RLJ Lodging Trust Q1 FY2020 Earnings Call

Good morning, and welcome to the RLJ Lodging Trust First Quarter 2020 Earnings Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. 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 2020 first 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 to the company's actual results differing 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 sincerely hope that everyone is in good health and doing well in light of these unprecedented times. As you all know, since our last call, our industry has been significantly impacted by COVID-19, which resulted in the near evaporation of lodging demand, and led to a 51.9% decline in industry RevPAR during March. Looking forward, we expect the second quarter to be the worst quarter of the year with April experiencing the most significant RevPAR decline. With respect to our portfolio, while we started the year strong and were ahead of budget in January and February, COVID-19 dramatically impacted our operating results in March. All of our markets were impacted by the combination of a shutdown in airline travel, group meeting restrictions, citywide cancellations, and the enactment of stay-at-home ordinances. During the first quarter, our RevPAR decline of 24.5% was primarily driven by a 61.8% decline in March. As the pandemic began to unfold, we proactively mobilized all our resources, first and foremost, to safeguard the safety and well-being of our associates and guests; next to determine what steps we needed to undertake along with all our operating partners to mitigate the operational impact; and then, we moved to ensure that we have significant liquidity to weather this crisis. From a liquidity standpoint, we started the year in a position of strength, following the successful execution of our non-core asset disposition strategy last year. This great work executed by our team not only improved our portfolio, but also strengthened our balance sheet. We ended the year with nearly $900 million of unrestricted cash and low leverage at 3.1 times. As a result, we are well positioned to navigate an extended period of uncertainty and pivot to reopening our hotels even in a low occupancy environment. At the onset of this crisis, there were several key steps we took to respond operationally. As demand started to fall in early March, working with our operators, we immediately implemented aggressive cost containment initiatives, including reducing staffing levels, closing F&B outlets, eliminating all non-essential services, freezing non-essential purchases, and closing floors to reduce room inventory. As the operating environment became more difficult, we developed a framework to assess whether our hotels could continue to operate with extremely low occupancies. In developing this framework, we worked with our operating partners to determine staffing levels and built a bottoms-up cost model for each hotel reflecting a low to no occupancy environment. We then made the prudent decision to suspend operations at hotels where a lack of demand or high carrying costs would result in the operating shortfall exceeding the cost of spending operations. We currently have suspended operations at 57 hotels, with the remaining 46 hotels operating at low occupancies with minimal staffing, no F&B, and only essential operations, all of which is intended to minimize operating shortfalls. In conjunction with our operational response, we took additional steps to preserve and bolster our liquidity. We reduced our 2020 capital expenditures by over 80%. We have limited capital spending to either endpoint projects nearing completion or emergency life safety projects. While we continue to believe that many of our projects represent an attractive embedded opportunity in our portfolio, we will revisit these projects when we have improved clarity. We took a hard look at our corporate G&A and reduced costs through renegotiating service contracts, eliminating travel-related expenses, and adjusting staffing-related costs. We will continue to monitor this changing environment and respond accordingly with additional measures as appropriate. Additionally, our Board of Trustees reduced our quarterly common dividend to $0.01 per share, which represents an annualized cash saving of approximately $200 million. And finally, we drew down $400 million on our $600 million line of credit to further shore up our balance sheet due to the ongoing uncertainty around the duration of this crisis. All of these actions improved our liquidity and minimized our cash burn. Having gotten our arms around our liquidity and having comfort with our financial position, we are now focused on developing a thoughtful framework to reopen our hotels in a socially and financially responsible manner. As the stay-at-home ordinances are lifted, we are carefully evaluating our