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Text: If you do not yet have a copy, you can access them on our website.
We are providing that information as a supplement to information prepared in accordance with generally accepted accounting principles.
With us on the call today are John Arabia, President and Chief Executive Officer; Bryan Giglia, Chief Financial Officer; and Chris Ostapovicz, Chief Operating Officer.
I'll start with a review of our second quarter operating results, which materially exceeded our expectations and pushed the company back into profitability sooner than expected.
I will also provide an update on the current operating environment and forward booking trends, which continue to provide strong signal of continued growth in the third and fourth quarters despite the uncertainty surrounding COVID-19.
Last, I'll provide an update on our most recent hotel investment, Montage Healdsburg, and the potential for additional acquisitions of long-term relevant real estate.
Bryan will later provide more details on our liquidity, earnings and dividends as well as an update of our recent finance transactions, which have materially increased our near-term investment capacity.
To begin, let's talk about our second quarter operating results.
Building on the better-than-anticipated results of the first quarter, second quarter materially exceeded our expectations with comparable 17-hotel portfolio revenues of $104 million, and RevPAR of $96.
RevPAR at all of our open hotels, including Montage Healdsburg, was $107, made up of an average daily rate of $235 and an occupancy of 45.6%.
While the comparison to the second quarter of 2020 is of little value, the open hotel RevPAR of $107 in the second quarter was more than double the open hotel RevPAR of nearly $48 achieved in the first quarter of this year.
Furthermore, our occupancy, ADR and RevPAR have each increased meaningfully on a sequential basis every month this year, and our June RevPAR of almost $130 was nearly 5 times that of the $27 comparable RevPAR achieved this past January.
While we still have a ways to go, the trajectory of the recovery has been far steeper than expected.
As a result of the better-than-expected second quarter results, hotel EBITDA was positive each month of the quarter, which is the first time we achieved this important milestone since the fourth quarter of 2019.
This is a testament to the efficacy of zero basing expenses, the efficiencies in our operations, the diligence of our managers and the proactive investment and operating decisions made during the depths of the pandemic.
When we last spoke on our first quarter earnings call, we shared that we expect to return to quarterly corporate profitability in the second half of the year.
I'm happy to report we achieved this goal in the second quarter at least three months ahead of schedule.
So let's dig into some of the details of our quarter.
While occupancy in all segments grew quarter-over-quarter, transient demand continues to be the shining star and transient room nights more than doubled compared to the first quarter.
Leisure demand continues to be incredibly strong, including in nontraditional leisure destinations, and commercial demand continues to demonstrate improvement as more people get back to business.
While special corporate demand for the portfolio is still only around 20% of normal levels in the second quarter, several of our hotels, including Hilton San Diego Bayfront, Embassy Suites La Jolla, Hyatt Regency San Francisco and Hyatt Centric Chicago, witnessed a meaningful acceleration in special corporate room nights.
Even more encouraging is the strength of transient pricing with our second quarter transient rate at $253.
Even after adjusting for the acquisition of Montage Healdsburg, our second quarter transient rate still approach that of the same period in 2019.
Despite several urban markets still lagging compared to pre pandemic levels, our resort hotels, specifically Wailea Beach resort and Oceans Edge, each achieved higher RevPAR than in the same time in 2019, up 4% and 79%, respectively.
The performance of these hotels was driven by occupancy approaching pre-COVID levels with significantly higher room rates compared to '19, running 30% higher at Wailea Beach Resort and up a staggering 91% at Oceans Edge.
The outsized rate growth at Oceans Edge is a direct result of our strategy to elevate the guest experience to match its superior physical offerings and then price the resort accordingly.
Following our acquisition of the hotel in 2017 and the implementation of several asset management initiatives, the rate growth at Oceans Edge has been more than twice that of the Duval Street adjacent resorts.
Additionally, our recent acquisition, Montage Healdsburg, has performed favorably to our initial estimates, running at an average rate of over $1,000 in the second quarter.
We continue to believe that our outstanding hotel product in these sought after markets and a desire by travelers to spend time in special locations gives us a competitive advantage and further justifies our strategy of owning long-term relevant real estate.
Now let's take a closer look at our quarterly group performance.
Though presently a smaller percentage of occupancy than is normally the case, group business also experienced growth beyond our expectations.
Group business contributed approximately 80,000 room nights in the second quarter, up from 51,000 room nights in the first quarter, and the outlook for the third and fourth quarters indicate significant sequential improvement.
Not only has attendance in several recent group events across the portfolio exceeded projections, but short-term lead volumes and new group functions have increased significantly in recent months.
For example, Hilton San Diego Bayfront, Boston Park Plaza and JW New Orleans each witnessed second quarter lead volumes approaching pre-pandemic levels.
