Chatham Lodging Trust Q2 FY2021 Earnings Call

Greetings, and welcome to Chatham Lodging Trust's Second Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I'll now turn the conference over to your host, Chris Daly. You may begin.

Thanks, Wally. Good morning, everyone, and welcome to the Chatham Lodging Trust Second Quarter 2021 Results Conference Call. Please note that many of our comments today are considered forward-looking statements as defined by federal securities laws. These statements are subject to risks and uncertainties, both known and unknown, as described in our most recent Form 10-K and other SEC filings. All information in this call is as of August 3, 2021, unless otherwise noted, and the Company undertakes no obligation to update any forward-looking statements to conform the statement to actual results or changes in the Company's expectations. You can find copies of our SEC filings and earnings release, which contain reconciliations to non-GAAP financial measures referenced on this call, on our website at chathamlodgingtrust.com. Now to provide you with some insight into Chatham's 2021 second quarter results, allow me to introduce Jeff Fisher, Chairman, President and Chief Executive Officer; Dennis Craven, Executive Vice President and Chief Operating Officer; and Jeremy Wegner, Senior Vice President and Chief Financial Officer. Let me turn the session over to Jeff Fisher. Jeff?

Well, thanks, Chris. Good morning, everyone. I appreciate everyone who's joining us this morning. It is good to be here and talk quite a bit about our quarter and the successes that we had. We became cash flow positive after corporate G&A and after all debt service in April, becoming the second hotel REIT to reach that achievement. For the quarter, we generated FFO per share of $0.10, up $0.36 over the same quarter last year. We successfully executed our first preferred stock offering, which was well oversubscribed, raising $120 million. And using a portion of those proceeds, we are positioned to acquire two incredible premium branded extended-stay hotels adjacent to the Domain in Austin, Texas, a market that we all know is absolutely thriving and will generate meaningful RevPAR growth and EBITDA growth for us going forward. Our RevPAR continues to grow meaningfully each month, driven of course by strong leisure travel, but aided by a bit of business and other non-leisure travel. Our operating margins continue to accelerate, now at 43% and not far off 2019 operating margins of 46%, despite much lower RevPAR. The brands are finally tweaking housekeeping standards and other complimentary service requirements that we have been asking and talking about with the brands for many years. Before I touch on operating trends, I want to emphasize our corporate efforts. We have emerged from the pandemic with a stronger balance sheet and more liquidity than we had going into the pandemic. Our liquidity was $135 million on March 31, 2020, and it sits at $253 million as of the 2021 second quarter. Our leverage ratio was 36% on March 31, 2020, and is now 29%. I'm proud of that, our lowest level in a decade. Reinforcing my point, when EBITDA recovers, many probably don't realize that our debt to EBITDA ratio is going to be lower than it was heading into the pandemic, to 1.5 to 2 full turns lower, excluding the preferred and half to a full turn lower, including the preferred. In April 2020, we raised proceeds of approximately $251 million, consisting of the $116 million preferred offering, $70 million of assets sales at a premium cap rate, a $40 million construction loan, and common equity proceeds of $25 million. We are using $141 million of those proceeds to construct 170 room Home2 Suites in LA, which is expected to open in the fourth quarter, as well as to acquire the 132 room Residence Inn and the 137-room TownePlace Suites in Austin, Texas. All three of these assets are expected to generate stabilized cash yields well over 8%. We've repaid a $13 million mortgage that matures this year and have no debt maturities until 2023. Lastly, I want to highlight that our cumulative cash burn throughout the pandemic was only $35 million, only about $0.70 of lost equity value. Our asset class is going to continue to produce the highest occupancies and profits over the next year or two. I think we'll be among the first to benefit from the return of the business traveler and other non-leisure travelers. We should be cash flow positive from here on out, even if there is a period post Labor Day when leisure travel slows down a little bit. And of course, we expect business travel to start to pick up. We have the confidence to go on the offensive. We've signed a contract to acquire these two hotels after successfully managing our way through the worst era in the history of our industry. As we look to grow our portfolio, we are going to increase our exposure to premium branded extended stay hotels in markets that appeal to a diverse set of demand generators. Our Austin acquisitions are ideal additions to our portfolio, and we are really excited about those hotels. These two hotels are two of our youngest four hotels, with the TownePlace Suites having just opened in June. We expect both hotels will enhance our portfolio RevPAR. The Domain in Austin is a massive, rapidly growing mixed-use submarket within Austin that has seen the highest amount of growth and is one of the fastest growing markets in the country. There is already 4 million square feet of office space in the Domain, with another 3 million under construction and another 4 million planned thereafter. By the way, that 3 million under construction is of course not