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Text: Neil, you may begin.
We are fortunate to have some encouraging news in the macro environment that could provide a tailwind to our team's efforts across the last eight months.
Emerging consensus around the split government removes an area of uncertainty for business and local governments.
And Monday's announcement of a vaccine and other therapeutics, while not a panacea should ultimately be a catalyst for business and international travel.
It will take time to distribute and it will likely be several more months for large companies to encourage travel again, but there is more visibility today than there has been across the last few quarters.
This said, the hotel sector is still has plenty of wood to chop and the seasonally slower fourth and first quarter will make continued gains in RevPAR and reductions in cash burn more challenging.
We continue to plan for a sluggish recovery in 2021, gaining momentum in the back half, followed by a more robust growth in 2022 and 2023.
We are encouraged by the recent news, but remain razor focused on reducing cash burn and shoring up liquidity as we close out this challenging year.
I'm going to touch on operations and capital allocation before turning it over to Ash for a deeper dive on cash burn and liquidity planning.
Last March, we took immediate action to shore up our liquidity and mitigate expenses by temporarily closing hotels.
Our primary goal in the second and third quarter was to minimize cash burn while reopening our hotels.
We achieved this goal as we now have 37 of our 39 wholly owned hotels open and operational with the two remaining closed hotels under contract for sale.
This sets up our portfolio to capture incremental demand through the end of the year and to continue to gain market share during the early stages of the recovery in 2021.
Our ability to stay nimble and leverage our flexible operating model in close connection with our independent franchise operator allowed us to reopen our hotels in a timely and cost-efficient manner.
This relationship coupled with our cluster strategy to maximize revenues and generate marketing advantage and economies of scale has given us the opportunity to reduce our cash burn rates and breakeven levels and sets up our portfolio to generate cash flow earlier than our peers as we continue to navigate this recovery.
It has also yielded positive results over the prior few months.
Of the 28 comparable hotels that were open throughout the third quarter, 21 of these hotels broke even on the GOP line with nine achieving EBITDA breakeven levels.
Leisure travel remained strong post Labor Day.
Weekends at many of our resorts outpaced pre-COVID performance and even provided a base during the week as many travelers have been able to take advantage of remote working and learning, lower gas prices and limited weekend sports engagements and other social activities.
TSA data continues to improve sequentially week over week.
Drive-to resorts have been our strongest performers since the inception of the pandemic and that continued through the typically robust summer months.
Our Sanctuary Beach Resort was the best performing asset again during the third quarter, ending the period at 81% occupancy with a $570 ADR, which led to 16% RevPAR growth.
Success continued in October, despite worries that leisure travel would subside after Labor Day as the resort grew RevPAR by 22% aided by 55% ADR growth and 70% occupancy.
Down the California coast, the hotel Milo in Santa Barbara continued its momentum from the second quarter and finished the summer on a strong note with third quarter ADR in line with last year, aided by a very strong September, which saw 70% occupancy and 11% ADR growth.
Down in Miami in South Florida, the case count escalation in June and July led to beach closures, restaurant and bar restrictions and curfews which stifled demand all summer.
Since Labor Day, drive-to traffic began to return as Miami and Key West have opened beaches and have loosened restrictions on restaurants and bars.
We have been able to win market share and saw an occupancy bump of 1500 basis points versus August for our South Florida portfolio and that momentum continued into October, as our portfolio occupancy grew another 500 basis points for the month.
By the third quarter, we began to see Northeastern and Midwesterners flying to Key West and Miami despite COVID-19 concerns.
This pent-up demand has continued in the fourth quarter as we are seeing positive trends for our portfolio entering the peak travel season for South Florida.
Rates around the holiday week between Christmas and New Year's are already in line with last year and with a strong 30% occupancy already on the books across our South Florida portfolio, we believe demand will continue to pick up as we move through the holiday season.
Pre-COVID our resorts portfolio, all the drive-to from one of our gateway market clusters contributed 25% of our EBITDA.
In 2020, these hotels will be among our top cash flowing hotels.
75% of our portfolio remains gateway urban markets.
These markets have lost not only business, international and group travel but have very few attractions for leisure travelers until cities open back up.
Our teams have done an admirable job reducing cash burn and ramping to breakeven in this very low demand environment.
As we continue to reopen hotels across our markets, we saw a change in traveler walking through our doors.
