South Florida portfolio, which ended the month with 50% EBITDA margin. Highlighted by our Parrot Key and Cadillac assets.

The Parrot Key finished March with a 63% EBITDA margin, which represented close to 1,300 basis points of growth versus March of 2019. While the Cadillac ended the month with a 51% EBITDA margin with $1.5 million in absolute EBITDA generation. Strong results were also seen in California and Washington, D.C. as our Sanctuary Beach Resort generated a 43% EBITDA margin, while in D.C. strong occupancy coupled with proprietary operational initiatives led to EBITDA margin approximately 44% at both the Hilton Garden Street and Annapolis Waterfront Hotel.

Our franchise operating strategy has also led to incrementally reduced cash burn over the course of the pandemic. As I mentioned, our total property level cash flow for the first quarter was $4.8 million and grew sequentially through the balance of the quarter. In January, increased demand at our South Florida and DC clusters, combined with the asset management initiatives that we implemented in 2020, allowed us to break even at the hotel level for the first time since the onset of the pandemic, generating $133,000 in earnings.

Continued portfolio improvement led to $986,000 in property level cash flow during February, while stronger demand in (inaudible) Philadelphia and on the West Coast in March resulted in $3.7 million of property level earnings for the month.

Robust results at our hotels during the first quarter led the corporate cash burn totaling $8.9 million for the quarter, 54% better than we forecasted at the beginning of the year. The total corporate cash burn in March was approximately $900,000, which represented a 91% reduction compared to April of 2020 at the depth of the crisis.

We have seen incremental pickup in demand thus far in April in our earning market, with weighted average occupancy for our urban clusters, Boston, Manhattan, Philadelphia, Washington, D.C. up approximately 400 basis points month-to-date in April versus March. Activity in South Florida remains robust, with occupancies on pace to generate similar results in April versus March. But we are getting towards the tail end of the higher-rated leisure traveler ascending upon the region.

Typically, the second quarter is the strongest quarter for our portfolio with extremely busy conference calendars for business travel, graduation ceremonies in urban markets and some vacations beginning to take shape.

Although we have begun to the early stages of leisure travel returning to our market. The offset of loss revenue from higher-rated business travel pull away on cash flow generation versus a normalized year. With the alteration in traveler to all of our markets, we anticipate cash flows in April and May to be on par with March, with operating results thereafter projected to surpass those levels.

The pace of the vaccination distribution, easing government restrictions, increased social gathering such as weddings and sports group and the resumption of summer travel plans that were canceled in 2020 should yield a robust pickup in bookings across our portfolio as we get into the summer season.

Our ability to maintain operations at more than 55% of our hotels, even in the depth of the prices and reopened close to 85% of our portfolio by the end of September, is a testament to our team and operating model, but it also allowed us to maintain core staff across our collectors. As the pace of occupancy continues to trend higher into the summer, it will yield incremental revenue growth and require additional staff. But we remain confident that our operational strategies will continue to deliver the service our clientele has become accustomed to in a cost-efficient manner.

We were fortunate to maintain the majority of our market-leading sales force and management personnel throughout the pandemic, and we have been selectively adding to our staff over the past few months to drive future growth. Although we are feeling the same labor supply pressure as our peers, it has not resulted in us holding back operations across our portfolio.

Before we move to Q&A, a few closing remarks on our balance sheet. We ended the first quarter with $83.3 million in cash and cash equivalents in the top. As of April 1, we had approximately $45 million in capacity on our $215 million senior revolving line of credit and $50 million in undrawn credit from the unsecured notes facility replaced with affiliates of Goldman Sachs Merchant Bank.

During the quarter, we spent $2.7 million on capital projects, primarily focused on maintenance and life safety renovation. Our 2021 CapEx load is projected to be roughly 35% below our 2020 spend. And following the disposition of the consumer growth, higher cost hotels we announced last quarter, in addition to the $200 million spent on more than 50% of our rooms the last few years, our portfolio will experience very little disruption on capital spend for the coming years.

