RLJ Lodging Trust (RLJ) 2020 Q2 法說會逐字稿

Welcome to the RLJ Lodging Trust Second Quarter 2020 Earnings Conference Call. (Operator Instructions) The conference is being recorded. (Operator Instructions)

I would now like to turn the call over to Nikhil Bhalla, RLJ's Vice President and Treasurer of Corporate Strategy and Investor Relations. Please go ahead.

Thank you, operator. Good morning, and welcome to RLJ Lodging Trust's 2020 Second Quarter Earnings Call. On today's call, Leslie Hale, our President and Chief Executive Officer, will discuss key highlights for the quarter. Sean Mahoney, our Executive Vice President and Chief Financial Officer, will discuss the company's financial results. Tom Bardenett, our Executive Vice President of Asset Management, will be available for Q&A.

Forward-looking statements made on this call are subject to numerous risks and uncertainties that may lead the company's actual results to differ materially from what had been communicated. Factors that may impact the results of the company can be found in the company's 10-Q and other reports filed with the SEC. The company undertakes no obligation to update forward-looking statements.

Also, as we discuss certain non-GAAP measures, it may be helpful to review the reconciliations to GAAP located in our press release from last night.

I will now turn the call over to Leslie.

Thanks, Nikhil. Good morning, everyone, and thank you for joining us. We hope that you and your loved ones are remaining healthy during these unprecedented times. We would also like to express a great deal of gratitude to our frontline associates, who continue to prioritize the health and safety of our guests; and our corporate associates, who are working tirelessly with our operators to help us navigate these uncertain times.

As we anticipated, the second quarter for our industry was dramatically impacted by COVID-19 as much of the country shut down. The lodging industry bottomed in April with the lowest monthly demand in the history of our industry. Demand improved in May and June, which was primarily driven by pent-up leisure demand as corporate and group demand was virtually nonexistent. Although we continue to lack clarity on future fundamentals, we believe that the second quarter will be the worst quarter of this year.

With respect to our portfolio, occupancy at our open hotels was 24% during the second quarter. Occupancy troughed in April at 15.4% and improved to 24.8% in May and 31.4% in June, mirroring the cadence of the broader industry trends while highlighting our ability to capture local demand. Although a number of our hotels benefited from the lift in leisure demand in markets such as South Florida, Southern California and Charleston, many of our hotels remained suspended for a significant portion of the quarter due to state mandated closures and restrictions. Our urban hotels were particularly impacted by the lack of demand, which limited our second quarter total portfolio occupancy to 11.7%.

In light of this challenging background, we executed on a number of critical priorities. First, we remain focused on managing our liquidity and minimizing hotel operating shortfalls to reduce our burn rate. Second, we successfully reopened hotels in a socially and financially responsible manner, including 21 hotels during the second quarter and 15 hotels so far in the third quarter. And finally, we successfully amended our unsecured debt facilities.

As we continue to navigate this crisis, preserving liquidity remains our #1 priority. At the outset of COVID-19, we have implemented a number of aggressive cost containment initiatives, including reducing staffing levels, closing F&B outlets, eliminating all nonessential services and closing floors to reduce room inventory. All of these cost containment efforts remain in place and have limited our burn rate.

Our second quarter cash burn was approximately $10 million lower than our expectations due to a combination of higher revenues at hotels that remained open, the reopening of more hotels than we initially expected and the success of our aggressive cost containment initiatives. Our burn rate improved throughout the quarter, as more hotels in our portfolio achieved profitability as demand materialized.

During June, approximately 70% of our open hotels achieved positive gross operating profit, and over 40% of our open hotels achieved positive EBITDA. Our success in reducing our burn rate, combined with the steps we took previously to preserve and enhance liquidity, such as limiting our capital expenditures and optimizing our corporate G&A, have strengthened our liquidity position. With over $1 billion in cash, our strong liquidity position gives us the confidence in our ability to navigate through this period of uncertainty.

As we outlined last quarter, we developed a thoughtful framework to reopen the 57 hotels that we previously suspended in a socially and financially responsible manner. Our approach is focused on minimizing our operating shortfalls by reopening those hotels that are best positioned to control costs and capture available demand while maintaining guest safety in this low occupancy environment. The hotels that best fit this criterion were our select-service assets, all-suite hotels and hotels located in resort or drive-to markets.

As many states began lifting restrictions in May, we began to execute on our plan, which led to the reopening of 36 hotels, with 18 of these assets opening in June and 15 opening in July, yielding positive results.