During the summer, we moved from first responder business to our new normal traveler, elective health-care workers and patients, design and construction teams outfitting offices to become COVID-compliant, professional sports teams quarantining during their abbreviated seasons and personnel related to content and entertainment production on-site around the country as studios remain shut and even the occasional micro wedding or corporate buyout.
Traditional corporate travel didn't return with its usual force post Labor Day, however across our urban markets there were employees staying in our hotels to avoid mid-week commutes, smaller businesses utilizing hotel rooms for office day use and even corporate buyouts for smaller meeting space.
September and October have seen a continued increase in these unique travelers staying in our hotels.
We've been working with local universities, housing students at The Boxer in Boston allocating inventory at our Annapolis Waterfront Hotel approximate to the US Naval Academy and continuing to work with universities in many of our urban clusters for the upcoming spring semester by offering alternatives for the new housing protocols that are likely to persist through the end of the school year in 2021.
In New York we saw success around staycation packages in Brooklyn, production teams in Tribeca hosting virtual Fashion Week events, government census workers in White Plains and a pickup in higher rated corporate business from the leading financial services and consulting firms that stay at our Hyatt Union Square.
In California, our select service hotels in Sunnyvale housed relief business related to the wildfires while in Washington DC, our Capitol Hill Hotel has seen increased bookings from elevated Supreme Court and congressional activity.
On the West End in Washington, our St. Gregory successfully contracted with various media outlets for increased coverage leading up to the election last week.
We've expected that a lodging recovery is likely to be in lockstep with medical investments as it pertains to rapid testing, therapeutics and ultimately a widely distributed vaccination.
Recent developments point to a recovery year in 2021 and we believe the recovery will be most pronounced in our core markets, highlighted by Washington DC, which is a historically strong market following an election year.
New administrations bring jobs, increase lobbying on the hill, the likely return of higher rated foreign delegations and an overall increase in corporate and leisure travel.
The Washington DC market has been an underperformer during the past few years, but we believe that a new administration will spark growth to the region aided by the aforementioned catalysts, reduced supply and the reopening of the city's unique demand generators.
We've seen from prior years that the first quarter, following the election and January specifically, proved to be a very strong period in this market, whether it's an incumbent or a de novo president.
During President Obama's second inauguration in 2013, our portfolio generated 23% RevPAR growth during the quarter.
In the first quarter of 2017, following President Trump's inauguration, our portfolio RevPAR grew by 15% with 57% growth on the night of the inauguration.
The upcoming inauguration is leading to early reservations across our portfolio at rates we have not seen in Washington DC in many years.
We believe our unique portfolio in Washington spanning select service, independent and lifestyle and luxury is very well positioned to capture the increased demand to the market during the first quarter as well as throughout 2021.
The recovery in 2021 is not just predicated on favorable comps and increased travel but also on deteriorating supply.
We have already seen the headlines and consultant forecasts for New York City.
20% of New York's total hotel room count, about 25,000 keys could permanently close and every week we seem to be seeing this forecast come to fruition with another permanent closure.
New York City is dominating the headlines but there are corners of every market filled with distressed assets that were troubled to produce margin growth even before the pandemic.
These assets were functionally obsolete prior to the pandemic and their closures will improve the long-term supply picture in many of our markets.
The other side of the supply picture is the development pipeline.
Recent reports from Smith Travel have showed a large increase in the number of development projects that have moved from either the planning or final planning stages into either the deferred or abandoned buckets.
Industry experts believe this could equate to more than 13,000 rooms.
Year-to-date through September, 211 projects in the US representing 56% decrease in the pipeline over the same period last year.
These are staggering figures that could continue to increase as our industry works through the recovery and even mirror the great financial crisis when the supply pipeline declined from a peak of 212,000 rooms at the end of 2007 to 50,000 rooms in early 2011.
Before Ash takes a deeper dive into expense savings and burn rate reductions I want to spend a few minutes on our capital allocation strategy and sources of additional liquidity.
As a quick reminder we have announced accretive binding sales agreements on four assets in our portfolio with total expected net proceeds of $70 million.
We remain optimistic that these transactions will close but we have provided extensions to the buyers through Q1.
With today's release we announced a fifth disposition, the Sheraton Wilmington, Delaware.
We began this process in the summer and are very pleased with a relatively quick execution in today's environment.
New Castle County of Delaware is acquiring the hotel for an additional $19.5 million in proceeds.
This is about a 2% cap on 2019.
These first five transactions are all smaller, non-core hotels and we are pleased with the pricing within 10% to 20% of pre-COVID values and at a combined 21 times EBITDA multiple on 2019.
