Earnings Call Transcript
RLJ Lodging Trust (RLJ)
Earnings Call Transcript - RLJ Q4 2020
Nikhil Bhalla, Vice President and Treasurer of Corporate Strategy and Investor Relations
Thank you, operator. Good morning, and welcome to RLJ Lodging Trust's 2020 Fourth Quarter and Year-end Earnings Call. On today's call, Leslie Hale, our President and Chief Executive Officer, will discuss key highlights for the quarter. Sean Mahoney, our Executive Vice President and Chief Financial Officer, will discuss the company's financial results. Tom Bardenett, our Executive Vice President of Asset Management, will be available for Q&A. Forward-looking statements made on this call are subject to numerous risks and uncertainties that may lead the company's actual results to differ materially from what had been communicated. Factors that may impact the results of the company can be found in the company's 10-K 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.
Leslie Hale, President and Chief Executive Officer
Thanks, Nikhil. Good morning, everyone, and thank you for joining us. I would like to start by saying that we are saddened by the loss of Arne. He was an exceptional leader for Marriott and the entire hotel industry. He was a mentor to many, myself included, but more importantly, he was an exceptional person, and it was truly an honor to have had the privilege of knowing him. He will be profoundly missed, and our prayers are with his family. As the new year continues to unfold, we sincerely hope that everyone remains safe and healthy. We remain deeply grateful to our frontline associates, whose tremendous efforts and personal sacrifice helped us navigate an extremely challenging year. We would also like to thank our management companies and our lenders, who are also instrumental in helping us through these uncertain times. Given the severity of the impact of the pandemic on our industry and the entire country, I am very proud of how well we responded. Our team was nimble and quickly pivoted to adjust the cost structure of our operating model and to preserve our liquidity position. We are not only positioned to benefit early during the recovery, but also to outperform throughout the entire cycle as we advance our long-term growth opportunities. During the year, we executed on a number of fronts: First, we took decisive actions at the corporate level to reserve liquidity relative to our dividends, capital expenditures, and G&A expenses. Second, we developed and executed a framework for operating with minimal cost in a low occupancy environment, allowing us to end the year with 95 of our hotels open. Third, we positioned our portfolio to benefit early as demand recovers, which allowed our open hotels to generate positive hotel EBITDA for each of the last two quarters. Fourth, we reduced our cash burn rate throughout the year, ending the year near the low end of our most recent guidance. And finally, we completed multiple amendments to our unsecured debt at favorable terms while retaining balance sheet flexibility to continue executing our growth initiatives. The successful execution of all of these efforts allowed us to end the year with over $1 billion of liquidity, which will enable us to take advantage of both internal and external value creation opportunities. As it relates to our fourth quarter performance, we achieved 34.1% occupancy for our entire portfolio. We were pleased to see the continued sequential improvement in occupancy as our results exceeded the third quarter, despite demand in November and December moderating due to seasonality and increased restrictions given the rise in COVID cases at that time. Our open hotels achieved an absolute occupancy of 37.5%, which was ahead of our expectations and exceeded the urban segment of the industry by 470 basis points. Additionally, our open hotels also gained over 900 basis points of market share during the quarter, further highlighting the overall quality and appeal of our portfolio. From a segmentation standpoint, our leisure-oriented markets continue to outperform with markets such as South Florida, Orlando, and Charleston achieving occupancy of 50% or more. Our portfolio mix once again enabled us to capture pent-up leisure demand, especially during weekends and around the holidays. Our fourth quarter weekend occupancy of 47% at our open hotels continues to meaningfully outperform weekday occupancy, highlighting our portfolio's broad appeal to the leisure demand segment. We also saw the continuation of a positive uptick in both business transient and group demand. Our fourth quarter business transient and group rooms revenue increased 12% and 4%, respectively, from the third quarter, evidencing that both of these segments are beginning to see a small level of improvement. Business transient demand continued to be primarily generated from industries such as health care, insurance, and government. And our group demand continued to benefit from our hotels being attractive to small social groups, such as weddings and sports teams. Overall, our fourth quarter results underscore the favorable positioning of our portfolio as a recovery unfolds, illustrated by our resort hotels achieving 56% occupancy. Our all-suite hotels, which represent nearly 50% of our rooms, exceeded 42% occupancy. And finally, our drive-through markets achieving 41% occupancy. The level of our occupancy combined with the continuation of our aggressive asset management