Our select-service hotels achieved 35% occupancy in June and nearly 40% in July. Our all-suite hotels, including most of our Embassy Suites, achieved 32% occupancy in June and mid-30% occupancy in July. And our resort hotels achieved occupancy of 55% in June and approximately 45% in July, while hotels in our drive-to markets achieved occupancy in the low 30s over these same 2 months.

We are pleased that 80% of our portfolio is now open. The number of properties and a pace at which we were able to reopen and the level of occupancy that we are seeing underscores the benefits of our portfolio construct. Specifically, we were able to reopen significantly more hotels due to our portfolio's operating cost structure, which allows us to minimize our operating shortfalls even at low occupancy levels.

Our all-suite hotels, which represent approximately 50% of our total rooms, are proving to be attractive to guests, especially in a social distancing environment, and our geographically diverse transient-oriented portfolio is ideally positioned to benefit from the lift in early demand in all segments.

These portfolio attributes were crucial in allowing us to drive occupancy to our hotels early, as we quickly pivoted to take advantage of all demand that was available. This included near-term leisure demand, pockets of existing project base and extended state corporate demand from essential workers, and small social groups such as youth sports teams. Ultimately, the construct of our portfolio and our geographic diversification will not only enable us to navigate this crisis but will also position us to benefit early once a sustainable recovery unfolds.

Looking ahead, while no one knows the timing of when we will return to pre-COVID-19 lodging fundamentals, we continue to believe that any form of recovery will likely be slow to build. In order to fully recover the pre-COVID demand levels, the industry needs all 3 segments to be healthy.

For the remainder of the year, given the current resurgence in COVID-19 cases across a number of states, including Florida, Texas and California, we remain sober as it relates to the sustainability of leisure demand, particularly after Labor Day, and any recovery in corporate or group demand, which we expect to remain anemic. While we, along with the rest of the industry, are facing extreme challenges, we continue to believe our relative positioning will allow us to rebound sooner and take advantage of opportunities at the appropriate time.

Our confidence continues to draw from our lean operating model, the construct and geographic diversification of our portfolio, our strong liquidity position and the embedded value creation opportunities in our portfolio. In particular, our portfolio of select-service and compact full-service hotels, which have a smaller footprint and lower operational complexity, allows our hotels to break even at low occupancy levels. Our lean operating model allows our hotels to achieve profitability earlier. Our transient concentration and the nature of our hotels positions us to ramp up early during a recovery. And our all-suite products will further bolster this ramp as a new normal unfolds. And finally, we continue to believe in the embedded opportunities within our portfolio, which have the potential to unlock significant shareholder value long term.

We are already seeing the benefits of the relative advantage that our portfolio offers as evident in our second quarter performance, given the number of open hotels, the pace of occupancy ramp-up and the number of assets that achieved positive EBITDA, all of which continued into July. Whether or not current demand levels are sustainable in the near term is unknown. Nevertheless, our recent performance illustrates that when a sustained recovery does unfold, our portfolio should benefit early.

Overall, we believe that these differentiating attributes, combined with our sizable liquidity of over $1 billion and a flexible balance sheet, continues to position us exceptionally well, not only to navigate an extended period of uncertainty, but to emerge in a relative position of strength early in a recovery.

I will now turn the call over to Sean for a more detailed review of our financial results and liquidity. Sean.

Thanks, Leslie.

As expected, April marked the low-water mark for lodging demand, which was significantly impacted by COVID-19. While still at anemic levels, weekly occupancies gradually improved from the April lows during May and June.

Turning to the numbers. Despite still having 36 suspended hotels throughout the second quarter, we will continue to include all 103 hotels within our reported results.

Our second quarter RevPAR contraction of 91.4% was primarily driven by a 71.5 percentage point decrease in occupancy and a 38.5% decrease in average daily rate. During the quarter, our portfolio actualized absolute occupancy of 11.7%, an average daily rate of $115.94. RevPAR contracted substantially throughout the quarter, declining by 95.1%, 92.3% and 86.6% in April, May and June, respectively.

The second quarter results for our open hotels were meaningfully better with occupancy of 24% and average daily rate of $117, resulting in RevPAR of $28. Open hotel occupancy bottomed out in April at approximately 15% and sequentially improved each month at approximately 25% and 31% in May and June, respectively.