With the recent surge in construction materials, such as copper, lumber and steel, freight rates skyrocketing to the highest level seen in decades and all indications that the supply chain is tightening in all construction materials, labor and FF&E becoming more costly in the process. We are happy to have our significant renovations behind us and believe that the replacement cost of our portfolio -- other portfolio of similar dollars, is significantly undervalued.

We look back on the past year and especially this past quarter and are proud of what we've accomplished at the company despite the challenging operating environment for the industry. We successfully zero-based budgeted on our hotels, allowing for margin improvement well into the recovery, which has begun to take shape.

We reopened all of our wholly owned hotels faster than the majority of our peers. And we were able to record property level cash flow, just 9 months after the onset of the pandemic and in the slowest quarter of the year. All are a testament to our aggressive asset management and nimble franchise operating model. Following the strategic transactions we accomplished in the first quarter, we remain laser-focused on operational performance of the portfolio and accretive opportunities that become available through the cycle.

So this concludes my portion of the call. We can now proceed to Q&A, where we're happy to address any questions that you may have. Operator?

(Operator Instructions) Today's first question comes from Dori Kesten with Wells Fargo.

You said that you were able to maintain your employment levels despite the increase in occupancy across the quarter. I was just wondering how you think employment eventually does read up?

I'm sorry, Dori, did you say how we think that employment ramp, it was a little hard to hear you.

Yes. I think 1 of your initial comments was that you didn't really increase the number of employees when your occupancy is at 35% versus I think you said 60%. So I was just wondering how do you think employment eventually does ramp?

Yes, absolutely. As we get above that level, I wouldn't say that it's an immediate sort of exponential growth that we need in our staffing levels. You're going to need more housekeeping. You may need more front desk from a ship standpoint. But with the focus of our hotels being primarily on the room side with limited F&B, we don't believe that we're going to need to bring back too many people and certainly not people anywhere staffing level f 2018 to '19 as occupancy has suffered.

Okay. And then if we were to ask you in 2019, how much of your expenses were fixed versus variable? And then ask you again today, how does that answer change for you?

Right now, it's actually a higher percent of the expenses are probably fixed because we just have sort of on an overall base we still have managers, and we still have salespeople, but we don't have the revenues that we had previously. So -- and we don't have the operating expenses. So I think that at this point, look at just kind of a lot of -- what gives us a lot of confidence going forward is we have the fixed expenses. We're not going to have to add those. It's truly variable as we grow occupancies and grow revenues.

Our next question comes from David Katz with Jefferies.

What I -- thank you for the copious detail. If we roll the clock back to a different time, there was sort of a notional EBITDA post some of the investments you were making in the hotels, that if memory serves, is going to get us in the neighborhood of a couple of hundred million of EBITDA. And since then, quite a bit has changed, right, both the cost management as well as some assets leaving the system.

How should we think about kind of whatever some on time notional EBITDA level could be now? And the second part of the question is, obviously, de-levering is at the top of the list and maybe it's second, third and fourth on the list also. Where are we trying to get to leverage wise?

The first part of the question I think was on the EBITDA. We did sell -- we sold 6 hotels across the last year or so. That represents somewhere between 10% and 15% of our pre-pandemic EBITDA. So I think a rough -- just speaking, roughly a 10% reduction to a former goalpost would be a reasonable estimate of peak -- of kind of coming peak EBITDA.

Okay. And with respect to leverage again, untimed, but just sort of setting the goalpost out there. And obviously, it's a ways away and important. Where are we trying to get to in terms of an optimal leverage level in the future?

I think the optimal leverage level remains kind of 4x for a portfolio like ours, debt to EBITDA. We are quite a ways away from that until we see the recovery in these major cities as the year progresses. And next year, as we see corporate group, and convention business start to pick up. And hopefully, international business as '22 moves forward.

I think at that point, it becomes a little bit more rational, a little bit easier to see the past 2a, 4x kind of level. We require, and we're looking for significant organic growth from our existing assets. We think that they are leaner. We as a company are leaner, and we think we can produce good income on that side.