Similar to the last quarter, we saw corporate and association groups holding their meetings as planned and group pickup was better than anticipated.
Several of our larger group of hotels, including Hyatt San Francisco, Boston Park Plaza and Renaissance Orlando, had several groups that picked up over 90% of the contracted blocks in the second quarter, which was substantially higher than we forecasted.
With these dynamics in place, we expect to see a steady acceleration in group meetings, including citywide, corporate and association meetings for the remainder of the year holding out other variables constant.
But rooms revenue was not alone and growing substantially on a sequential basis, Food and Beverage revenues increased by 2.5 times in the second quarter representing a 22% increase in food and beverage spend per occupied room and other revenues doubled as higher occupancy drove ancillary revenues such as parking.
Catering revenue per group room night also increased by over 2.5 times as corporate group and associations returned.
Not only are more guests staying in our hotels, but they are increasingly ready for the complete hotel experience and embracing our facilities and amenities as they reopen.
As a result of these factors, our comparable total revenue per available room, or TREVPAR, increased from nearly $60 in the first quarter to over $138 in the second quarter.
While we are pleased with our portfolio's financial improvement, we are equally pleased that our guest satisfaction scores remain very strong.
For example, travelers on TripAdvisor recently ranked Oceans Edge as one of the top 10 hotels in Key West, up from 24 at the end of 2019, even with a massive increase in ADR. These factors give us confidence that the rate increase is sustainable, and additional growth is achievable.
Again, we are seeing the benefits of the portfolio transformation completed in recent years as well as the operational investment decisions made during the depth of the pandemic.
As we look forward, we are mindful that since early July, there has been a spike in COVID cases, particularly among the unvaccinated and areas such as Florida and Texas.
The recent spike in cases may result in reinstituting travel restrictions, mask mandates and vaccine mandates in certain locations, which could postpone the eventual travel recovery.
That said, we have not yet witnessed meaningful evidence that the spike in COVID cases has had a material impact on the trajectory of the lodging recovery.
Rather booking trends for all segments continue to accelerate despite increased COVID cases in numerous parts of the country.
This is evident in our continued sequential monthly RevPAR improvement in July.
Through July 29, our 17 open hotels generated RevPAR of approximately $165, made up of a 62% occupancy and a $266 average daily rate.
July's occupancy, ADR and RevPAR all increased meaningfully over the prior month, continuing the trend that started last year.
Our July RevPAR represents a $35 increase from June and is $138 higher than that experienced this past January.
As we evaluate expected group activity for the rest of the year, we anticipate increased demand for corporate and association meetings.
The citywide calendar in many of our primary markets are very encouraging over the next several quarters and over 30% of our group room nights on the books for the fourth quarter are for citywide events.
Citywide events are planned to resume in San Diego, Boston, New Orleans, DC and Orlando.
That said, given the uncertainty around COVID, our operators have prudently assumed that the group room blocks will travel at significantly lower levels than historically been the case.
This assumes that attendees continue to make attendance decisions in relatively short time frame and are influenced by evolving COVID data and trends.
For example, in Orlando, a number of citywide groups relocated dates into the August to October time frame from prior periods, but the team is forecasting higher than normal slippage on these programs and is anticipating softer performance for the larger conventions in the fourth quarter.
However, based on early trends, there may be upside potential in some markets from taking this conservative approach.
As previously mentioned, several recent groups have picked up 90% to 100% of their room blocks, which was well in excess of our forecast.
While this will not be the case for every group, it is a far cry from the muted group attendance we initially feared.
These are just a few instances of the evolving citywide and group landscape that gives us confidence that the positive trends established in the second quarter are likely to continue this pent-up group demand gets back on the road.
In-house group business has also witnessed positive trends.
Increased vaccinations and the easing of travel and in-person meeting restrictions have given meeting planners a greater comfort level that their events will move forward.
This has resulted in stronger group leads, more confirmed events and more participants planning to attend.
In-house group demand has been broad-based and includes incentive trips from technology and pharmaceutical groups of Wailea; retail, medical and financial services groups at the Hilton Bayfront; state and regional associations at the Renaissance Orlando; and a medical company at the Hyatt San Francisco.
With the number of vaccinated people growing every day, we are optimistic that group activity should continue on this trajectory.
Based on these assumptions, we expect group to make up an increasingly larger part of our room mix and revenues in the second half of 2021 and specifically in the fourth quarter.
On average, group rates on the books for the remainder of 2021 are higher than the rates on the books for the same period in 2019.
Furthermore, given the anticipated increase in corporate and association group business, we also anticipate that banquet spend for occupied group room will increase substantially compared to the first half of the year when government and rooms-only group characterized most of the group room mix.
Supplementing the return of corporate and association travel, local social business should be robust in the third and fourth quarters including a record numbers of weddings expected in the second half of the year.