As Leslie mentioned, performance at our open hotels improved throughout the second quarter as our mix of resort properties, hotels in drive-to leisure markets, and all-suite hotels benefited early from the lift in leisure demand. We are pleased that our 2-bay all-suite hotels gained 2,000 basis points of market share during the second quarter, ending the quarter with an index of approximately 135%, which underscores the relative attractiveness of this product type.

Third quarter RevPAR is expected to improve from the lows of the second quarter as 82 of our 103 hotels are open, and we expect leisure demand to remain healthy through at least Labor Day. As an example of current operating trends, we expect July RevPAR to contract by approximately 80% for the entire portfolio. For our open hotels in July, we estimate occupancy of approximately 32% and ADR of approximately $122, which was in line with our open hotels' ADR in June. We are encouraged by the fact that we expect our 103-hotel portfolio to generate positive gross operating profit during July, which is the first month of positive GOP since the start of the pandemic. Our ability to quickly return to positive GOP is a good representation of how our portfolio can perform during a sustainable recovery.

Turning to the bottom line. Our second quarter pro forma hotel EBITDA and adjusted EBITDA were negative $42.7 million and negative $50.5 million, respectively, and adjusted FFO per share was negative $0.49. As Leslie mentioned, we continue to remain committed to monitoring operator compliance with the aggressive cost containment initiatives that we instituted last quarter.

Underscoring our lean and flexible operating cost structure, our second quarter operating costs declined approximately 70%. Our team was vigilant on controlling variable costs during the quarter, achieving a 73% reduction in wages and benefits. As you would expect, our team remains focused on cost containment initiatives to minimize operating shortfalls in the current environment.

Turning to liquidity. I would like to reemphasize that we entered the year in a strong position, with approximately $900 million of cash and an undrawn line of credit. Even with this strong liquidity, our efforts continue to be laser-focused on ensuring that RLJ had adequate liquidity to withstand a protracted period of disruption. To that end, we have continued to suspend our capital allocation initiatives, including ROI projects and the Wyndham conversions, until we have more clarity on the outlook. Additionally, we continue to closely monitor our monthly cash burn.

We were pleased that our second quarter operating shortfalls were lower than prior expectations, which assumed the continuation of April demand trends for all of 2020. Our second quarter average monthly operating shortfalls were approximately 40% better than our expectations, which was primarily driven by 3 factors. First, revenue at our open hotels was stronger than expected as leisure demand rebounded sooner and stronger than expected. Second, we reopened 21 hotels during the quarter, which was more than expected and led to revenues at reopened hotels exceeding expectations. And third, our cost containment initiatives were more effective than assumed, with particular success in managing wages and benefits.

The operating shortfalls at individual hotels will differ by hotel type location and other factors. The average monthly operating shortfalls at our focused-service hotels is meaningfully better than operating shortfalls at our full-service hotels. Overall, based on our portfolio's lean operating model, our hotels' operating shortfalls will continue to be substantially better than portfolios comprised of traditional full-service hotels.

For the other costs, our assumptions have not changed for hotel fixed costs, primarily property taxes and insurance, and corporate level outflows, including dividends, debt service and G&A. Inclusive of the second quarter, our monthly cash burn is now expected to range between $25 million and $30 million, reflecting a $5 million reduction to the top end of the range and a $2.5 million reduction at midpoint. The improvement in the range is primarily attributable to the better-than-expected hotel operating shortfalls, which represent 25% to 30% of our total cash burn. Our monthly cash burn is expected to be towards the low end of the range if lodging demand remains at current levels, and the high end of the range if lodging demand contracts from current levels. The timing of actual cash outflows will be lumpy, as our fourth quarter fixed costs and corporate outflows are expected to be higher than the third quarter due to the timing of payments of senior notes interest, insurance premiums and property taxes. And operating shortfalls could be impacted if there is a post-Labor Day decline in lodging demand. These estimates exclude RLJ funded capital expenditures. Regardless, we expect to end the year with significant liquidity and remain well positioned to withstand a protracted period of limited hotel demand.

Turning to our fortress balance sheet. We ended the quarter with approximately $1 billion of unrestricted cash, $2.6 billion of debt and no debt maturities until 2022. We continue to maintain significant flexibility on our balance sheet. As of the end of the quarter, approximately 88% of our debt is fixed or hedged, and 84 of our 103 hotels are unencumbered.

During the second quarter, we further enhanced our financial flexibility and amended our corporate line of credit and term loans to waive quarterly financial covenants through the end of the first quarter of 2021, and also reduced certain financial covenant thresholds through mid-2022. We continue to place great value on our lending relationships and have remained aligned with our lenders during the entire process.