How else would you suggest? Yes. And could we provide appropriate levels of detail. To just provide some context in each of these markets. And we are seeing the news sentiment has just shifted so much. It's gone from -- you couldn't find a good story out there. So today, you can't find a bad story out there. But we wanted to make sure that we've provided some on the ground color from what we're seeing at each of our hotels and among each of our team members and the like. You know how close we are to each of the cities we operate in, and we want to provide as much visibility as we can in this difficult environment.

The next question comes from Tyler Batory with Janney.

This is Jonathan on for Tyler. First 1 from me Neil, you highlighted some larger groups in Miami in your prepared remarks, but I was curious what you're seeing more broadly on the larger group side? And if you're seeing any larger conventions or city lines returning in the back half of the year?

No. This isn't just for Miami, but we've -- across the country, we do see convention centers and the booking agents and our sales teams getting excited about bookings in the back half of the year and into '22. But frankly, a lot of those pieces of news and pieces of needs are still potentially cancelable or can be pushed back in time.

And so we're not yet ready to kind of put a stake in the ground in terms of the amount of convention bookings we're expecting in each of our markets in the back half of the year. But the trends are continuing to be positive. I think we had a little bit of a disappointment in DC. We were expecting the diabetes convention and the national police force kind of convention this summer.

Both of those conventions were pushed into the fall into September and October, but they're happening and they're paying significant for Washington. Similarly, most of the other markets also, things are being pushed into the fall, we don't have absolute certainty on them.

But you can be sure that most revenue managers around the country are starting to kind of push rates up, assuming there's going to be some demand compression mid-week in the fourth quarter. So I think there are expectations there, and it's not just ours or it's not just the CBBs of big cities, but the entire market is starting to feel it and expect it.

Okay. Great. I appreciate all that detail. And then returning to the labor market. Can you just provide some additional color on the labor pressures that are out there that you guys are seeing? And what could potentially be driving that?

On the labor side, the biggest challenge we found is on the hourly kind of staff front desk team members and particularly housekeeping. For managers and for kind of more senior operating level team members? We have not had a great challenge there. We are a great company to work for. We're recognized in most of our markets as being a great employer.

And so we've, on kind of that mid- level and above, we continue to have our pickup very strong talent today because the industry is still very disruptive. But on the hour lease side, we -- it is difficult, and particularly in some of the coastal markets that are seeing such significant demand. But all across America, there is -- when hotels closed down, people did look for other opportunities.

And now we have to attract them back. I think 1 factor is clearly the stimulus. The math is very clear. You can make more money, collecting the stimulus and not working. So until September, we will have that headwind. That will likely change after September, and then it will remain more market based.

But until September, we do have that headwind of just kind of stimulus and economic policy leading to the some of these challenges. We think it's a challenge, and it will continue to be a challenge. But we've gone through this in other cycles and other periods of time as well.

And we've started to -- we started some really -- not all that innovative, but they're interesting, and they're working, but these kinds of referral programs among our team members and the like. And so it's an area of attention for sure. It's an area that in the summer will continue to be a challenge. But longer term, we don't think that it impairs the margin story moving forward this cycle.

The next question comes from Michael Bellisario with Baird.

Neil, I want to go back to 1 of the prior questions, just kind of on de-leveraging, but basket related to -- regarding acquisitions, I think you mentioned you've kind of completed your disposition activity for the year, at least that's the expectation today aside from Dwayne Street. Does that mean you are starting to think about acquisitions today?

And then how would you balance putting some money to work if deals did arise versus how you think about your current cost of capital and that further balance sheet de-leveraging that that you want to achieve eventually over time?

Yes. We are -- we are on the disposition side, as I mentioned in the prepared remarks, we're not expecting any additional dispositions, but we remain opportunistic at all times, and there is a chance that we would before the end of the year. So another asset and then have some additional proceeds that we may be able to use for acquisitions or the like.

But generally, we think of -- we're thinking at least for this early part of the cycle for us to generate free cash flow and pay down debt and remove this very significant discount that we're trading at in the public markets. We feel that we're unlike most of our peers who have rebounded closer to pre-pandemic levels, we're still well over 30% below that level and well below our considerations of NAV.