speculative space; it's mostly all spoken for, with large, mostly tech names that we are very familiar with from Silicon Valley and our ownership and operation in the valley for over 25 years. It includes significant retail and entertainment options, as well as multifamily growth for all the new workers that need to be housed to work in the market that's growing so fast. There's a brand new stadium for the Austin FC that just opened and is already benefiting from other games, such as the U.S. men's soccer team in the Gold Cup and the U.S. women's soccer team in a friendly just before the Olympics. The Domain is home to a who's who of today's top companies including Apple, IBM, Amazon, Facebook, Expedia, Vrbo, Indeed, Trend Micro and many others. As I said, I think our familiarity with these customers, specifically booking rooms, should really enhance our operations, both in Silicon Valley and our ability to ramp these hotels up, particularly the brand new TownePlace Suites, very rapidly. Acquisitions that match our strict underwriting criteria remain difficult to find. We'll stay disciplined, and we'll use our precious capital and our liquidity to acquire assets that are going to be accretive to earnings, value-enhancing, and really are based on a diverse set of demand generators. Certainly, the pandemic has taught us a lot of lessons and being in a market that has the ability to generate great midweek corporate business, yet have the base around it and the demand generators around it to enhance weekend business is obviously very important and will continue to be important. Portfolio RevPAR performance continues to experience meaningful growth month to month in 2021. Second quarter occupancy was almost 70%, and July occupancy was a strong 75%. We are seeing demand from leisure, healthcare, government, military, as well as the business traveler. ADRs are already showing great growth, with a second quarter ADR of $127, far outpacing the July ADR of approximately $152. July RevPAR of $113 is up 18% over June and up 30% over second quarter RevPAR. With only a handful of our 39 hotels located in pure leisure markets, our performance throughout the pandemic and continuing this summer proves the high quality of our assets and the flexibility that we've talked about with the extended stay business model as well as the strength of our operating teams. Our portfolio sees demand from all types of travelers across all segments. We have seen the return of the non-leisure traveler, as evidenced by occupancy patterns that are developing midweek. Our weekday first quarter occupancy was only about 48%, and that's jumped to a weekday occupancy of 65% in the second quarter. I'd like to point out that our RevPAR performance throughout the pandemic continues with this impressive performance, despite what I call sluggish performance in our most significant market, Silicon Valley. Silicon Valley RevPAR was only $73, one of the weakest of our top markets. The first quarter Silicon Valley RevPAR was $54, so it is beginning to show signs of life. We know that most of the tech companies, as you've read about it every day, have said that they will come back to their offices after Labor Day. We've all read about Apple postponing that for about a month or a month and a half because of the Delta variant. But we still hear that other companies plan on resuming office operations, which of course, should favorably impact our RevPAR in the valley. Among our top markets, South Florida remains on fire, and our Fort Lauderdale Residence Inn posted the highest RevPAR of all our top markets with RevPAR of $170, up almost $40 from the second quarter of 2019. Second quarter 2021 ADR was $195, almost $30 higher than in 2019. As we said on our last quarter call, we expected our predominantly leisure markets to excel, and of course, that's what we've experienced. Savannah and Portland, Maine continue to outperform. As we look to the second half of the year, we all know that July and August, as we are living it right now, are going to remain strong. The question everyone is asking— and honestly, nobody knows the answer to— is what's going to happen after Labor Day? The Delta variant, as I said, adds another layer of unknowns. But we do know that in most markets, kids are going back to school in person, companies are getting their employees back in the office, although some major companies have delayed reopening by a month or so. Companies will get their employees back to work, and occupancies, particularly ADR, will rise midweek. We certainly believe that leisure travel is going to remain strong, especially on weekends and holidays. But with kids in school, as I said, and employees back in the office, leisure travel will obviously tick down as the fall sets in. We think that business will continue to cautiously expand their travel patterns. Those travelers will be looking for cost-conscious options, as well as accommodations that allow for longer stays than one or two nights. Obviously, our extended stay hotels suit that perfectly. As the recovery continues and the business traveler comes back, we will continue to gain more than our fair share of revenue, because we've got the largest concentration of extended stay rooms of all lodging REITs at almost 60%, and the business traveler is going to get the most value and flexibility in our kind of hotels. Our upscale extended stay hotels provide us the flexibility during periods of growth or weakness to diversify our customer base and maximize revenue, a thesis we have believed in and espoused for almost four decades with these hotels. With that, I'd like to turn it over to Dennis.