decision to reopen hotels, which will correlate to both the timing of businesses reopening and a sequencing of the return of lodging demand. Unlike prior recoveries, we do not believe that demand will necessarily follow traditional patterns in the recovery phase as consumer behavior adjusts to the new normal. We anticipate that the primary lodging demand segments will ramp up at a highly staggered pace. We believe that initially there will be some pent-up leisure demand as stay-in-place orders are lifted which should benefit our hotels in drive-to markets such as South Florida, Southern California, Charleston, and New Orleans. There are some early indications that leisure demand is picking up in states where restrictions have already been lifted. We expect airline travel to ramp slowly as the economy reopens with domestic travel recovering first followed by international. We expect to see incremental demand at some of our hotels as air traffic ramps. Although we anticipate some segments of corporate demand to come back sooner, we believe that overall corporate demand will see a more gradual recovery. In reopening our hotels, we will consider the pace of corporate demand on a hotel-by-hotel and market-by-market basis. Finally, we expect the group segment to be the last to recover. Prior to COVID-19, our contribution from group was less than 20%. Clearly, how demand ultimately builds will be influenced by the trends in the number of COVID-19 cases and the development of a medical solution. With the backdrop of a gradual demand ramp, our reopening framework will take a number of factors into account. We will prioritize reopening hotels where operating shortfalls can either be reduced or eliminated in a low occupancy environment which is initially likely to consist of our select service hotels. We will also pay close attention to the nature and quality of demand initially opening hotels that stand to benefit from leisure demand in drive-to markets while avoiding reopening hotels where seasonality does not permit a sustained ramp-up in occupancy. Additionally, where we own multiple hotels in a cluster, we will sequence the openings with a return of demand while keeping overhead costs low. Operationally, we will be vigilant about maintaining a low-cost model until demand normalizes. Additionally, in light of rapidly evolving health, safety, and cleanliness standards, our asset management team is working diligently with our operating and brand partners to address the operational adjustments around cleanliness and hotel staffing levels. We are not yet prepared to speculate as to the timing or the strength of a recovery. However, we recognize that any form of recovery will likely be slow to build. That said, we are encouraged by what we believe is a relative position of strength for RLJ. Our confidence draws from our lean operating model, the construct and geographic diversification of our portfolio, our strong liquidity position, and the embedded value creation opportunities within our portfolio. As the reopening of the economy unfolds, our portfolio is well positioned. We own select service and compact full-service hotels, which generally have smaller footprints are less complex and require lower occupancy to breakeven as compared to a traditional full-service hotel. Our lower cost operating model should allow us to return to profitability more quickly. We also expect the transient segment, which in 2019 represented over 80% of our revenues to be the first segment to ramp up when demand returns. Overall, we believe our lean operating model combined with a sizable liquidity of $1.2 billion and a flexible balance sheet provide us a relative advantage during the current environment and ultimately in a recovery. And finally, the key milestones we achieved last year, including asset sales, refinancings, and the Wyndham termination created the opportunity to unlock the embedded value in our portfolio. Although we have paused our ROI initiatives and the Wyndham conversions, I would like to emphasize that we continue to maintain a high conviction that these opportunities represent key growth catalysts and a source of embedded value creation for us long term. Now, before I turn the call over to Sean, I would like to say that our hearts and minds are with those who have been directly affected by this pandemic. I also want to recognize our associates on the front lines many of whom have been directly affected but who continue to help us navigate through this crisis. And finally, I want to say how proud I am of the efforts of our corporate associates. I could not have asked for a more dedicated team. I will now turn the call over to Sean for a more detailed review of our financial results and he will provide an update on our liquidity position and color on our recent discussions with our lenders.