From corporate events, social gatherings, people are motivated to get together and celebrate.
In addition to the more optimistic outlook for group business, transient trends have steadily improved.
While our net transient reservations are still short of normal levels, bookings continue to accelerate.
Our trailing six-week booking trends are now down only 10% to 15% compared to the same time in 2019, which marks a substantial improvement from the 80% to 90% declines we saw in the first of the year and the 40% to 50% declines we saw going into the second quarter.
The booking window, though, still relatively short term, continues to expand.
While leisure demand was the first to come out of the gates, business transient demand is expected to pick up in the third quarter and accelerate following Labor Day as companies continue to return to the office.
Moving to our recent investment activity.
We are excited to discuss the strong performance of Montage Healdsburg, which has exceeded our underwriting.
While we are confident that this hotel would perform well, the ramp-up in rate and occupancy has surpassed our expectations in each month of ownership.
During the quarter, the hotel ran an occupancy of 61% at an average rate over $1,000 and in July, the hotel ran at over 70% occupancy at a rate of nearly $1,250.
We are seeing broad-based demand from the wine country and strong interest from transient and groups alike.
In the second quarter, we experienced transient compression on weekends and stronger-than-anticipated group demand during the week.
Profitability also outperformed with the hotel achieving positive EBITDA ahead of schedule in the second quarter.
Looking forward, there's a lot to be excited about.
The hotel has received extraordinary reviews, which has translated into strong group leads and is preparing for its second full property buyout since our acquisition.
Layering in group with already strong transient will help drive additional success at this standout resort.
Since our last earnings call, we executed upon a number of balance sheet enhancement transactions, including the issuance of two record-setting series of preferred equity and another favorable amendment to our unsecured debt agreements.
Not only will these transactions provide us with an advantageous cost of capital that will result in greater FFO growth, but they unlock meaningful debt capacity that we can use to pursue additional acquisitions of long-term relevant real estate.
We expect to be acquisitive and can do so without relying on the often fickle equity markets.
This is a significant advantage that is not shared by many others, and one we plan to take advantage of to enhance the quality, scale and earnings power of our portfolio, while increasing NAV per share.
To sum things up, performance in leisure and group segments in the second quarter set the stage for increased optimism in the second half of the year despite the ongoing threat of COVID-19.
Based on forward booking information, we believe the portfolio is on track for continued improvement as the year goes on.
Furthermore, we are in the enviable position to use our strong balance sheet and debt capacity to grow the company and to create value for our shareholders.
As of the end of the quarter, we had approximately $210 million of total cash and cash equivalents, including $47 million of restricted cash.
Adjusting for the issuance of our Series I preferred stock and the expected redemption of our Series F, our pro forma total cash balance at the end of the quarter would have been approximately $235 million.
In addition to cash on hand, we also maintained full availability on our $500 million revolving credit facility.
During the quarter, we executed another favorable amendment to our unsecured debt agreements, which removed the restrictions limiting the amount of unencumbered hotel acquisitions we could fund from existing liquidity during the covenant relief period.
Even after deploying a portion of our excess liquidity in the second quarter, our balance sheet retains significant capacity, and this most recent amendment better positions us to use that capacity to grow the company through additional acquisition of long-term relevant real estate.
We appreciate the continued partnership and support from our long-standing lender and noteholder relationships.
As John mentioned, since our last earnings call, we also executed upon two additional balance sheet enhancing transactions through the issuance of both our 6.125% Series H preferred and our 5.7% Series I preferred.
Proceeds from these two transactions, both of which were record-setting low coupons at the time of issuance, are being used to redeem higher cost existing preferred equity and will reduce our comparable preferred dividends by $1.5 million per year.
Given the attractive pricing and strong demand for our most recent offering, we elected to upsize the Series I transaction to take incremental proceeds.
Preferred equity is an increasingly important part of our long-term capital structure and as a result of the acquisition and financing activity in the quarter, we have increased our exposure, and we'll have three attractively priced series of preferred stock outstanding.
Second quarter results reflect an improving operating environment driven by continued strong leisure demand and an increasing amount of commercial transient and group business.
Second quarter adjusted EBITDAre was $15 million, and second quarter adjusted FFO per diluted share was a loss of $0.01.
These results far surpassed our previous expectations and marks the return to positive corporate EBITDA, a full quarter sooner than we had previously projected.
While total FFO was marginally negative in the second quarter, we expect it to also resume quarterly profitability going forward.
Now turning to dividends.
We have suspended our common dividend until we return to taxable income.
Separately, our Board has approved the quarterly distributions for our Series H and I preferred securities.
With that, we can now open the call to questions.

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q2 adjusted ffo loss per share $0.01.

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