Thanks, Jeff. Good morning, everyone. Albeit two of our 39 hotels had occupancy over 50% in the quarter, that compares to 20 of our 39 hotels in the first quarter. 21 of our hotels had occupancy over 50% in the quarter, with a third of our hotels having occupancy over 50% and a third of our hotels having RevPAR over $100 in the second quarter. Looking at our most recent trends, our portfolio continues to rise. Since the start of the pandemic, we've produced the highest weekly ADRs over the last four weeks and our highest RevPAR over the most recent three weeks. In June, six of our 39 hotels had higher ADRs in 2019 and three of our hotels had higher RevPAR compared to 2019. In July, 14 of our 39 hotels had higher ADRs than 2019 and 11 of our hotels had higher RevPAR compared to 2019. Just this past weekend, over half of our portfolio produced higher RevPAR again compared to 2019. Our most significant brands in the quarter had the highest occupancies, with Residence Inn at 73%, Homewood Suites at 70%, and Hampton having the highest occupancy at 78%, bolstered by strong performance at our Portland, Maine and Exeter, New Hampshire hotels with occupancies of 72% and 85%, respectively. Looking at our top markets, our suburban New York assets in New Rochelle and White Plains had average occupancy of over 90% in the quarter, up from 72% in the first quarter, with ADR of about $150. Our New York market hotels have performed best of our top markets since the start of the pandemic—something you certainly aren't hearing about from any hotels in the Manhattan area. In Los Angeles, we've shifted away from a lot of medical and government-related business to leisure guests visiting Disney and in Southern California, along with some corporate demand in our Marina del Rey, Hilton Garden Inn. In Dallas, we secured a significant block of business related to the immigration department at our downtown Courtyard hotel. In Houston, we're seeing a meaningful increase in demand attributable to the Houston Medical Center and MD Anderson. Our five highest hotels with absolute RevPAR in the second quarter were our Residence Inn in Fort Lauderdale, which Jeff spoke about, our Springhill Suites in Savannah, our Hampton Inn in Portland, Maine, our Residence Inn in New Rochelle, New York, and the Residence Inn in White Plains, all with RevPAR of at least $130. Our top five absolute occupancy hotels in the quarter were the Residence Inn in New Rochelle, the Springhill Suites in Savannah, our Residence Inn in Charleston Summerville, our Residence Inn in White Plains, and our Residence Inn in Fort Lauderdale, all with occupancy of at least 87%. Again, reinforcing the diversity of our portfolio, only two of those five hotels would be considered predominantly leisure hotels. Although our length of stay has clicked down a bit from the first quarter, we continue to see an average length of stay that is much longer than historical levels for our portfolio. At our Residence Inn hotels, our average length of stay was 3.4 nights, which is down from 4.5 nights in the first quarter, but well above the 2.4 nights in the pre-pandemic second quarter of 2021. For our Homewood Suites hotels, our average length of stay was also 3.4 nights, compared to 3.7 nights in the first quarter and 2.7 nights in the 2021 quarter before the pandemic. From an operating expense standpoint, we continue to be hyper-focused on every expense. We've produced incredible cash flow, flow through of 65% on the sequential revenue improvement from the first to the second quarter. On an $18.6 million increase in hotel revenue, we drove an increase in GOP of $12.2 million, which is particularly impressive given the fact that portfolio occupancy rose from about 52% in the first quarter to almost 70% in the second quarter. Because of that significant occupancy jump, we've needed to bring on more staff or use outside labor to service our front-of-house operations as well as service our rooms. We continue to invest in data analysis on the operating expense side. Working alongside Island, we have a best-in-class operating model that drives premium operating margins. We've generated positive GOP and Hotel EBITDA each month during 2021. Our second quarter operating margins were 43% on RevPAR of $87, which is a 43% increase over our first quarter operating margins of 30% on RevPAR of $55. Flow through and operating leverage within our portfolio remain strong. If you look at our 39 hotels, 38 of them generated positive GOP in the second quarter compared to 32 in the first quarter. Even if you look back over the trailing 12 months, only two of our 39 hotels generated positive GOP and six of our hotels generated positive hotel EBITDA. Just a remarkable performance during this pandemic. Our top five producers of GOP in the second quarter were the Residence Inn Gas Lamp in San Diego, which is doing very well despite there being zero convention business downtown; the Springhill Suites in Savannah; the Hampton in Portland, both leisure markets; followed by the Residence Inn in New Rochelle, and then the Courtyard in Dallas downtown. Again, multiple different brands represented in our top five lists. On a pro-occupied room basis for our 39 comparable hotels, payroll and benefit costs were approximately $22, which is down about 27% or $8 from the first quarter cost per occupied room of $30. Our employee count as of the end of the quarter was 1,067, up about 150 employees since the end of the first quarter, but still down about 40% compared to pre-pandemic levels of almost 1,700. The current employment environment remains challenged, and we are doing everything we can to attract and retain talent. We have gotten some traction with the brands regarding housekeeping standards that Jeff talked about. Hilton was certainly the first company to introduce new standards for our guests, where they must opt-in to have the room cleaned. If they do not, rooms will be cleaned less frequently. Our hotels have a longer length of stay, so we should see some meaningful decreases in housekeeping costs that other owners, who have a much shorter average length of stay and more transient guests, will not be able to benefit from, as travelers check in and out more frequently, and rooms will have to be flipped to be resold. On the food and beverage side, you only have one or two dedicated employees in a select-service hotel anyway to manage breakfast and the evening complimentary cocktail hour, which again, as we've talked about over the last couple of quarters, the extended stay hotel brands have generally eliminated all evening cocktail hours. So we should, and we have, seen savings there. We're also looking forward to limited items on the breakfast menu relative to what it was prior to the pandemic, which again should help with some savings. In addition to the expected labor savings based on feedback from premium travel brands, we have worked with owners to reduce the offerings provided. Of course, complimentary breakfasts are still getting up to speed as coronavirus-related restrictions have lessened, but we are seeing a nice reduction in costs. Compared to the second quarter of 2019, our complimentary food and beverage costs have come down 55% from that period. Our breakfast cost per occupied room has decreased from about $2.90 to about $1.84 in the 2021 second quarter, a decrease of 37%. And of course, since the elimination of evening hospitality hours, our costs have decreased by essentially $300,000 from 2019. On the CapEx front, we spent approximately $2 million in the quarter, with our budget for the full year still set at about $6.5 million, excluding the Warner Center development. Regarding our Home2 Suites at the Warner Center in Los Angeles, we have spent about $59 million on that hotel versus a budget of $70 million. As Jeff mentioned, we look forward to that opening in the 2021 fourth quarter. So with that, I'll turn it over to Jeremy.