As we look ahead, given the high degree of uncertainty, we continue to lack visibility on the timing and cadence of returning to pre-COVID-19 levels of demand. That said, we are confident that lodging demand will ultimately return to precrisis levels. In the meantime, we will continue to closely monitor industry trends and stay nimble as we react to the changing environment.

Despite all of the uncertainty facing our industry, RLJ remains well positioned with a flexible balance sheet, ample liquidity, lean operating model and a transient-oriented portfolio with embedded catalysts.

Thank you, and this concludes our prepared remarks. We will now open the lines for Q&A. Operator?

(Operator Instructions) Our first question is from Wes Golladay with RBC Capital Markets.

I'm just wondering if you can frame up how close is it to making financial sense for some of the conversions at more leisure-oriented hotels, looking at Charleston and Santa Monica. You just may be holding back on these from just wanting to preserve capital for yourself or maybe the brands have key money on hold. Just trying to get a sense of where we're at there.

Wes, look, I think that, as we've talked about before, that preserving capital is our #1 priority right now. We're in a very unique situation and not really understanding how long this dislocation will last and when the new normal -- and how the new normal will unfold. That said, we're working hard to continue to design work on the Wyndhams as well as finalizing the negotiations with the brands and select a manager so that we can hit the ground running and move forward with those renovations.

As we said at the beginning of this year, we expected to start 2 renovations this year and 2 next year, and we continue to believe that's the right sequencing, but that's going to shift by about a year, is what our current thinking is.

Okay. And then maybe you can -- with occupancy being a little bit higher than you had thought, how close are you to opening up some of the F&B outlets?

Wes, this is Tom. Right now, we're still very careful in regards to the F&B deliverable. And the reason for that is predominantly when we look at our select-service assets, we're doing a bag breakfast in the morning. And at the lower occupancy levels, that seems to be acceptable based on the consumer behavior and what they're looking for. In our resort properties, we do have to-go menus. We're also providing beverage opportunities around the pool where there's opportunity to be profitable. But overall, food and beverage, in regards to catering and the meeting space and what's going on based on the demand that's in the hotels, I would say we're a little ways off in regards to going back to normal F&B levels in regards to what we're going to be providing to our guests at our hotels.

And Wes, just to add on to Tom's comments. One, we do believe that there is some risk in the fourth quarter or the pullback that we've mentioned in our prepared remarks. But the other thing that I would point out to you is we sort of think about the new normal and how to sort of think about the new operating model. The F&B is where there's the greatest opportunity for improvement, whether it's the approach to the service, buffet versus room service offerings, a level of offering, the staffing hours of operations. So we're not going to be in a hurry to reopen that until we really understand how we can reimagine an F&B, and we're working really hard with the brands to be able to sort of do that.

Our next question is from Anthony Powell with Barclays.

So ultimately, yesterday seem pretty, I guess, not optimistic, but they thought that kind of current trends could, I guess, persist through the rest of the year, and some of your other REIT peers seem to believe that there may not be a sharp drop-off in the fall. You seem to be more cautious. Maybe you can go into maybe why you're a bit more cautious than some of these other market participants. That would be great.

Yes. Anthony, I would say, look, our general house view is that August will look much like July, but that leisure will taper off after Labor Day as kids go back to school. Now we recognize that weekends may perform better in the back half of the year than in a normal demand pattern because people will still have a desire to get out of their homes. So we think that there's some opportunity there. But by and large, it's not going to be able to supplement what we're seeing over the summer.

And then as it relates to BT, we think it's going to be very limited and anemic. As corporations have pushed the reopening of their offices off to next year, many of them have, we think that business travel will correlate with that. And so we don't see that materializing after September to replace the leisure demand that we see right now. And then right now, there's very limited to no group that exists, and cancellations are continuing on the same path. Whatever is on the books now, which is very limited, we expect that to continue to cancel. And there's no catalyst for the change as it relates to the group environment.

So from our perspective, the booking windows right now are extremely short, 0 to 3 days. If you look at what we've experienced so far, 50% of our contribution has come from that 0- to 3-day window. So we don't have the ability to look forward, but we just don't see the demand that's going to replace the level of leisure that we have today.