So it's very difficult for us to consider issuing new equity to get on offense, at least until our cost of capital remains where it is today. As you know, we're very active in the acquisitions and dispositions markets generally, either from our activities in HT or our insight from our private operating company, HHM. And there are opportunities out there.

I wouldn't describe the deal flow as once in a lifetime, I wouldn't even describe it as distress. I think as the year moves forward, we're going to continue to see more fatigue donors. We're going to see special servicers and lenders kind of getting -- becoming inpatient and looking to get paid back, and that will lead to some transactions.

We think that the back half of this year 2022, 2023, will all still be very strong acquisition. We'll still provide great acquisition opportunities. And at that time, we expect our cost of capital may be more attractive than we may be more willing to raise equity to go after acquisitions. At this time, we're not seeing anything to make us regret not having more liquidity on the balance sheet nor tempted to raise any capital to go after any opportunities.

We always have the opportunity to do joint ventures. We have -- and being public, you have the ability to raise capital if the opportunities are that compelling. But for now and for the rest of this year, we're just very focused on driving cash flow.

Got it. That's helpful. And then just maybe for Ashish. How are you guys thinking about the last $50 million tranche in the Goldman facility? Is it your hope you don't have to draw on that? Or I guess, maybe what would be the circumstances that would arise for you to maybe you could draw on that?

Yes, it's there and it's available to us when we -- if we want it. At this time, with what we're seeing from accelerating cash flows and the ability to probably move forward our internal estimates of when we took our corporate cash flow positive, it is our hope that we wouldn't draw that capital.

The next question is from Bryan Maher with B. Riley Securities.

Just 2 questions on your markets. In South Florida, with the heating up in the second and the third quarters. I mean, do you expect demand there, which was so robust in the first quarter to fade as we get into the hot summer months? Or do you think that there's just so much pent-up demand to get out of the house that people will power through the heat and go anyway?

Yes. That's what we feel like right now, Brian. Our internal models and things to do still have a moderation of demand and particularly ADR in South Florida in the coming quarters. But I think we may be set up for another surprise there. We're seeing just tremendous momentum in Miami and Miami Beach and the surrounding areas of key West in the region, just even though it's been very popular and people have been coming, there still isn't nearly the number of demand generators open even for leisure (inaudible).

And that's all continuing to open. We didn't have any of the music festivals. They're finally coming back. We have Food & Wine coming next month. This summer, there's some other interesting things planned. So I do think that this year will be exceptional in Miami. We used to have to rely on international demand to even out kind of demand patterns during the summer in South Florida.

That doesn't seem to be -- I don't think we'll need that this time. There's some other kind of leading indicators where as it's just more gates and more airlift into Miami from various cities across America. Southwest now flies to Miami that's new as of the last quarter or 2 and a handful of other airlines also coming in. Key West has had a lot more flights as well.

So we do think it's going to be a big summer. And it's kind of obvious in that there is still -- the Caribbean is still relatively restricted. Europe is starting to open up, but probably a concern for a lot of domestic travelers. Mexico has opened, and they have been getting a lot of California's traffic. But I think there are a lot of Americans that would be concerned still about going there.

And the cruise line industry, still in the United States, at least it hasn't said any certain dates around its opening. So until all of that comes back, we think warm weather destination in the United States, particularly culturally unique ones like Miami, will have a great run.

Great. And then just on New York City with most estimates of supply being down kind of 20% to 30%, with so many hotels having closed, I mean, clearly you and certain others will benefit from that. The New York City market comes back, what percentage of that close supply currently do you think actually makes its way back into the market?

No, we've seen the same reports of 20% to 30%. In our mind, we think of it over the kind of the medium or long term, it's probably closer to 10%. That remains dominantly closed. They were assets that were struggling pre-pandemic, union boxes, aging hotels, too smaller rooms, too little of windows, and you know operating models. We've seen already, I think we've counted internally about a 7% absolute reduction in supply today, where it's been clearly aimed and announced things like the 1,700 room Hotel Pennsylvania or the Roosevelt.