Thanks, Dennis. Good morning, everyone. Chatham's Q2 2021 RevPAR of $87 represents a 57% increase versus our Q1 RevPAR of $55. During the quarter, RevPAR increased from $75 in April to $88 in May and $96 in June, with Q3 off to a great start at a RevPAR of $113 in July. Our $87 Q2 RevPAR represents a 39% decline compared to a RevPAR in Q2 2019, while our July 2021 RevPAR of $113 represents a decline of 26% versus July 2019. Through our significant efforts to contain costs, we were able to generate a Q2 hotel EBITDA margin of 31.2% and a GOP margin of 43.3%, which are quite strong in light of the $87 RevPAR in the quarter and are higher than many other hotel owners' margins before the pandemic. Our Q2 2021 hotel EBITDA was $15.6 million, adjusted EBITDA was $12.5 million, adjusted FFO was $0.10 per share, and cash flow before capital, which represents hotel EBITDA less corporate G&A, cash interest, and $2.1 million of principal amortization, was positive at $4 million for the quarter. I think it's worth noting that these solid results were achieved even with a very limited amount of business travel demand in Q2. Some of our largest and most profitable hotels before the pandemic, like the four Residence Inns in Silicon Valley and the Residence Inn in Bellevue, are very dependent on business travel and have seen the least amount of recovery of all our hotels to date. Whenever business travel starts to recover in a more meaningful way, our portfolio should experience significant upside from its current performance. Chatham's portfolio has demonstrated remarkable resilience during the pandemic, and our unique focus on extended stay hotels has enabled us to get through the worst of the pandemic with significantly less cash burn than most of our peers. In addition to the outperformance of our hotels during the pandemic, as Jeff mentioned earlier, we have taken several actions to reduce leverage and increase liquidity during the pandemic in ways that won't reduce the long-term upside for shareholders as performance continues to recover. Over the past year, the steps we have taken, such as selling the Residence Inn in Mission Valley at a 6.5% cap rate, obtaining a construction loan for our Warner Center development, issuing $120 million of perpetual preferred equity, and issuing a very limited amount of common equity have generated over $250 million of incremental liquidity. From Q2 2020 through Q1 2021, our cash burn before capital was only $35 million. We are coming out of the pandemic with a stronger balance sheet and significantly more liquidity than we had going in. At June 30, we had $253 million of liquidity between our unrestricted cash balance of $131 million and $122 million of available credit from our revolving credit facility. The $120 million preferred equity offering we completed in Q2 closed on June 30, which is why our cash balance was so high at the end of the quarter. On July 1, we used the $116 million of net proceeds to repay credit facility borrowings. After we closed the acquisitions of the Residence Inn and TownePlace Suites in Austin at the Domain for $71 million, our pro forma Q2 liquidity will be $182 million. Our monthly free cash flow is now meaningfully positive, so we expect our liquidity will continue to increase going forward, even when there is a reduction in leisure travel after the peak summer months and even if the expected recovery in business travel is pushed back a couple of months. Our positive free cash flow and our solid liquidity put us in an excellent position to opportunistically pursue attractive investments. In addition to coming out of the pandemic with a better balance sheet than we had going in, we're also going to be exiting the pandemic with a better hotel portfolio than before. The pending acquisitions of the Residence Inn and TownePlace Suites in Austin, which are expected to close in the near future, and the completion of the development of Home2 Warner Center, expected in Q4, will meaningfully enhance Chatham's growth and the quality of our portfolio by adding three newly constructed high RevPAR hotels in markets with very strong demand growth. We are very optimistic about the future given the potential for significant improvements in operating performance as business travel begins to recover, the growth we expect from the Austin acquisitions and the Warner Center development, and our ability to pursue additional growth opportunities given our strong balance sheet and significant liquidity. This concludes my portion of the call. Operator, please open the line for questions.