Last quarter we discussed exploring additional asset sales if we saw improvement in the transaction environment.
Across the last 90 days, even before the election or the vaccine, there has been a meaningful improvement in the availability of debt for higher quality, lower cash burn hotels.
In addition to private equity firms, there has been an increasing diversity of buyers, credible family offices, international capital and new domestic entrance to hospitality.
We assessed future sale candidates in our portfolio by triangulating buyer interest, capital requirements or age of hotel and expected growth rate.
The additional five hotels we launched for sale in September and October are emblematic of our portfolio and are highly sought after in this environment.
These simple hotels that have remained open throughout the pandemic are unencumbered of management and onerous labor contracts or are even unencumbered of brands and in some cases have assumable financing and are approaching break-even levels.
These characteristics do make these hotels more valuable as visibility increases.
We will see where values come out in the coming months and balance liquidity today with reversionary growth tomorrow.
But judging by early interest, we do expect to complete several more dispositions across the next couple of quarters.
At this time we view hotel sales as the lowest cost alternative for capital today as discounted hotel sales provide relatively quick liquidity and do not encumber our capital structure or permanently dilute our equity.
As you may know, the management and board of Hersha are among its leading shareholders and across this year we have continued to buy our common equity in the open market as we consider it a remarkable value for an exceptional portfolio.
We've constructed a portfolio with high absolute RevPAR, sector leading margins and minimal capex requirements for the foreseeable future, all in the most valuable markets in the United States with few if any encumbrances.
Our portfolio is both attractive to a vast buyer pool and still offers incredible operational and financial leverage to this recovery.
This quarter's successful completion of our hotel reopening strategy that began during the second quarter and concluded with the opening of our two Ritz Carltons would not have been possible without the close working relationship we have with our third-party independent operator.
Due to our focused service strategy we were able to comfortably restart our hotels with the confidence that we can attain GOP breakeven levels within 45 days of reopening.
Results this quarter at our open hotels validated this confidence as the number of hotels that achieved GOP breakeven levels rose over the balance of the quarter.
During July, 21 of our 28 open hotels broke even on the GOP line.
This increased to 22 hotels in August and 25 hotels in September.
Our team's expense saving and revenue management strategies also yielded positive EBITDA results for a portion of our open hotels over the course of the period.
Once again during July, nine of our 28 open hotels achieved break-even EBITDA levels which increased to 11 hotels in August and 16 in September.
Our operational strategy allows us to run our hotels on very lean labor models until demand reaches levels warranting additional staffing.
We're able to do this by applying various cost cutting strategies such as cross utilizing management personnel as well as outsourcing and job sharing within the hotel and across our clusters to lower our overall expense base.
As demand begins to pick back up and occupancy levels start to improve from these low levels, we will begin to phase back in staffing levels and other operating expenses in a very deliberate and calculated manner.
Our model allows us the flexibility to continue to operate our hotels at current staffing levels at our break-even occupancies approximating 35% all the way up to 55% and even 60% at some of our hotels.
With our open portfolio generating 37% occupancy in the third quarter, we estimate that revenue from the next 20 percentage points of occupancy gains should drop down to the GOP line at 75% to 80% flow-through, generating outsized margin gains and highlighting the operating leverage inherent in our portfolio.
We would anticipate seeing these gains in the first half of 2021 as the recovery progresses and margins should continue to see momentum as we get deeper into the recovery in the back half of 2021 and 2022.
We also anticipate labor force headwinds to be much more favorable over the next few quarters with reduced F&B and smaller ancillary service departments such as salons and spas.
This development along with the various expense savings implemented by our asset management and sustainability teams such as grab and go breakfast options, reduced in-room amenities, housekeeping optimization and utility savings should bolster our margins through the recovery and post pandemic.
We estimate that many of these changes will lead to a 10% reduction in housekeeping labor and our preoccupied room cost for items such as breakfast and in-room amenities.
We also believe that there are significant opportunities to reduce our non-housekeeping labor expense.
Through zero-based budgeting we've found ways to operate more efficiently and are confident that these savings will exist even when occupancies return to more normalized levels.
As an example, we currently maintain an average FTE count at our hotels of 21 employees versus 60 FTEs in February of 2020.
Employee counts will increase as occupancies rise but changes in our operating model should allow for additional labor cost reductions in the 5% to 8% range leading to sustainable margin expansion of 150 basis points to 200 basis points post-pandemic.