Yes. And then Anthony, to bolt on to some of Leslie's comments, the thing that I think is worth noting is that notwithstanding of what our sort of house view of cautiousness for the fourth quarter, we still have 80% of our portfolio opened and positioned that if the fourth quarter is better than we expect, we're well positioned to capture that demand. The hotels that remain suspended still are generally roughly half our clustered hotels that will -- that are in clusters that have open hotels as well, with the balance in sort of some of those core urban areas that I think our view around -- the demand around some of the core urban areas, San Francisco, New York, specifically, we're certainly more cautious, and I don't think any different from our peers on those markets. And so I think our portfolio is set up to benefit from that. But also, when we think about how we manage costs and are able to flow in that environment, having that cautious tone is enabling us to continue to be vigilant around our cost containment initiatives.

Understood. And there's a lot of talk about, I guess, small or regional business travel maybe being a bit better than national corporate travel this fall. Do you share that view? Or are you still cautious on that, that kind of local business travel, as well?

So what I would say is that, that local business travel in the small group is right in our sweet spot. And our product and portfolio makeup is designed to capture that, right? So if you look at our contribution this quarter, we had about 10% from small groups and we had about 20% from whatever little BT that was out there. What I would say is that those are numbers are relatively anemic, but they represent how our portfolio will perform when that type of demand comes back, which we expect it to be the earlier demand, which is what you're alluding to.

The fact of the matter is, it's just not enough, Anthony, to replace what we're seeing on the leisure side today, is what our general current house view is.

Got it. Understood. And just maybe one more on the Wyndham, I guess, conversions. Are you seeing the brands kind of with maybe easier terms like favorable fee ramp-ups or more key money ahead of the brands all decide again to kind of turn on the conversion engine in the current environment?

Anthony, what I would say is we're in active negotiations, and these are high quality, highly sought-after assets. And so it's very competitive, and we feel good about what we're going to be able to get from the contribution of the brands.

Our next question is from Austin Wurschmidt with KeyBanc.

One more maybe on Wyndham. I guess with kind of still moving forward with the planning there and having your ducks in a row as well as the capital just to move forward with that, once you feel comfortable or have more line of sight on normalizing conditions, what's the time line for a turnaround on those conversions?

Austin, you broke up a little bit. But I would say that, again, we had anticipated starting 2 projects this year and starting 2 the following year. And that's still the sequencing, but it's pushed off by a year. And so I would expect a year to 18-month lag on -- from start to finish on the fully completion of those renovations early. We would expect Charleston and Santa Monica to be the earlier assets. And we think that those assets will ramp up nicely, assuming a normalized demand levels.

Understood. And then just curious about your thoughts on what you're seeing within -- from a shadow supply perspective within your competitive sets and submarkets. I mean do you feel like a lot of the competing hotels are open, along with -- in the markets where you have open hotels? Or there's still a lot more suspended hotels that are likely to reopen?

Well, if you follow the pattern of what's opening and what's still suspended, what we're finding in our markets is it's predominantly all select-service seems to be open, except for consolidated and hotels that are in the same proximity, similar to our portfolio. And then full-service hotels started to open in June and July that are smaller in nature, more compact full-service. And then the largest full-service hotels that have those significant amount of group exposure as well as meeting space are the last to open, outside of the urban environments that Sean talked about earlier in San Francisco and New York and then obviously, in Hawaii, based on what's going on with the ordinance in regards to what's happening out in Hawaii until that opens back up.

But what I would say is, in regards to shadow supply, Airbnb certainly is continuing to do well. But we're also finding that in our world, the ability to have flexibility for the consumer and allow them to cancel and have that ability to come and go as they please over the last 2 or 3 months has actually spurred demand for our brands as well as our premium brands that we operate, where the host in Airbnb isn't responsible for the cancellation. So we think that's an advantage for our space in regards to the hotels versus Airbnb for the next 2 or 3 months as well.

I think the other element, just to add on to Tom's comment about the shadow supply, while we do think that Airbnbs of the world will do fine on the leisure side, we think that the other business segments that they were trying to get into pre-COVID, like on the business traveler, we think that, that is going to be stunted. We think that corporations are going to be very focused on safety and liability, and they're going to want their employees to know that they're safe and that the brands represent that. So we see that -- those segments being stunted, Austin.

Appreciate that. And then just last one for me. Sorry if I missed this. I know you touched a little bit on how ADRs have trended, but how have you seen kind of ADR growth track month-to-month and specifically into July?

Sure, Austin. We've seen ADR pretty much stable really from late May through today. Our July ADRs were right in line with our June ADRs, which we included in the prepared remarks. And so what we're seeing across the country is that there's a consistency in ADRs in most markets, which leads us to believe that the ability in this environment to really aggressively yield manage just is not really the reality in today's environment. And so we are picking up business and picking up occupancy at market prevailing rates, and there's just not a lot of variability within the market rates out there. And so when you look across our portfolio, it's been pretty consistent.