initiatives led to our entire portfolio achieving positive gross operating profit during the quarter and our 95 open hotels generating positive hotel EBITDA. We achieved these milestones for the second consecutive quarter, which highlights our ability to quickly return to profitability as fundamentals continue to improve. The positive operating cash flow generated by our hotels allowed us to lower our fourth quarter cash burn. Over the nine months of the pandemic, our average monthly cash burn was $23.6 million, which was in line with the low end of our most recent guidance. The magnitude of our cash burn reduction throughout the year as well as the low absolute cash burn per key continues to validate our lean operating model and affirms our ability to get back to profitability sooner. Now looking forward, we continue to believe that the pace of vaccine distribution and the reopening of offices will be critical to the recovery of our industry. There has been significant progress towards the rollout of the vaccine since our last call. Given this progress, our confidence relative to the recovery accelerating during the back half of 2021 is incrementally more positive today. As the current year unfolds, we are encouraged to see fundamentals in January improved sequentially from November and December. Leisure demand in January was strong in all of our Florida markets, while our properties in D.C. benefited from demand related to the presidential inauguration. These trends led our January results to come in ahead of our expectations. We expect February to continue to see similar positive trends. As it relates to overall segmentation trends, we expect leisure to continue to be the dominant driver of demand and anticipate incremental strength throughout the year. We expect local and regional corporate demand to continue to see some gradual improvement. And finally, we are encouraged that group leads have continued to improve during the first quarter, which could give rise to gradual improvement in small group bookings. Based on the sequencing of these trends, we expect the first and second quarters to be similar to the back half of 2020. However, we expect demand to gain momentum starting in the third quarter as a greater percentage of the population becomes vaccinated. We believe that if the current pace of vaccination leads to a meaningful improvement in schools and offices reopening, it could allow for a step change in fundamentals during the second half of the year. Overall, we view 2021 as a year of transition, but one that could lay the foundation for a stronger 2022. As we demonstrated throughout 2020, our lean operating model and our portfolio mix will continue to provide RLJ with key advantages in the early stages of this recovery. Our transient-oriented hotels will continue to benefit from leisure demand as well as a recovery in business travel as it unfolds. Our hotels are proving to be very attractive to the small group demand that is continuing to emerge. Our hotels have smaller footprints and are less complex operationally, which will continue to allow our hotels to minimize our cash burn. Our lean operating model will allow us to achieve breakeven and profitability quicker. And the efficiencies we have achieved during the past year will enable us to return to pre-pandemic EBITDA sooner. More importantly, our portfolio is poised to outperform throughout a sustained recovery, given our liquidity of nearly $1.1 billion and our lower burn rate, which will enable us to emerge with a healthy balance sheet, which we will use to pursue our growth strategy. Our large asset base will provide significant optionality to recycle capital without meaningfully shrinking our EBITDA base. Although we do not have a liquidity need to sell assets, as evidenced by our recent asset sales, we will remain active portfolio managers and will evaluate select dispositions that create incremental capacity for growth. Additionally, the improved long-term growth profile of our portfolio will allow us to thrive throughout a sustained recovery as the business transient and group segments return. And finally, our EBITDA growth throughout this cycle will be amplified as we unlock our embedded growth catalysts. We are currently on track to complete the repositioning conversions at Mandalay Beach, Santa Monica, and Charleston in 2022, and we are continuing to advance the plans and the timing of the other conversions. These catalysts position us for both internal and external growth. With respect to external growth, we are actively monitoring the transaction market and expect to be in a position to deploy growth capital as the recovery takes hold. We expect the acquisition window to remain open for several years, and we remain extremely disciplined as we underwrite acquisitions. Finally, we could not be more pleased with our relative positioning. While the road to recovery will span several years, we are confident that our industry will fully recover. Our portfolio construct will allow us to grow revenues earlier, achieve overall profitability quicker, and position us to take advantage of growth opportunities sooner, all of which will create significant value for shareholders throughout the cycle. I also want to take a moment to express my sincerest gratitude to our corporate team for their tremendous efforts and unwavering commitment during these challenging times. I will now turn the call over to Sean.