The East side, a lot of hotels in the Midtown east kind of submarket, which make us excited for our positions there. I think hard supply clearly reducing at least 10%, if not more. I think sometimes what's overlooked is the reduction in the shadow supply inventory. Airbnb inventory in major cities reduced by at least 20% to 30% during the pandemic.

We continue to think that the affordable housing lobby as well as the hotel workers union and the like, will continue to raise issues around Airbnb inventory in major cities. And so we think that the reduction in shadow inventory and shadow supply is also going to have a meaningful impact on New York performance this cycle.

Our next question comes from Aryeh Klein with BMO Capital Markets.

A follow-up on the Calvin's question. Curious how staffing looks at some of the hotels or resorts that have kind of gone back to pre-pandemic occupancy level and maybe just to get a sense of what ultimately staffing will look like at other hotels across the portfolio?

Yes, sure, Aryeh. What we are looking at in staffing, hotels that are coming back or are pretty close to prior occupancy is at this time, I mean, you are certainly operating these hotels with just less people. Housekeeping protocols in some situations have changed. There's more contactless checking, there's more contactless F&B offering, people found ways to do more with less from a sales perspective and sales people using technology to get out to different customers using e-commerce channels.

I would say that the number of bodies in the buildings is just less than it was previously. And at our select service assets, you're seeing just less in the way of maybe hot breakfast bar offerings or how some of those amenities were offered. And we don't think that a lot of that comes back in the near future. So I think that certainly, the levels of service and what we provide to guests, we're trying to keep it the same. We're trying to provide value, but we're just doing it with less bodies.

Got it. And then just, obviously, a lot of improving trends across portfolio. As you look out over the next few years, how are you thinking about the recovery to prior RevPAR levels? And given the cost reduction, do we get to higher EBITDA levels ahead of a recovery in RevPAR?

Yes. I mean that is really sort of our thesis, and I think a lot of the industry thesis as well because what we're seeing in markets where there is demand, is that you are able to not just maintain rates, but push rates that the customers are willing to pay for it. And our operating models have changed, and there is a likely hope that our margins little -- as we always have been, kind of at the leading edge of the types of hotels that we run.

So with our flex operating model with our focus on cost containment but keeping strict rate integrity and pushing that as much as we can. We do think that we're in an opportunity to exceed EBITDA levels. From same-store hotels. And in addition to some of the comments that Neil made, our 2019 level of EBITDA was significantly disrupted.

We had several hotels in South Florida, our 2 biggest that was just coming off of being closed for the entirety of 2018 from the hurricanes. We had a lot of CapEx work going on in 2018 and '19 that was affecting our margins in our ramp up. So as we look at getting back to IP, it's not really '19, it's sort of the peak for these hotels was really anywhere from 2015 to '17 in many, many cases.

Got it. That's helpful. And then just last one if I can. Can you just talk a little bit about ADR? What does that look like in urban markets? Obviously, there's a lot of strength in the resorts market but trying to get a sense of how far below 2019 levels that is that the urban markets?

Yes. In the urban market side we are still pretty significantly below. If you look at the first quarter, I would say that in most cases, it was 30% or higher off from 2019 level from an ADR perspective.

The next question comes from Anthony Powell with Barclays.

Another question on pricing. And some of the resort markets and even mostly pricing needs to be pretty strong. That travelers are traveling now or seem to have a strong desire to travel. As the travel recovery broadens to more people do you expect that pricing power to kind of remain as especially during the service level that hotels may be slightly different than what people remember?

No. I mean, it's a big question. I would just tell us, our bias is that we think that there will be that we're entering kind of an inflationary environment, and there will be increased pricing for a lot of things that people valued relative to pricing before the pandemic. I think we're seeing strong performance not just among our rates, which is still based on very low demand, but there is pricing power in other sectors of the economy as well.

And so we think that hospitality is -- one of the great benefits of hospitality that we have the ability to reprice our inventory on a daily basis. If there is as much stimulus as expected, as much infrastructure spending is expected, even just the productivity benefits of this kind of virtual world.