Thanks, Leslie. As Leslie discussed, our portfolio was performing ahead of budget expectations in both January and February. COVID-19 began to impact lodging demand in early March and accelerated each week through mid-April. Although we will continue to monitor trends in hotel fundamentals, we currently lack visibility on the timing and cadence of returning to pre-COVID-19 lodging demand. While we are confident that lodging demand will ultimately return to pre-crisis levels, we remain cautious about near-term lodging fundamentals. Turning to the numbers, although we have 57 suspended hotels, we will continue to include all 103 hotels within our reported RevPAR results. Our first quarter RevPAR contraction of 24.5% was driven by the combination of a 15.5 percentage point decrease in occupancy and a 5.1% decrease in average daily rate. RevPAR performance was uneven throughout the quarter with 0.4% growth in January followed by RevPAR contraction of 2.8% and 61.8% in February and March respectively. Second quarter RevPAR is expected to significantly decline as more than half of our portfolio is likely to remain suspended with the balance operating in an extremely low demand environment. As an example of current operating trends, our April RevPAR contracted by over 95%. April occupancy was 16.4% and ADR was $108 for our 46 open hotels, which compares to 83.1% and $184 last year. The demand at our hotels that remain open is primarily associated with medical professionals, government, and displaced residents. Despite the challenging operating environment, our operating model is proving relatively resilient as our portfolio gained approximately 240 basis points of market share during a difficult first quarter. Turning to the bottom line. Our first quarter pro forma hotel EBITDA and adjusted EBITDA were $51 million and $41.4 million respectively, and adjusted FFO per share was $0.10. As Leslie mentioned, we were very quick to respond to COVID-19 and swiftly implemented aggressive cost containment initiatives. Together with our lean and flexible operating cost structure, our first quarter operating cost declined 9.8% with a significant cost containment initiative being implemented during the month of March. Despite these initiatives being rolled out mid-month, we reduced our March operating costs by approximately 34% versus budget. Excluding the impact of an accrual of benefits for furloughed employees, we reduced March operating costs by over 41%. As you would expect, our team remains focused on cost containment initiatives to minimize operating shortfalls in the current environment. Our second quarter cost containment initiatives will eliminate over 75% of variable hotel expenses resulting in the elimination of approximately two-thirds of total hotel operating expenses. Turning to liquidity, we entered the year with strong liquidity including holding approximately $900 million of cash and an undrawn line of credit. That being said, we took quick and decisive action when it became clear that COVID-19 was going to create an unprecedented shock to lodging demand. From a balance sheet perspective, our initial efforts were focused on ensuring that RLJ had adequate liquidity to withstand a protracted period of disruption. To that end, we temporarily suspended the capital allocation initiatives that we highlighted last quarter including share repurchases, senior notes redemption, ROI initiatives, and the Wyndham conversions. Additionally, we completed a comprehensive review of our monthly cash burn which consisted of assessing variable and fixed hotel operating costs and corporate-level expenses. The assessment of the variable hotel operating costs included all of our 103 hotels whether suspended or operating with low demand. In the current operating environment, all of our hotels are expected to generate monthly operating shortfalls with hotels that remain open generating shortfalls that are more than 40% lower than suspended hotels. Inclusive of both suspended and open hotels, we estimate that our average monthly variable operating costs assuming current occupancy levels will be approximately $140,000 per hotel. The cost for individual hotels will differ by hotel type, location, and other factors. The average monthly variable cost was approximately $110,000 at our focused service hotels and $190,000 at our full-service hotels. Overall, based on our portfolio's lean operating model, our hotel's variable costs are expected to be substantially lower than portfolios comprised of traditional full-service hotels. We then layered in our hotel fixed costs on top of these variable costs with property taxes and insurance making up the majority of these fixed costs. Additionally, we incorporated the following assumptions for our corporate-level outflows: quarterly common dividend of $0.01 per share, maintain existing quarterly preferred dividend, continue funding debt service, and corporate G&A at a reduced level. In total, our monthly cash burn for the remainder of the year is expected to range between $25 million and $35 million excluding RLJ-funded capital expenditures which are estimated to be $50 million for the remainder of the year. Our actual monthly cash burn will be influenced by many factors including the time our portfolio is either suspended or open with low occupancy. Our monthly cash burn is expected to be towards the low end of the range if the economy opens at the start of the third quarter and the high end of the range assumes all of our hotels are suspended through the end of the year. 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 $2.6 billion of debt, approximately $1.2 billion of unrestricted cash, no debt maturities until 2022 and net debt-to-EBITDA of 3.9 times. We continue to maintain significant flexibility on our balance sheet. As of the end of the quarter, approximately 84% of our debt is fixed or hedged and 84 of our 103 hotels are unencumbered. Finally, I want to provide an update on our debt covenants. To start, no financial covenants are designed to withstand the impact that COVID-19 is having on the lodging business. That being said, our senior notes are covenant light and we currently are in compliance and expect to remain in compliance under the note indenture. However, our unsecured line of credit and term loans include several financial covenants that are tested each quarter. Like all lodging REITs, we proactively reached out to our lenders to pursue a temporary waiver of these financial covenants. We place great value on our lender relationships and have historically aligned with lenders who are focused on long-term strategic relationships. These discussions are ongoing. While we remain confident that we will obtain a covenant waiver, we can provide no assurances until final documentation is complete. Before opening the call for Q&A, I wanted to affirm that 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.