Sean Mahoney, Executive Vice President and Chief Financial Officer
Thanks, Leslie. I would like to echo Leslie's comments on the passing of Arne, an outstanding leader and visionary in our industry. We were pleased to see the continued sequential improvement in our occupancy for the fourth quarter and continued improvement in the fundamentals so far this year. Our pro forma hotel operating results include the 102 hotels that we owned as of December 31, despite having seven suspended hotels throughout the fourth quarter. Pro forma numbers exclude the residents in Sugarland, which was sold during the quarter, but include the Courtyard Sugarland, which was sold in early 2021. Our reported corporate adjusted EBITDA and FFO include operating results from sold hotels during RLJ's ownership period. Our fourth quarter portfolio occupancy of 34.1% represented a 490 basis point improvement from the third quarter. The fourth quarter marked our highest quarterly occupancy since the start of the pandemic. Factoring in normal seasonality in November and December, our portfolio's monthly occupancy was relatively stable at 37.3% in October, 33.2% in November, and 31.7% in December, which was stronger than we expected and provides further evidence that our portfolio is well positioned to capture demand in the current environment. Additionally, despite several of our large urban assets in New York City and San Francisco remaining suspended throughout the quarter, our portfolio generated $15.8 million of positive GOP during the quarter. Our ability to continue generating positive GOP is affirmation of how we expected our portfolio to perform during the early stages and throughout a sustainable recovery. The fourth quarter results for our 95 open hotels were meaningfully better with occupancy of 37.5% and average daily rate of $111. We were especially pleased that our open hotels generated $1.6 million of positive EBITDA during the fourth quarter, representing a second consecutive quarter of positive EBITDA. Similar to the overall portfolio, our monthly open hotel occupancy was relatively stable during the quarter at 41.2%, 36.5%, and 34.9% in October, November, and December, respectively. We are encouraged that demand during the first quarter has been stronger than our expectations. During January, our open hotels generated occupancy of 37.1% and ADR of approximately $111, which was ahead of our open hotels results for December. We expect February demand to remain consistent with January, which benefited from the continued strength in leisure and recent unexpected demand from responses to the tragic storms in Texas. Turning to the bottom line. Our fourth quarter hotel EBITDA and adjusted EBITDA were negative $7.3 million and negative $12.8 million, respectively, and adjusted FFO per share was negative $0.28. For the full year, we delivered adjusted EBITDA of negative $41.1 million and adjusted FFO per share of negative $0.98. As Leslie mentioned, we remain committed to monitoring operator compliance with the aggressive cost containment initiatives that we instituted at the beginning of the pandemic. Underscoring our relentless focus on controlling costs, our fourth quarter total hotel operating cost declined approximately 59% versus last year. Our team is vigilant on controlling variable costs during the quarter, resulting in a 64% reduction in wages and benefits from 2019. Additionally, with demand generally stable, we were also able to continue operating the hotels with minimal operating costs during the fourth quarter. Specifically, while fourth quarter revenues increased 8.7% from the third quarter, our operating costs only increased approximately 2.5%, which allowed our portfolio to increase the bottom line by approximately $4.9 million. Our team remains focused on cost containment initiatives to minimize cash burn in the current environment. Turning to liquidity. I would like to reemphasize that we entered the year in a strong position with approximately $900 million of cash and an undrawn line of credit. In responding to the COVID crisis, we took the necessary steps to preserve liquidity. Our efforts continue to be laser-focused, not only on ensuring that RLJ continues to maintain adequate liquidity, but also that our portfolio is well positioned to take advantage of opportunities to drive outperformance during the recovery and beyond. To that end, while we continue minimizing capital allocation initiatives until we have more clarity on fundamentals, including certain ROI projects, we successfully completed our in-flight 2020 capital projects and will continue to prioritize high-value projects, such as the addition of new rooms in Emeryville and Buckhead, conversions in Santa Monica, Charleston, and Mandalay Beach, as well as our less capital-intensive ROI initiatives, such as parking and contract renegotiations. We were encouraged that our fourth quarter monthly cash burn was significantly lower than expected, which was driven by our portfolio generating positive operating cash flow for the second consecutive quarter. Our fourth