And to just add -- one other thing I would say, Austin, when you look at channel contribution and you think about what's happening out there with the mix that's going on today, typically, what we talked about earlier was GDS is down, which is where corporations book. OTA percentage is a little bit up. So therefore, that's usually at bar rates based on parity. And then group is down, which is your 2 highest segments in regards to average rate are the ones that are down. So it's really more of the dynamics of what availability is out there of who you're pricing to be able to get that discretionary traveler and leisure traveler, which is typically looking for discounts as well as the brands offering those discounts to try to increase demand.

I would sort of summarize our revenue management strategy as a heads in beds and a race to breakeven, to simplify it, opening all channels, taking advantage of whatever demand is out there as long as it's helping our burn rate. And to Tom's point, what's out there is a lower rate of business today, the leisure, medical, and now we're seeing education, obviously, schools looking for alternative housing. And even the BT that we're seeing is largely related to medical. All of that is on the lower end of rate, Austin.

Our next question is from Chris Wandoronka (sic) [Woronka] with Deutsche Bank.

Some of these operational changes that you've made to keep cash burn levels low and basically improve margins, if you will, how many of those can stick around kind of longer term? And at what point do you think you have these conversations with your brand operators? And how do you -- how much luck do you expect to have with convincing them to make some of these changes permanent?

Look, first of all, all parties are working collaboratively to control costs and reduce burn rate and also to reimagine the model, but it's really too early to say how these things will actually unfold, what's going to be permanent, what's going to be temporary. Our overall house view is that the puts and takes are going to generally be neutral, but -- and I sort of think about it in a couple of buckets.

As I mentioned earlier, I think F&B has the greatest opportunity for a long-term change around the approach, the offering, staffing and the hours. As I think about housekeeping, we already know that the frequency of the housekeeping is down within the rooms, but it's increased in the public space. It's unknown how that's ultimately going to unfold based on consumer preferences. So as I sort of think about the impact of technology that's been implemented, like mobile key and allows you for a contactless check-in, I think that's here to stay because people have made those investments.

Some things that are on a temporary basis, we're seeing amenities being cut down, whether it's no valet or no coffee in your room. Some of that stuff will come back, but I think it's too early to say exactly how that will unfold. But what I would also point out to you, that our better performance on a burn rate, while we had aggressive cost containment, and that played a role, it was largely focused on the fact that we had greater revenues this quarter.

Okay. Fair enough. And then on The Knickerbocker, the fact that we expect a lot of inventory to come out of the New York market, does that change the calculus at all in terms of your longer-term kind of hold or sell decision on that asset?

No. I mean I think at the end of the day, we made the decision on that asset with the information that we had at that time. We continue to believe that in New York, long term, we recognize that New York has challenges, and it's going to have to overcome the stigma of being hot spot early and that international is going to lag. But there are some green shoots in New York related to some hotels not reopening, and we'll have to see how all that unfolds. It's just too early. But we recognize that on a relative to other markets, New York is going to lag.

Our next question is from Tyler Batten (sic) [Batory] with Janney Capital Markets.

This is Jonathan on for Tyler. First one from me, I was wondering if you could provide some additional color on the recent trends that have been seen in the portfolio, and specifically in July and specifically in states where COVID cases have been rising.

Sure. What we've seen in -- within the portfolio is we're generally stable in both June and July with occupancy rate, as I mentioned in the prepared remarks, was stable. And so the only market across our portfolio that we saw a little bit of a pullback in demand was Key West, where we were -- we have 2 hotels down there in Key West where we were running in the 70s of occupancy, and we've -- that's now down to the high 50s to 60% over the last few weeks. Still healthy and still among some of the top in our portfolio, but we just didn't see the upside. But I would characterize our portfolio today, even with the increased COVID cases, as stable.

The other hot markets, Texas, for us -- Houston is our largest market. We've actually -- were more cautious on opening hotels in Houston. And so when you look at the number of hotels that are -- that remain suspended in Houston, relative to our portfolio, it's the market that we have one of the largest percentage of hotels continue to be suspended. And so that's on the Texas side.

And then lastly, in California, our hotels are actually performing steady and really didn't see a falloff there.

Okay. Great. That's very helpful. Appreciate all the color there. And then second question. As it relates to reopening the hotels, has there been any surprises or changes with the ramp there? And the way they're thinking about -- are you guys are thinking about ramping up the remaining closed hotels?