Thank you. Our first question comes from Austin Wurschmidt with KeyBanc Capital Markets. Please go ahead with your question.

Hi, good morning everybody. I was just curious how you're balancing the thought of preserving your liquidity versus maybe being opportunistic if something presents itself, for example, repurchasing some of the preferreds. And I was just curious if you expect that the restrictions from the amended credit agreement would preclude you from taking such action or either with the preferreds or with any steps toward the 6% unsecured bonds you have outstanding as we approach midyear.

Okay. So, Austin, first of all, good morning. What I would say, just to make it clear that our number one priority today is to preserve liquidity in absence of having visibility. This is a complicated environment. We don't know how long this demand shock is going to last and what the new normal is going to look like. But having said that, once we do have some visibility, we are going to be very thoughtful and disciplined around capital allocation. We'll evaluate all the capital allocation opportunities that are available to us on a relative basis and determine where we want to deploy capital. I think the good thing is that we already have the capital on hand, which allows us to be nimble and to take advantage of any opportunities that present themselves when we have visibility. And as it relates to our covenants, I'll let Sean jump in here, but there are some things that we want to be thoughtful around related to the covenant release that we'll receive.

Sure. Thanks, Leslie. I mean, first and foremost, Austin, the value creation opportunities that we identified earlier in the year are all on pause as we mentioned in the prepared remarks as we rethink understanding what the new normal is going to be on a go-forward basis. But specifically around things like share repurchases, refinancing, the FelCor bonds, etc., we have ongoing discussions with the lenders. I'm not going to get into the details of that other than there's a market out there for restrictions on cash outflows as you would expect. We are in the middle of those discussions right now, so I can't really give you any granularity around those discussions. But just know that as we think about value creation, one of the things that we're certainly going to look at on a go-forward basis is what is the relative value creation specifically on the FelCor bonds, which were wide three months ago or two months ago where the markets have shifted, it actually looks relatively attractive today at that 6%. And so that is an opportunity that likely will be deferred based on the credit markets coming back on that.

Hey. That's helpful. And then, I guess, with leisure being the primary source of demand that everybody has been discussing, just curious what that implies from an ADR perspective and how we should think about rates across the portfolio?

Austin, this is Tom Bardenett. What’s interesting about the situation is that in late March, all rate levels were open. Currently, we see demand primarily from the medical sector, extended stay occupancy, and crew business. With the lifting of restrictions, premium rates will gradually return, especially for corporations with national and local discount rates and retail rates. The leisure market you mentioned represents discretionary income opportunities that will also build slowly over time. We plan to avoid discounting rates; instead, we will open up value levels. We are not yielding much at these low occupancy levels right now. However, we expect the average rate to gradually increase as we attract premium business and can yield again, but for now, all value levels remain open.

And the other thing that I would just generally add about leisure, Austin, as you mentioned benefiting from the drive-to, our portfolio is well-positioned to benefit from that. We expect Charleston, South Florida, New Orleans, Southern California, Tampa, all of those markets in an environment where you're just trying to bring down your cash burn, our exposure is well-positioned. As I mentioned in my prepared remarks, 80% of our portfolio is transient-oriented, 45% of that historically has been leisure-oriented, and we expect over 35% of our markets to benefit from drive-to, and you have to think about drive-to slightly differently today. We're seeing benefits in Austin, which is a market that we wouldn't have normally considered a drive-to benefiting market, but it is benefiting right now. And additionally, if we look at our portfolio, we've got about 10% of our assets that are considered resorts. So, we think as an early mover on demand from leisure that our portfolio is well-positioned to benefit.

That's really helpful color. And then can you just clarify what amount is the extended-stay business in the portfolio?

Well, it's about 50%.

Yes. When you look at the category that we have, we have obviously residents in Homewood Suites, Hyatt Houses. We would actually put the Embassy Suites in that category as well. So, when people are looking at the consumer behavior, we think the two-base suite, the extra room is going to be critical as we start to ramp up. And we expect many of the hotels that we kept open were because they were extended stay with longer-term business in the assets at this time.

Yes. And just to sort of – sure, go ahead, Austin.

I was just curious what the breakout was with and without the Embassy Suites maybe.

We have 21 Embassy Suites, so a little bit less than 50% of the portfolio would be extended stay then.

Yes. So, Austin, just to add, historically, about 25% of our EBITDA has come from the Embassy Suites brand.

Back that out...

Back that out.

Yes. To expand on Tom Bardenett's point, we believe that as consumers spend less time in public areas of hotels and more time in their rooms, our suite product, including the Embassy Suites, will benefit from this trend. This makes the 50% figure significant. Looking at various demand segments, we understand that business travel will be uneven, but we anticipate that small business travelers and vendors who must travel for their work will find our product appealing for several reasons. Therefore, we expect this to be advantageous for us as different demand segments begin to grow.

That’s really helpful. Thank you all for the time.

Thank you. Our next question comes from the line of Michael Bellisario with Baird. Please proceed with your question.