quarter hotel-level operating cash flow was approximately $10 million better than our expectations at the beginning of the quarter, which was primarily driven by stronger-than-expected revenue at our open hotels and the continuation of our cost containment initiatives with continued success in labor and benefits. Overall, based on our portfolio's lean operating model, our hotels are expected to continue to perform substantially better than portfolios comprised of traditional full-service hotels. Our hotel fixed costs and corporate-level outflows, including dividends, debt service, and G&A were also approximately $10 million lower than our expectations at the beginning of the quarter, which was primarily attributable to lower property tax payments during the quarter. These factors enabled us to exceed our cash burn estimates again this quarter. For the nine months of the pandemic, our average monthly cash burn was approximately $23.6 million, which came in near the bottom end of our prior estimated range. Based on our December 31 liquidity and continuing at our 2020 cash burn rate, we have approximately 47 months of total runway. Since providing our initial cash burn estimates in May, we actualized a cumulative cash burn that was over $100 million below the high end of our initial estimates. Looking forward, we expect first quarter monthly cash burn of $20 million to $24 million, which will be towards the low end of the range if first quarter lodging demand remains at current levels, and the high end of the range if first quarter lodging demand contracts from current levels. As a reminder, our cash burn estimates exclude RLJ funded capital expenditures, which we estimate will be between $75 million to $85 million for the full year 2021. Turning to our solid balance sheet. We ended the quarter with approximately $0.9 billion of unrestricted cash, $200 million of availability on our corporate revolver, $2.6 billion of debt, and no debt maturities until 2022. Our significant liquidity provides us with close to four years of runway based on the actual 2020 monthly cash burn, which ranks us among the best positioned lodging REITs, and provides the flexibility to take advantage of potential external growth opportunities. We continue to maintain significant flexibility on our balance sheet. As of the end of the quarter, approximately 81% of our debt is fixed or hedged, and 82 of our 101 hotels are unencumbered. During the quarter, we further enhanced our financial flexibility and amended our corporate line of credit and term loans for a second time. The latest amendment provided three additional quarters of financial covenant waivers, which now go through the end of 2021, and also continued the reduction of certain financial covenant thresholds through mid-2023. We continue to place great value on our lender relationships and have remained aligned with our lending partners throughout the process. As we look ahead, 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 many embedded catalysts. Thank you, and this concludes our prepared remarks. We will now open the lines for Q&A.
Operator, Operator
Our first question comes from Austin Wurschmidt with KeyBanc.
Austin Wurschmidt, Analyst
Leslie, you flagged that you guys have a tremendous amount of opportunities within your existing portfolio, and you're sequencing those based on risk-adjusted return profile. So as we start to think about the opportunities on the acquisition side, are those going to be more newer operating assets that just have kind of attractive demand generators and growth ahead? Or will they be more revealing what’s within the portfolio and require some additional heavy lifting like the conversions that you've been talking about now for the last several years?
Leslie Hale, President and Chief Executive Officer
Austin, thanks for the question. Well, I would say that it will be a combination of all of the above, given the fact that we have demonstrated the ability to do deep turns. We've demonstrated the ability to create value in all the assets that we've purchased, and we continue to do that. Today, where we sit, we have a greater amount of conviction in the types of assets that we invest in, rooms-oriented, high-margin premium branded assets. And we believe that we've demonstrated their resiliency today, but also, we believe that how they will perform in a recovery is another reason why we would focus on those assets. So what I would say is that, yes, we'll be looking at younger assets, but we will also not be afraid to look at assets that require a deep turn because we have an in-house team that has demonstrated the capacity and capability to do that. And we will do that also on our conversions that we've highlighted that we're working on right now as well.
Austin Wurschmidt, Analyst
Got it. And then, Sean, you outlined you expect to spend $75 million to $85 million on RLJ funded capital expenditures this year. How much additional maintenance spend are you anticipating? And can you expand a little bit on some of the most notable projects that are in that pipeline?