All of those things set up for tremendous growth in the economy, and we think that, that will translate to significant growth in the lodging sector. Particularly with kind of differentiated hotels that can offer either a killer location or a truly experienced oriented stay.

Yes. So we're bullish on rates for this cycle. And so far, it's been wonderful to see the industry generally, not drop rates tremendously. I mean, it's still a challenge in many of our markets, and we do wish that there was a little bit more of a concerted effort to hold on to rate integrity, but it's been better than low cycles that we remember in terms of keeping some base level of rates when there is without demand, we sometimes struggle at the Rittenhouse because we're doing well over $400 rates.

If we were to lower the rate we're not going to be able to drive enough more RevPAR to drive better profitability, and we're going to ruin our brand, and we are going to create more ware and tear in our buildings and so I think we're seeing that kind of -- as lodging has become more institutionalized, I think we are seeing better pricing decision making today.

Got it. And you mentioned a couple of convention to DC delayed into the fall. I guess, what do you think those decisions a little bit uncertainty around the government regulations around market? Would that uncertainly effect conventional attendee about gathering? And what do you think may be switch to get conventions to finally say, all right, well then it could lead to a big moving out, sort of go through with it?

I think a big part of it is city regulations. I think that's -- I think it's how much -- how many people can kind of meet in the convention hall, how many of the venues that conventioneers will do outside of the convention hall will be open, how give -- because these are -- it's all of the stuff that happens outside of the convention hall that really is the most memorable parts of conventions for these big productive room night conventions.

And so I think it's until more kind of demand generators and kind of venues and facilities reopen. I think that's what's kind of slowed it down. In Washington, in particular, Washington and Philadelphia are the 2 markets within our portfolio that have had the most kind of stubborn restrictions.

Philadelphia is starting to open up. Washington is starting to open up. We would expect by summer. But to your question, Anthony, I do think for conventions to return, not only do you need to see the vaccination kind of trends that we are now seeing over 50% of the adult populations to vaccinate, I think that's a critical, critical fact. For booking conventions, but I think you do need to have more facilities open in major markets in order for it to be worthwhile to host a convention.

Our next question is from -- our next question is from Dany Asad with Bank of America.

My question is probably for Ashish, but actually, we can appreciate that it's still early in the recovery. But can you maybe help us think about where GOP margins can go? And like what is the opportunity relative to last cycle for the Hersha portfolio as it stands today?

Yes. I think that from a GOP standpoint, we continue to target anywhere from 150 to 250 basis points of margin improvement. We all know that there's wage pressures and that there's just operating expense pressures. But we do believe that we have pricing power in the portfolio like ours, where you're running some of the highest rates amongst all of our peers, we know for certainty that we are not going to have the same number of bodies in these buildings as we saw pre-pandemic.

And as we look out at our protocol, and ways to use technology, we'll continue to think about more ways that we can utilize technologies to cut down expenses. So all those things still give us confidence that we are going to be able to run these hotels with better operating margins, close pandemic than we did pre-pandemic. And we think that, that range is still something that we are pretty confident in. And as we always have been, we have been the leaders in driving EBITDA margins at our hotels and these types of hotels. And we don't see why we couldn't do that post pandemic with our operating model and our alignment with our operator.

Got it. Makes sense. And just to clarify, when you were talking about 150 to like that extra bump, is that off of the 2019 pre-pandemic margins? Or is it your prior peak in like '15 to '17?

It really -- we're looking at it right now off of '19 and every hotel had a peak at different periods of time. But some hotel in '19, some in '15, some in '17. So we're right now looking at based on '19.

The next question comes from Bill Crow with Raymond James.

I appreciate your commentary on CapEx and the rising cost environment, which is somewhat alarming. If you just take back the old rule of thumb for maintenance CapEx reserves we've kind of gotten to a place where it's, call it, 6% to 8% of revenues. Revenues are obviously down a decent amount from where they were, CapEx is up a decent amount. And I understand your portfolio may be a little bit different. But do you think we're at a 10% sort of number at this point?