Good morning, everyone. I just wanted to dig a little deeper on that last question. I think you mentioned an 80-20 transient group split. Can you kind of give us your best estimate of business versus leisure within that transient breakout? And then what are the different kind of rate categories discounted kind of just a more fulsome breakdown of the transient side of the business and who the customer was pre-COVID?

Yes. I would say historically Mike our breakdown on transit was 45% leisure and 55% business and Tom will give you some more color on the other segments.

Yes. So when you look within the transient category we would roughly average about 20% to 25% depending upon which asset and locations for the national negotiated rates the local negotiated rates as we look at the AT&Ts, the IBMs, Oracle, Amazon that type of business. Retail was also in the 20s. So when you look at the premium categories, those were your top two premium categories. And then to Leslie's point on leisure sometimes you have leisure that comes in at retail and sometimes you have leisure that comes in to discounts whether it's AAA, AARP or the variety of opportunities that the brands give us where they market the discount category. So hopefully that gives you a little basis on the transient side. On the group side within the 20% the thing that we are encouraged about is when we look at group within the RLJ portfolio about 40% of that business is kind of the smurf business, the smaller groups, the volleyball teams, the groups that don't have to have the large convention space or the meeting space. In fact, most of our full-service hotels average around 10,000 square feet. And so we think we're going to be primed to be able to be in a market where we can get the type of groups that are a little bit smaller in nature versus having to rely on the large citywides or the large meeting space environments that will be slower to ramp up. So hopefully that helps you a little bit on the percentages.

And Mike just the point that Tom is making on the small groups and the smurf type business is relevant because while we all know that group is going to lag whenever it comes back, the types of group that are coming back first are your small business group your social group which our portfolio was built for and is largely concentrated that's the type of group that we do. So again I think when you look across leisure when you look across business transient and you look across group, however the recovery unfolds, we think that our portfolio is well positioned to ramp.

That's very helpful. And then one for Sean, can you just remind us how many CMBS loans you have? Where you are in the process of discussing or having discussions with servicers or lenders there? And then what the opportunities for potential forbearance might be for you on that end?

Sure. Thanks Mike. We are current on all of our CMBS debt. We have a $200 million loan that we originated last year, which was a stand-alone CMBS, and we also took on four CMBS loans from the FelCor acquisition. We are not in active discussions with any of the servicers because we are up to date on our debt service.

Thanks helpful. Thank you.

Thank you. Our next question comes from the line of Wesley Golladay with RBC Capital Markets. Please proceed with your question.

Good morning everyone. I would like to ask about the process of starting and closing hotels. Is there a significant cost associated with reopening? How long does it typically take to reopen a hotel? If you ever need to close it again, what would that cost be? Additionally, if there is a considerable cost involved, would you need to maintain a substantial buffer for profitability or a reduction in cash burn before deciding to reopen the hotel?

We carefully considered our approach to suspending hotels. The full-time employee count at a suspended hotel is quite similar to an open hotel, with the main difference being in housekeeping. This similarity enables us to reopen a hotel within two to three days if necessary. When evaluating the conditions for reopening, it’s essential that any reopened hotel either breaks even or decreases our burn rate. For select service hotels, we aim for a baseline occupancy of 5% to 10%, while for full-service hotels, it’s 10% to 15%, and this level must be sustainable. We want to prevent the situation of opening a hotel only to close it shortly after. For instance, in a leisure market like during Memorial Day, we are monitoring demand, but we won’t reopen hotels just for that weekend if we anticipate a decline in demand afterward. We are also evaluating the broader area’s reopening status, as this will influence demand. Additionally, we are looking at future reservations at suspended hotels to see if there is any increase in bookings. This combination helps us decide when to open a hotel, as we need to ensure sustainable occupancy at the levels mentioned. Our lean operating model allows us to avoid any additional costs related to closing or reopening hotels. Sean has a point to add.

To build on Leslie's comment, it's important to note that the decision regarding when demand returns won't be a straightforward open or close situation. We anticipate that demand will come back and increase gradually. Therefore, in our remobilization plan, we will adjust our workforce according to the level of demand that emerges in the hotel sector. This means we won't be bringing everyone back at once; instead, we will expand the labor pool based on the demand that justifies it. So, as we gradually ramp up, you can expect us and others in the industry to align our workforce with the increasing revenue.

Okay. And then looking at the 57 hotels that are closed, just trying to get like maybe a distribution of how many of the hotels are in that longer lead time going to take a while to open more group focused air travel seasonality? Is there many of the 57 in that tail?