Sean Mahoney, Executive Vice President and Chief Financial Officer
The majority of the $75 million to $85 million we plan to spend in 2021 is tied to the significant conversions at Mandalay Beach, Charleston, and Santa Monica. The additional maintenance capital expenditures will align with what we've seen in the past few years and will be a relatively minor part of that total. Our capital deployment in 2021 is primarily aimed at these high-value conversions. Given our strong belief that leisure travel is set to outperform in the upcoming cycle, it is essential to position these assets to take full advantage of that leisure growth. Looking at these markets, Mandalay Beach 1 and 2, and Hilton Hotels along the California coastline present excellent opportunities for transformation to a Curio brand, which would help improve performance by eliminating competition and enhancing food and beverage offerings. We have strong confidence in this strategy. Additionally, both Charleston and Santa Monica are great leisure-focused markets where we plan to transition from the existing brand—Santa Monica to an independent venue and Charleston to a global lifestyle brand. Both should be well positioned to capitalize on the increase in leisure travel. Importantly, all three of these assets have performed exceptionally well during the pandemic, demonstrating that leisure customers appreciate them even in their current state, which reinforces our belief in the potential benefits of the repositioning.
Austin Wurschmidt, Analyst
And when do you think you're going to give some additional detail on the Charleston global lifestyle brand and any key money that may go along with that?
Sean Mahoney, Executive Vice President and Chief Financial Officer
We've made significant progress in our discussions and negotiations with all of our stakeholders regarding scope setting and contracts. We anticipate being able to provide more clarity this year around scope, return expectations, and capital. We recognize the market's eagerness for this information, and we are looking forward to sharing it, as we believe it will present compelling return on investment opportunities for us.
Operator, Operator
Our next question is from the line of Michael Bellisario with Baird.
Michael Bellisario, Analyst
Leslie, just as you're evaluating the growth opportunities that you referenced, maybe big picture. What signals, data points, macro indicators are you looking for in order for you to say, yes, let's put more money to work? Or now is the time to move faster?
Leslie Hale, President and Chief Executive Officer
So Mike, as we've said before, one of the key things for us was to be able to have visibility to be able to underwrite an asset at least breakeven so that we weren't taking on assets that were burning incremental cash. Additionally, we wanted to make sure that we had conviction in our underwriting. Based on the way that fundamentals have continued to show positive signs early on in this year, we feel that where we sit today, we have a greater amount of confidence in our ability to underwrite an asset getting back to pre-COVID levels. Now we may be off a little bit on the initial ramp here or there, but our confidence in the ability of the asset to return to pre-COVID levels is something we feel greater confidence today. Additionally, given how our portfolio has performed and achieving breakeven at our open hotels, we feel that we can also underwrite that as well. And so we are entering that zone of comfort in terms of being able to move on external growth, Mike.
Michael Bellisario, Analyst
Got it. Very helpful there. And then just one more for me on your closed hotels in New York, Chicago, San Francisco. How far away do you think we are on the fundamental front from getting to a point where those hotels maybe can reopen or at least you start to think more seriously about reopening them?
Leslie Hale, President and Chief Executive Officer
We're encouraged by some of the news about restrictions being lifted in both of those markets. I think most recently, New York talked about opening movies. Well, that's not a big demand driver for us, but it does tell us about the psychology of what's going on in the broader market. Look, we developed a framework that allowed us to operate hotels in a low occupancy environment. We will apply that same framework to these assets. And as we see the demand, appropriate demand arriving or emerging rather within those markets, we'll open these assets. I mean, obviously, San Francisco and New York are higher cost structure markets, which therefore requires incremental demand relative to other markets. But as we see that emerging, we will open those assets. And we're incrementally positive today relative to the restrictions being lifted.
Operator, Operator
Our next question comes from the line of Neil Malkin with Capital One.
Neil Malkin, Analyst
Good quarter. Can you elaborate on your strong expense controls, which were better than expected? Specifically, how do you view full-time equivalents in the current environment as demand normalizes? How do you assess your labor structure considering your success in operating at lower occupancies and potentially rethinking the balance between full-time and more flexible part-time staff?