[Operator Instructions]. Our first question is from Aryeh Klein with BMO Capital Markets. Please proceed with your question.

Thanks, and good morning. Maybe first just on the labor front. I think there are probably 1,000 basis points below 2019 on occupancy, and I think you mentioned 40% below FTE. So could you just talk about that dynamic and whether you are where you want to be from a hiring standpoint? Where do you think you will end up, and are you having to increase pay at all as you bring on new employees?

Thanks Aryeh, this is Dennis. Listen, we're not at an ideal staffing level, that's for sure. We are supplementing our current labor numbers not only with additional overtime for those employees, but also casual labor, which is obviously generally more expensive. In certain of our markets, we have had to increase our pay levels. But you know, we were just talking with the operation side yesterday about kind of the challenges that we've seen as we've toured some assets in the Boston area. Even though there might be some premium hourly rates at the moment, as the labor pool expands, there might be an opportunity to reset some of those increases as you start to replace or hire additional employees. So, it is a bit more costly at the moment, but we're certainly not of the belief that hourly wages will just continue to rise as the employment and labor force starts to become more available.

Got it. And then just on the seasonality of the business, typically we'll be seeing debt in the fourth quarter. Trends are still continuing to improve, but we may have this lag between leisure and business recovery. So I guess that's how should we think about the fourth quarter relative to what we normally see from a seasonality standpoint?