One important thing to remember about the 57 hotels is that around 15 to 17 of them are part of clusters. As I noted earlier, these hotels are likely to take longer to reopen. For instance, in Houston, we have three hotels on one site, and it wouldn’t make sense to open the other two until occupancy returns to normal levels. Therefore, these hotels will require a longer lead time. Additionally, when considering the market-by-market situation, New York and certain areas of San Francisco will also take time to reopen due to the size of properties and the need for higher occupancy to break even or reduce losses. Currently, we have 46 hotels open, and we anticipate that the next group of hotels to reopen will be in Southern California, New Orleans, and South Florida, which are expected to benefit from leisure demand.

Thank you very much.

Thank you. Our next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.

Hi, good morning everyone. Question on the Wyndham projects. I understand that the ROI portion is delayed, but what about conversions? A lot of these hotels are in leisure markets. So would it make sense to convert them to an interim brand well before you actually do the ROI portion of it?

It's a great question, Anthony. All of those projects are largely delayed as well. While we still see the value creation opportunity and actually have more confidence in that, the Wyndham assets, which are prime real estate, continue to be prime real estate. We plan to move forward with those projects when it makes sense. The only thing that has changed is the timing. We generally expect to capitalize on the current low occupancy and time the conversions for when demand fully returns. As you recall, we aimed to complete two conversions in 2021, but that may be delayed a bit. Overall, demand for the industry will take some time to recover. We believe the way we stagger the projects will align with the eventual return to normal industry conditions.

Got it. So just to be clear you expect to keep these as Wyndham-branded properties for basically the time being for the next year or so? Is that fair?

Yes. They will remain Wyndhams until we convert them fully.

Got it. Okay. And one more for me. Just in terms of brand standards and operating cost models other brands have talked a lot about reducing cost and increasing efficiency across the board. What are you looking for in that process? What's the biggest opportunities for you as an owner to kind of maybe permanently generate some better economics for yourselves here?

I think a lot of the details are still being determined. There are ongoing discussions with the brands, and I commend them for engaging in these conversations. We recognize that this is a unique time to adapt our model. The specifics regarding brand standards and shared services are still pending. We anticipate benefiting from adjustments in housekeeping, which may balance out as we clean fewer rooms during stays but allocate more time to cleaning between them. Additionally, we expect increased cleaning in public areas. We foresee reduced food and beverage hours, which will be noticeable in our portfolio, alongside job sharing and a decrease in contract labor. For us, particularly in our smaller public spaces, transitioning to a more meticulous cleaning regime should lead to greater efficiency compared to traditional full-service lobbies. Since we have fewer elevators and escalators that require extensive cleaning, we should encounter lower relative costs. Moreover, as we adapt our food and beverage standards, we believe that our Embassy Suites, which make up 25% of our portfolio, will benefit by moving away from the more expensive structures in this area.

Buffets?

The buffet, there you go. Thank you. Thank you. Yes. As we move away from the buffet structure and I think that's really going to benefit our Embassy Suites and we're going to see some reduced costs, hopefully, around that. All of this is still to be determined. But we think that, overall, the industry is going to see some impact and our portfolio specifically will see some incremental benefit.

Okay. Thank you.

Thank you. Our next question comes from the line of Chris Woronka with Deutsche Bank. Please proceed with your question.

Hey. Good morning, everybody. I wanted to circle back on the Wyndham portfolio. And my question is, I noticed in the first quarter, those hotels performed relatively in line with the rest of the portfolio. And I know first quarter is no longer a good indicator, but would you expect that relative performance continue, or do you see a reason why they might decouple from that in this environment?

So when you look at the Wyndham portfolio segmentation, obviously, the brand needs to rely a little bit more on OTAs, crew business, some of the business that actually has allowed those hotels to remain open. And to Leslie's point about bull's eye real estate, many of those are in leisure markets, as we have San Diego, Santa Monica; you look at Philly in the Historic District, those are locations that are in leisure markets. In addition to that, we had two in medical markets, in Boston as well as Houston. So that's been a benefit through this unique time that we're located next to Mass General. And then obviously, MD Anderson and all the business that comes into Houston that's related to Medical. So we feel like the segmentation at the current levels is appropriate to be able to remain open. And then, it'll obviously ramp depending upon where we see business demand come in. A lot of the Wyndhams too do not have significant meeting space, comparatively in regards to other full-service hotels. So we think they're ripe for conversions to other brands as we get into that. And then, we'll start to see more premium business that we talked about on the retail, national corporate, and local corporate, based on the other brands having a little bit more familiarity with those type of accounts on a long-term basis.