I think the biggest surprise was how short the booking window was. We thought that when we opened hotels that we would be able to sort of look out, and the reality of it is, is that we can't. The booking window is 0 to 3 days. And as I mentioned earlier, we're getting 50% of our occupancy contribution in that 0, 3-day window.

And so what the lesson that we learned, to paraphrase one of my team members, is that the open hotel is a booking hotel. And so the lesson learned here for us is really to open the hotels. And so we -- even if we see a pullback in the fourth quarter, we do not anticipate resuspending our hotels.

And so when I look at the balance of our hotels, we have 21 that are not open. We expect to open 3 to 5 in the month of August, which would leave about 18 -- 16 hotels, rather. Waikiki is in there. Clearly, that's going to be tied to the ordinance that's in place. Louisville, our largest -- one of our largest assets, we expect to open in the near term. And then that leaves San Francisco and New York where you have larger boxes, higher cost structure. And so while we expect to open those before the end of the year, the reality of it is, is they are going to lag based upon what we're seeing right now.

And then one more lesson, I think, which is important for us, which sort of toggles on to Leslie's comments, is that we were able to decrease operating shortfalls at much lower levels of occupancy than we would have thought going into the pandemic. When you look at how the hotels have performed, even with relatively limited demand, we were able to cut into our operating shortfalls, and that's a function of that we're running these hotels with minimum staffing. And the incremental staffing required for those levels of demand is very low, which allows us to reduce operating shortfalls. And so that works with Leslie's comments about being hesitant to close hotels again or suspend hotels again because our breakeven, if you will, to make that decision is at a much lower level of occupancy than we would have thought 3, 4 months ago.

Our next question is from Gregory Miller with Truist Securities.

There has been a lot of discussion in the hotel industry today on the use of outsourced staffing. I'm curious what your position is on this matter and what cost implications may result.

So look, on the labor front, Greg, we are seeing the need for some contract labor in some of our markets, particularly Boston, Atlanta, Orlando. And we've seen cases where bringing back staff has been a little bit challenged, whether it's the unemployment benefits or childcare or concern about risk for their family. So we have seen an uptick in contract labor. Currently, we're running at about 20% to 25% of our normal labor levels at hotels, whether it's full-service or limited-service, but we are seeing pockets where we do have to use contract labor.

And just one more question from us on the Wyndham side. I concur with the great real estate and the long-term growth catalysts with conversion opportunities, but one could also make a case that some of the hotels could also be theoretical disposition candidates, especially if material incremental EBITDA post conversions could be at least a few years away. Would you entertain disposing some of these hotels given today's macro environment?

Look, I think that we did the heavy lifting on dispositions last year, which is what put us in a great position this year coming in with liquidity that we have today. Based on our current burn rate assumptions, we don't have a need to sell an asset today. Having said that, all assets at any point in time are for sale at the right price. What I would say to you, though, based on the backdrop that you described, the Wyndham assets are actually performing relatively well, and we would see those as beneficial to maintain in our portfolio in the climate that you described.

Our next question is from Neil Malkin with Capital One.

First question. People talked on the call about potential slowdown in the fourth quarter. Just wondering in terms of that, what are you guys doing to prepare yourself or to be more defensive in terms of limiting the downside or the deceleration that you're likely to see on the leisure side, going after opportunistic contracts or firstline people or universities, kind of like you alluded to? Anything that you could kind of talk about that would help defend against that?

Yes. So Neil, this is Tom. A couple of things from a strategic standpoint is to focus what we find is the small group business is still starting to book, and we're focusing on making sure we're trying to replace some of that leisure, and that is actually coming on weekends because it's social: weddings, sports groups, youth teams. We are finding an increase in the amount of leads that are happening from people from 10 to 25 in regards to that area. That's one thing that we're looking at.

We did mention that we're locking in a couple contracts with dorm business where we have a buyout in one location and then probably 50% of the hotel in another, which will be coming in, in this fall. And so we're encouraged there based on the current level of demand in those markets, but that was a really smart, profitable decision for us on the top line.

And then lastly, I would say, above and beyond the top line and the focus on strategic sales, we will continue to maintain the cost levels with the slower amount of FTEs. All approvals have to come through us with our management companies in regards to what they're going to add and being very thoughtful in regards to being prepared in case occupancy and revenue levels aren't at the levels that we're enjoying right now in July and August because of that leisure demand that you mentioned. So that gives you a little bit of specifics in regards to our strategy around that.