I'll start, and then Jeff can add in. We expect there to continue to be seasonality in our portfolio. Generally, August tends to be a bit less busy than July; September is usually a bit slower than August, and then October is typically one of our strongest months of the year. So, we expect to see that seasonality continue, as we saw even in the first and second quarters of this year. So, we don't expect different trends. We do believe, as Jeff talked about in his prepared remarks, there will be some unique aspects. We expect leisure to remain strong on weekends and holidays in the fall, and the real question is, what midweek business travelers will do and how quickly that will ramp up post Labor Day.

I couldn't do any better. Thanks, Dennis.

Alright, thanks for the call, guys.

And our next question is from Anthony Powell with Barclays. Please proceed with your question.

Hi, good morning. Just a question on the transaction environment. Obviously, branded, upscale extended-stay hotels have outperformed the past several quarters and through the pandemic. Have you seen values for these hotels reach or exceed pre-pandemic levels? How does that impact your ability to do more deals this year and next year?

Hey, Anthony, it's Jeff. Well, you certainly got the drift of what's happening in the market. I would say that values are certainly at or pretty close for almost all limited service products to pre-pandemic levels, 2019 valuation. That's why I said it's a difficult environment, and we're just having to work really hard to kind of pick and choose—I would say, cherry-pick— a few opportunities on a direct basis that might be out there for some folks and some developers that just want to recycle some capital or have other reasons, whether it's a partner issue, age, estate planning, or needing to fund hotels that suffered significantly during the pandemic. I'm not going to lose them, but I would like to gain some liquidity. Those are the circumstances in which we can occasionally take advantage of, mostly because of our long-standing direct relationships with owners and developers within the Marriott and Hilton franchise community, which really plays a significant role at this time. However, extended stay hotels are hard to come by within the limited service subclass of hotels due to how well they have performed relative to most other brands.

And do you think this dynamic will lead to a faster resumption of development in supply growth than you originally thought?

I still think there are plenty of financing constraints on that front, more than we initially thought. More importantly, pricing for construction has increased. Dennis and I were sitting with our contractor in the construction trailer two weeks ago, and I asked, "So what's this going to cost me to build if you are pricing it today?" They looked around at each other and came back, saying, "Jeff, at least 25% more." When you look at that kind of increase, even if you assume 2019 RevPAR, and then add some growth, a lot of deals simply don’t pencil out for developers. You may see a slight sequential decrease. I read Marriott's numbers—it's small but larger than what you're reading. While we feel good about where we came from and where we're headed, it's important to remember that Chatham has experienced a disproportionate share of supply increase in Silicon Valley, in Bellevue, Washington, and in many other areas. Most of our hotel clusters experienced an influx of new competitive brands prior to the pandemic. So, that presents somewhat of a barrier to entry for us.

Got it. Maybe just one more unrelated question. In markets like Fort Lauderdale or Portland, where you're charging more than you did in 2019, guests aren't getting daily housekeeping or the breakfast may have been downgraded. How are the guests reacting? Are they okay with that? Are they complaining? What's the kind of reaction on the ground?

Generally speaking, as we look at our guest service scores and customer complaints, the uptick has not been significant, even in places like Portland, Maine, where we're charging more than before. So, that experience has been quite good, frankly. We'll see how that continues moving forward. But, so far, so good. I think people are very happy, obviously, just to get out of their house, get into hotels, and experience the markets they are visiting.

Our next question is from Kyle Menges with B. Riley Securities. Please proceed with your question.

Good morning, this is Kyle on for Brian. I was hoping you could provide a little bit more detail on the two announced acquisitions and how they were sourced. Any cap rate or expected return information would also be helpful?

Yes, we would expect about an 8.5% return on these acquisitions. We think the Residence Inn, because it was open a couple of years before the pandemic, will just continue to increase RevPAR along with pandemic recovery. The TownePlace Suites will take 12 to 18 months to ramp up. Within that period, our expected yield will occur; however, we have a lot of activity in Austin, so we're hoping we are being conservative on that number. We actually were able to avail ourselves of these attractive opportunities with someone that we have transacted with on two or three different occasions, all the way back to my Innkeepers USA Trust days, generating a long-standing relationship over almost 25 or 30 years. So we believe we're cherry-picking some great assets here.

Great, thanks for that color. And then also, could you talk a little bit about leverage? As you look to grow the portfolio, what leverage level would you be comfortable with?