Okay. Very helpful. Thanks, Tom. And a follow-up question on New York. Is it possible to kind of just get your world view on how the city is ultimately going to recover? And what that means for the Knick. And I know it's still a very fluid situation, but do you have any longer-term thoughts about how it might unfold?

I believe it’s too early to determine how certain markets will specifically develop. What we know is that New York was facing challenges even before COVID-19, and those challenges have increased. New York is an incredible city with a rich history, but it must address the stigma of being a hotspot. I can’t predict how long that will take or what changes in mindset will be needed. Ultimately, we think New York will see benefits as some hotels exit the market and if there is a decrease in Airbnb inventory. Long-term, we have confidence in New York and our investments there, but it remains too soon to say how any specific market will perform.

Okay. Fair enough. Thank you.

Thank you. Our next question comes from the line of Tyler Batory with Janney Capital Markets. Please proceed with your question.

Hey. Good morning. Thanks for taking my questions. Just a few questions on the new normal, what do you think the competitive environment looks like as we move past some of this? I mean some of your peers have talked about operating their full-service hotel more like select service hotels. So, do you think that could pressure you maybe make it tougher to differentiate? And then, additionally, just to ask the rate question a little bit differently. Once demand starts to normalize do you think we could see a race to the bottom on rate, or do you think the environment could be more rational?

I find it interesting that our peers claim they would manage their hotels similarly to select service. I haven't heard that before, but it's noteworthy. We've always operated all our hotels, whether select or compact full-service, in a select service manner. We welcome anyone willing to take on that challenge. Regarding your question about rates, Tom previously mentioned that the decline we’ve seen isn't due to competition driving prices down, but rather a reflection of the demand that exists. In the short to medium term, we will need to explore channels we typically yield out, as we must make the most of any available demand. While many are concerned about rates and their potential growth, our focus is on reducing our burn rate. We are concentrating on bringing in as many guests as possible to help decrease that burn rate. Thus, you will likely see more emphasis on channeling rather than simply lowering rates. Tom, would you like to add anything?

Yeah. Two things I would add too. And that is, if you think about two organizations that are large and that will impact rate in the future. One is the Global Business Travel Association. Typically that event takes place in August, and it now has moved to November. So rate negotiations for 2021 will move to the back end of 2020, which we think is positive for the industry, knowing that, as corporations start to ramp up, start to put people back to offices, start to travel again. It'll be a little bit more normal process in the November timeframe versus in the summertime when the rates start to get negotiated for future years. And the second group is the PCMA which is the professional management, all the meeting planners that book group business. And so, when you look at the out years and you look at the postponements that were cancelled this year, that moved to 2021 or 2022, rates weren't renegotiated in those contracts. Because obviously, deposits were held opportunities to be able to rebook that business were discussed. And so we think those two key categories also could potentially lift up rate when they start to rebook. And so I just want to add that to Leslie's point.

Okay. That's very helpful. I appreciate that detail. And then, the second question I had is just housekeeping on CapEx. I think you said $50 million of spending the rest of the year. So, how long beyond 2020 do you think you can maintain such low levels of CapEx spend? And, could there be any catch-up spending outside of the project CapEx, in 2021 or 2022?

I wouldn't refer to it as catch-up. What we plan to do is roll out our campaigns over the next year. We will revert to a normal level of renovation campaigns when the situation allows us to do so. I believe our balance sheet can support a typical level of capital expenditure, and we'll have better clarity on how the recovery will progress.

I wanted to emphasize, Tyler, that a significant part of our strategy involved reallocating capital from our slower growth assets that we sold in 2019 and reinvesting it into our portfolio, which includes capital expenditures. We believe this will yield a high return on investment. The Wyndham properties are part of this strategy. There are additional space reconfigurations and initiatives that are currently on hold. However, as Leslie pointed out, we expect to resume these efforts in the future because we believe the returns from those projects will still be strong. Before COVID-19, we discussed that many of these projects were not cyclical. Therefore, as we assess the value creation from these projects, Wyndham being the largest, we still believe they are not primarily dependent on the economic cycle. The recovery's trajectory will influence the timing and order of implementation, but we are confident that this capital needs to be reinvested in our portfolio. This is why we have maintained our liquidity, as we raised that capital as part of the disposition plan in 2019. We expect to effectively deploy that capital in our portfolio during 2021 and 2022.