I wonder really, Bill, because there's been such little wear and tear on hotels. I mean, it depends on the kind of hotel, I guess a resort in the leisure market, but there's a lot of urban hotels that just haven't had any occupancy. So I don't know if they're going to require more CapEx than usual.

The increase in construction cost is real and freight and associated labor and the like. And I guess our expectation is that room rates are also going to move up. And so on a percentage of revenue, I don't think we would jump to -- and your 6% to 8% number or 10% would be for like a big box full-service hotel, right?

Like we've generally felt like select services depending on how old it is. Like since we've generally focused on newly built hotels, we think of it as 3% to 5% on select service and maybe 5% to 7% on kind of lifestyle hotels. But since we're generally focused on newer hotels less than 10 years old, we've never felt like that was underestimating our capital needs.

So Bill, I don't think I would go that far yet. I still think it's still in this kind of the range that it was before. But let's see where room rates go in the recovery and how that compares to increased construction costs and the like.

Yes. Okay. Part of Biden's initiative calls for the end of the 1031 exchange. Talk about what sort of risk that may pose to transaction volumes in the hotel space?

Not as big as -- it's not as big as I think we initially fear. Like when you read the newspapers, articles and stuff, you start to think about some dollar amount and things. But I think it is still much more relevant for smaller assets, assets that have a lot of private high net worth kind of owners, retail, triple net. Some of those kinds of segments and small assets where it's so significant in the larger institutional lodging marketplace.

I don't think 1031 is a real driver of transaction activity necessarily. So I don't think it's a major thing, but it's anything that increases transaction costs and friction, will have some resulting kind of impact on transaction velocity.

So it's not great, but it's not a major concern for us. I think on one hand, for REITs, maybe it even can make currency more attractive. As owners don't want to trigger such high capital gains, they can defer it and hold on to the yield from a diversified REIT or something.

Yes. One final question for me. I know we're long in the tooth here. But I know there's often a lot of focus on the hotels that come out of New York City, but the pipeline shows at about 7%. And supply growth, and new openings this year, another 6% next year. So it's #1 in the country, if you will.

Do you think there's risk that those numbers don't materialize or maybe opportunity, those numbers don't materialize. I assume most of those have already gotten started.

Anything, it takes longer. Bill, I think there's a very good chance that, that 7% takes several years to deliver rather than delivering in 1 or 2 years, it may take 3 to 4. I think, projects that are in the ground are clearly going to keep moving. Their pace may be slower, but they'll likely keep moving. But if you haven't gone into the ground, you're trying to preserve some permits you had in (inaudible) zones. And now you've just gone through this pandemic, and you see how it's difficult the lodging market is.

I'm hard-pressed to think of someone to really put a shovel in the ground if they hadn't had a project capitalized pre-pandemic. So I do think that there will be a real deterioration in the current supply pipeline. Now that said, we do some new hotels opening this year. So like you're going to continue to see it.

And so we are monitoring and we are expecting each quarter, we go pretty detailed. And so we know each quarter, which hotels are going to be opening in our comp sets or adjacent to our comp sets and the like. And at least for the new supply that's coming in the next 6 months, it's higher quality, interesting kind of boutique-oriented projects or luxury oriented projects or lifestyle or projects.

So I think that hotels like the Virgin and the Ritz-Carlton, NoMad. I think those actually are good benefits for that lower Park Avenue tech corridor to have a little bit more luxury offerings. There are a couple of hundred rooms, 200 rooms.

An interesting dynamic where you might see 10% of the stock come out but 5% or 6% get added. And that 5% or 6% may be much more competitive than the 10% that comes out. Is that a fair way of thinking about it?

I think so, at least there is a very strong possibility of that.

At this time, I am showing no further questioners in the queue, and this concludes our question-and-answer session. At this time, I would like to turn the conference back over to management for any closing remarks.

I think we've kept everyone long enough. We remain in the office for the rest of the day today. If we can answer any further questions. But thank you, and we look forward to speaking to you in the summer again, not sooner.

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