Yes. And the thing that I would add onto that, as we mentioned earlier in the prior question, was that we are smarter now on how to toggle between the level of occupancy we see now and the level of occupancy that we think that we'll be at -- possibly be in the fourth quarter. And so our ability to run at a suspended model labor pool versus where we're at now, we know how to toggle between that despite having the [wholesale] open. We've also come to understand how some of the costs, like, for example, utilities and cable and other things that are sort of normal that you have when you're open, we've been able to sort of figure out how to even get incremental savings off of that. So we are preparing both mentally and through a dialogue with our operators that things are going to get soft. We're not waiting until they get soft. We're assuming that they're going to get soft, and we're managing a tight control around (inaudible) that are being made in preparation for that.

Okay. Great. Other question for me is, you guys have a fair amount of exposure to cities on the coast that have been -- that have seen upticks in, I would call it, radical legislation, social, political unrest, violence, increasing unaffordability. How do you -- I understand these things are relatively recent but, I feel like, building over a couple of years. How do you navigate that in terms of the next cycle, in terms of demand shifts or capital flows? I also know people always say, well, it's hard to build in San Francisco. And I agree, but I would argue that the restrictions and the very onerous union requirements are basically synthetic to apply anyway. So just to get your comments would be very helpful.

I think the first and foremost is that you have to have a long-term view. You can't make decisions based on what is going on right now in this moment. Again, as I mentioned before, this is a complex environment we're in. We don't know how long dislocation is going to last, and we don't know what the new normal is going to be. Some of these things are a result of what's happening, which we ultimately hope will be solved, particularly as the medical solution is evolved. But we also have to look at the overall diversification of our portfolio and our footprint to make sure that we're sort of minimizing our exposure in the markets that we think have outsized risk to the factors that you described.

Okay. Great. And then if I can get one more, Tom, for you. Your biggest brand is Embassy Suites, talk about that a lot. The -- many factors and sources of demand that, that generates. How has that brand performed over the last couple of months and into July? And then can -- are there any discernible trends in how different brands are performing within your portfolio?

Yes. Happy to answer that, Neil. The performance of Embassy Suites for the quarter in our write-up was about 15% occupancy, roughly, when we look at the brand performance. And remind you that quite a few were closed during some of that month. So it's -- that's an all-in number, for instance, that. And out of the 21 assets, 12 were in that number that were actually opened. In the month of June, it's improved where it ran 22%, and then we started to open some of those assets because of the opportunity that we learned where the demand was available in the market. Again, in July, we feel good about how that's performing. In fact, I was on the call with Hilton yesterday about how that brand is performing, and it's in the all-suites brand portfolio, obviously, Homewood Suites, Home2 and Embassy Suites. And I think one of the key drivers for Embassy Suites is what we talked about earlier. It's the 2-bay suite. It's the opportunity that it's a value proposition. And as we've always seen within Embassy Suites over the last 20 years, that brand out-indexes other brands because of that value proposition during the down cycle. And certainly, we're in one right now.

We think when we look at small groups and what's been attractive for the Embassy Suites brand, that fits exactly in that area where people want that 2-bay so they can have kids in 1 room while the parents are watching TV in the other room, is an example of that. So we feel good about what's happening. Even though we're in a unique environment, we're tackling this opportunity with -- going after business that the Embassy Suites brand attracts.

Yes. And Neil, to sort of toggle on to some on Tom's comments. I mean the -- during the second quarter, our all-suite product gained, as I mentioned in the prepared remarks, 2,000 basis points of market share and are sitting at 135% share within their set. The majority of those are Embassy Suites. Some of the stats around the second quarter that Tom mentioned are influenced by the cadence with which we opened the hotels. But we remain confident that Embassy Suites is well positioned to outperform. They had a strong July. And so we think both Embassy Suites as well as our all-suites hotels are going to be a difference maker for our portfolio in this environment and as we come out of it.

And the last point that I would add to that is that, as we mentioned before, 40% of our open hotels were breakeven at the EBITDA level, and 68% of those were suite products.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Leslie Hale for closing remarks.

Thank you, guys, for joining us today. As we discussed on the call, there's no denying that the entire lodging industry is continuing to face extreme challenges. However, RLJ is situated well with our strong liquidity, our lean operating model and our favorable position with the asset type and our geographic footprint.

I hope that you and your families stay safe and that you guys find a way to enjoy this unusual summer. Be well, everyone.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and have a wonderful weekend.