Okay. Very helpful. Thank you.

Thank you. Our next question comes from the line of Neil Malkin with Capital One Securities. Please proceed with your question.

Hey, guys. Good morning. So first question just given what's going on the disparity between some sunbelt versus coastal markets in terms of opening time lines, the variety of political climates and if you look in California you see things like potential Prop 13 repeals things like that. And then, if you adjust or overlay that with the idea that in all likelihood supply for the industry is going to be heavily reduced for the next probably three to five years. Do you think about potentially reallocating or where you allocate incrementally will be maybe not so focused in the California market and maybe more of the sun belt markets?

Yeah, Neil listen as we – part of the initiatives that we put in place in 2019 was to reallocate into the markets and geographic locations that we felt comfortable about not only for 2019 and 2020, but long term. I think the examples that you're mentioning are all true, but all relatively short-term in nature. I think as we step back and look at and where our geographic concentration is today, we like our South Florida exposure. We like our California exposure. And we like our – frankly, we have a bunch in the sun belt as well. I think – as we think about deploying on acquisitions, which were – which we still need to get through COVID-19 before really focusing on acquisitions in any meaningful way. But certainly, the new normal will factor into our thoughts around geographic reallocation within our portfolio. But our footprint today – we have a portfolio for a reason, which is we like to have a diverse geographic dispersion and we're comfortable with our footprint today.

Okay. I appreciate that. Other one for me is, have you seen a pickup or I guess maybe stabilization in occupancy or future bookings? From the middle of April till now the travel data looks like it kind of bottomed out in mid-April. And although, it's still at very low levels it's more than doubled from the anemic levels it was in mid-April. So just kind of wondering, how that's translating into what you're seeing at the property level.

Yeah, this is Tom. Regarding bookings, our open hotels are seeing bookings that exceed inflation, which is a positive sign. Week-to-week, even though TSA travel dropped from $2 million to $2.5 million daily to under $100,000, it has risen to over $200,000 in the last four days. In our portfolio, hotels planning to reopen are starting to see demand as restrictions are lifted. We’re currently in phase one and need restaurants, locations, and offices to open for sustainability. However, we see opportunities as we maintain our hotels for future reservations. We've noticed some corporate demand, like campuses opening 50% of their offices in Denver, leading to business from Oracle and CenturyLink. Additionally, in LAX at Chevron, we secured 30 to 35 rooms for refinery work. There is business beyond typical crew and medical needs related to COVID-19. Looking ahead, we anticipate a different type of group demand. For instance, we’ve had business with a university in Pittsburgh and are exploring more housing due to social distancing as campuses reopen. In NOLA, we're considering opportunities with Xavier and Tulane for the fall semester. We're assessing where demand will come from and adapting our bookings for 2021. For example, our hotel in Mandalay ran at 18%, which is promising because of California’s beaches. We have one of two beachfront hotels, and we are at 56% occupancy month-to-date. As restrictions lift, we expect people to travel and for pent-up demand to materialize; it’s just a matter of pace and direction, which we're closely monitoring in terms of future bookings.

Okay. Great. And then I guess just maybe following up on that. I don't think you mentioned it before, but can you give us some context on what occupancy looked like in mid-April and then what it looked like now, or maybe, what the occupancy averaged in April versus what it looks like now?

So, Sean gave our April occupancy. Do you want to reiterate that?

Our April occupancy was approximately 15% or 16% for the hotels that were still open, resulting in an overall portfolio occupancy of around 7% to 8%. We've observed an increase in occupancy as we entered May, although it's starting from very low levels. The demand within our portfolio is improving in May, reflecting trends seen in the wider industry. However, it's still early in the recovery process, and we are beginning from a very low point.

Got you. Thank you.

Thank you. Ladies and gentlemen, we've reached the conclusion of our Q&A session. I would like to turn it back to Leslie Hale for closing comments.

Thank you, guys for joining us today. It goes without saying that these are unprecedented times. However, based on the swift actions that we've taken, we believe that we're well positioned to not only weather this environment, but also to be one of the early beneficiaries of any form of recovery. On behalf of the entire RLJ team, I want to convey that we wish everyone remains safe and healthy and we hope that everyone takes care. Look forward to seeing you in the future.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.