Jeremy, you want to take that one?

I think as we come out of the pandemic and as business gets back to normal, I think we would comfortably target a net debt to EBITDA before the preferred of something like four and three-quarters to five and a quarter times, in that ballpark.

Great, thanks. That's all from me.

Thanks, Kyle.

[Operator Instructions]. Our next question is from Tyler Batory with Janney Capital Markets. Please proceed with your question.

Good morning. Thanks for taking my questions. I appreciate all the commentary so far. First question for me, just in terms of the improvements in July versus June, can you give a little bit more specificity on what drove that? I mean, is corporate travel getting a little bit better? Have you seen any impact from the Delta variant on your results yet?

Yes, I would work backwards. We really haven't seen any significant impact from the Delta variant. We did have a book of business in Silicon Valley that was expected to come back in the fall. So, there is essentially a delay for something that is now pushed to a larger session in the fall. But outside of that, no meaningful events. As for July over June, we continue to see demand from our Portland, Maine asset, our Hilton Garden Inn in Portsmouth, New Hampshire; those are two hotels, especially in the northeast, where the leisure traveler is a little bit more frequent and less rate resistant in July versus June. So, we certainly saw some increases there month over month. But as Jeff and I have talked about, we’ve seen no other real drivers other than just a steady accumulation of occupancy from month to month. That has been pretty consistent for us over the last few months.

And to follow up on some of the other questions and perhaps get at some of these topics in a different way. On the margin side of things, and clearly, very impressive where you are right now versus where you were pre-pandemic, considering where RevPAR and occupancy are. As trends hopefully continue to improve into the fall, how sustainable do you think these margins are? I mean, given some of the labor pressures that are out there, if we see occupancy go a little bit higher or guest expectations ramp up? Is that something that you're concerned about or considering as you look at where margins might go in the back half of the year?

Always. We believe that, on an apples-to-apples basis, our operating margins should be a bit better on a stabilized basis than they were in 2019. There are certainly going to be bumps in the road between now and then with respect to staffing. The significant change since 2019 has been the likes of Hilton and Marriott officially changing the housekeeping standards, which is where our biggest cost component lies. You've heard us discuss this for several years now. That is a big driver, and it's going to benefit companies like ours with portfolios that aren't flipping rooms every one and a half nights, more than others. While we believe we need to continue to add more staff as we move from 75% to what used to be in the low to mid-80s for portfolio occupancy, we have been bringing back staff. I previously mentioned that we had to utilize casual labor and overtime to bridge some gaps. However, we are encouraged that our long-term operating model will lead to increased profitability.

Okay, very helpful. Last question for me, just in terms of capital allocation. You talked about leverage; I think the liquidity position you have right now is extremely strong. Help us think a little bit more about the priorities for that. It sounds like acquisitions are really priority number one, but what are the other avenues you could consider for deploying some of that capital? How conservative would you like to be with that going forward? And also, could you touch on potentially when dividends might start to make more sense?

Let me just start, and then Dennis can pick up. Yes, acquisitions and growth are first and foremost on our mind. As we said earlier, barring a real shutdown, we think we've got cash burn behind us. Therefore, the need to maintain and be ultra-conservative with our balance sheet and liquidity isn’t as great as it was. That's why we want to be in growth mode. So that's really what we're thinking about on the capital allocation side. In addition, we are looking to recycle some capital as well and are discussing selling a couple of hotels which we believe may not produce enough returns given the anticipated renovation requirements. That may provide even more liquidity for us in the near term, if we can succeed in that endeavor. On the dividend perspective, our Board's stance has always been to pay taxable income, and we would suspect there is some dividend resumption most likely next year, not this year based on our numbers and what we've carried forward.

Okay, that's all from me. Appreciate the detail. Thank you.

Thanks, Tyler.

And we have reached the end of the question-and-answer session. I'll now turn the call back over to Jeff Fisher for closing remarks.

Again, I'd like to say we appreciate everybody being on the call today. We look forward to continuing our successes and moving forward in a very positive manner, hopefully with more good news as the third quarter winds itself up, and we'll talk to you then. Thanks.

This concludes today's conference and you may disconnect your line at this time. Thank you for your participation.