During the third quarter, steadily increasing occupancies and expense savings enacted during the prior quarter resulted in a reduction of our cash burn across the portfolio.
Our property level cash burn ended the second quarter at $3.4 million and decreased sequentially over the balance of the third quarter with a $2.5 million cash loss on property in July and ending September with a $1.7 million property level cash loss.
This brought total property level cash burn for the third quarter to $5.7 million, 25% below our forecast at the beginning of the period.
At the beginning of the pandemic, our corporate level cash burn which includes all hotel operating expenses, corporate SG&A and debt service was originally projected to be $11 million per month.
Our corporate level burn rate steadily declined over the six-month period ending in September reducing from $10.5 million for April to $6.6 million for July and ending the third quarter with a $5.9 million burn rate in September.
Our corporate cash burn for the third quarter totaled $18.2 million, 32% below our second quarter burn rate and 27% below our initial downside scenario forecast.
Our third quarter and October results which saw occupancies advance over the period despite precarious COVID-19 conditions and fear of a post Labor Day headwind for leisure travel resulted in breakeven levels that improved since our second quarter earnings call.
Based on this quarter's results and our forecast for the fourth quarter, we are comfortable that on a property level basis our entire portfolio breaks-even with a 65% RevPAR decline with occupancies approaching 35% to 40% and a 25% to 30% ADR decrease.
At the corporate level, our RevPAR breakeven occurs at a 45% RevPAR decline factoring in 55% to 60% occupancies at a 20% ADR discount.
Transitioning to an item that is cash flow positive.
After more than two years we've settled our insurance claim related to hurricane Irma which significantly damaged our two largest South Florida hotels the Cadillac and the Parrot Key hotel.
During the fourth quarter, we expect to collect insurance proceeds between $7 million and $8 million which will be recorded in our fourth quarter results.
During the third quarter we spent $5.4 million on capital projects bringing our year-to-date spend to $21.8 million.
We anticipate a significantly reduced capex load for 2021, primarily focused on maintenance capex and life safety renovation, roughly 40% below our 2020 spend.
Since 2017, we've allocated close to $200 million for product upgrades and ROI generating capital projects across more than 50% of our total room count.
Entering 2020 we had substantial built-in growth projections for our portfolio based not only on market demand trends but on these recent capital improvements driving new and loyal customers to our hotels which was unfortunately upended by the pandemic.
The majority of our rooms oriented transient hotels have been renovated to the tastes and preferences of today's traveler and with very minimal capex moving forward, our portfolio will experience very little disruption at the onset and through the recovery.
As of November 1, we've drawn $126 million of our $250 million senior credit facility and ended the quarter with $20.2 million in cash and deposits.
We remain very encouraged by the resiliency of the capital markets throughout this pandemic.
The markets remain open and available at every tier of the capital stack and we've seen the first signs of traditional asset level financing from commercial and regional banks looking to deploy capital into the sector.
We believe there is a significant amount of capital forming both on the debt and equity front that will be seeking attractive opportunities in lodging over the next several years and we're still in the early stages of this capital formation.
We continue to have an active dialogue with our bank group and we plan to accelerate conversations over the next few months regarding the parameters surrounding our covenant waiver test on June 30, 2021.
Until then our lines of communication with our bank group remain open and constructive.
We remain in constant contact with suppliers of the four assets that we announced earlier this year and we recently granted the buyer of the Dwayne Street hotel an extension before in the first quarter of 2021 and this resulted in our receipt of an additional deposit of $500,000 for the transaction.
As none of the buyers need material financing we remain confident these transactions will close in a timely fashion next year.
Over the past week we went under contract for sale for the Sheraton Wilmington in Delaware for $19.5 million and we've received a material hard deposit from the buyer.
We anticipate this sale will close before the end of 2020.
The proceeds from these five transactions will be utilized to pay down our debt and we plan to utilize any additional proceeds received from any of the five assets we currently have on the market for debt pay down and for additional working capital to bolster our liquidity.
As we enter the final months of this unprecedented year for our company and our industry, we look toward our pillars of strength to navigate our passport, our unique owner operator relationship which has yielded significant expense savings over the past nine months, our cluster strategy which maximizes revenues and economies of scale while capturing unique demand opportunities in our market and the more than 20 years of experience in the public markets as a team for Jay, Neil and I. All the while we continue to explore various opportunities to fortify our balance sheet, to give the portfolio extensive runway as we navigate toward stabilized demand over the next several years.
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.

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suspended its full-year 2020 guidance.

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