Thomas Bardenett, Executive Vice President of Asset Management
Yes. Neil, this is Tom. What I would say is we've been, as Leslie spoke earlier, really monitoring the model and taking control of how many FTEs are allowed at each asset. And we have the luxury of benchmarking because of the amount of assets we have to be able to understand what that model should look like, no matter where it is in the country. So first and foremost, we kind of looked at the first quarter as the threshold to compare to as we looked at the quarters two, three, and four in 2020, to be able to understand what we came from and where we are today. And then we looked at what we are actually doing at the property level, from food and beverage closing outlets to a breakfast in an environment that's no buffets. And so you drastically reduced FTEs in the food and beverage area. When we think about rooms and protocol and housekeeping, we also really identified the productivity opportunities related to the fact that no longer are you cleaning on every stay-over; you're actually cleaning on checkout. So we also looked at FTEs knowing that productivity would improve in those areas, even though we had to do more cleaning in the housekeeping area in the lobby areas. But at the end of the day, we think when we come out of the recovery, we will be at less FTEs than we were when we started in quarter one 2020. So as we gradually increase and ramp up in occupancy, we also have a model in regards to when to put those FTEs back. So the biggest relationship will be when food and beverage starts to open outlets. And sales and marketing come back in regards to group business and BT when we start to look at the management payroll. But on the actual associate payroll, we feel very good about where we're at, running similar levels in Q1 than we did in Q4. And then we'll gradually ramp up as occupancy ramps up knowing that we don't want to get back to the ultimate level we started in Q1 2020. Sean, do you want to add to that?
Sean Mahoney, Executive Vice President and Chief Financial Officer
Yes. Neil, to provide some data points around that. For the fourth quarter, our cost per occupied room at the rooms departmental level decreased by approximately 24%. This reduction was mainly due to two-thirds coming from savings in wages and benefits per occupied room, while the remaining one-third was related to commissions and other costs per occupied room. We believe we have not only limited business costs effectively but also improved efficiency when looking at per-occupied room metrics. Furthermore, I am very proud of our food and beverage performance this quarter. Despite our revenue from that sector dropping by 90%, we still achieved profitability at the departmental level, which is a remarkable accomplishment for our team as it reflects our ability to manage costs effectively. We are optimistic about future synergies emerging from this situation, especially regarding the overall cost structure where labor will play a significant role. Leslie?
Leslie Hale, President and Chief Executive Officer
No, no. I think Sean put a bow on the very end there in the sense that we've been operating this low occupancy environment for over nine months. And we have a greater amount of confidence in our ability to have some of these cost efficiencies sustained past the recovery. And you heard Tom talk about food and beverage and housekeeping. And we also believe that the conversations we've had with brands on above property costs relative to shared services. We also think that we've been operating within some of these clusters. We've always done clustering in assets that were close proximity. But we've expanded the clustering to include assets that are further away, assets that are with other owners, and we think that there's an opportunity for some of those cost savings to sustain themselves past recovery as well. So I think overall, we are incrementally positive on the ability to see some benefits here.
Neil Malkin, Analyst
Interesting. Well, yes, I think that's already working. So look forward to seeing how that plays out. Second one for me. You talked about you sold some assets in Houston. It looked like they were in need of some CapEx, which I imagine drove the sale. But just curious on your overall view of capital allocation in this coming cycle. Are there markets that you feel like you maybe want to lighten up on in the form of acquisitions and other places? You mentioned you expect leisure to outperform this cycle. And just given that I think a lot of paradigms have changed for a lot of coastal markets in post-COVID in terms of people leaving, remote work, etc. How does that go into your calculus of how to move the portfolio forward over the next, say, five years?
Leslie Hale, President and Chief Executive Officer
I appreciate your questions, Neil. Regarding our portfolio, we are satisfied with it, especially considering the significant number of dispositions we made in 2019. We have done extensive work in that area and will remain active in managing our portfolio, looking for opportunities but not planning to exit any markets at this time. As we anticipate how the recovery will progress and explore acquisitions, we will focus on our traditional strengths. We have always targeted markets that are poised to outperform or have growth catalysts relative to the broader industry. We seek markets that align with our existing footprint and enhance it, filling in areas where we need more exposure. We are also considering how recovery will unfold, particularly with leisure being the key demand driver during this cycle, and with business travel making a gradual return followed by groups. Therefore, it's important that the assets we evaluate can attract diverse demand segments. We aim to ensure that our assets can support both weekend and midweek demand. Thus, we will continue to seek assets with multiple demand drivers in markets that add value to our overall footprint.
Operator, Operator
Our next question is from the line of Tyler Batory with Janney Capital Markets.
Tyler Batory, Analyst
Apologies if this was already addressed. I wanted to go back to the capital allocation discussion and interested in how you're looking at things. How does paying down debt or looking at something creative potentially with the preferred, how does that fit in? I'm curious when you think about those as options to create value.
Sean Mahoney, Executive Vice President and Chief Financial Officer
Great. Thanks. Good question around capital allocation there. I think from our perspective today, we think the most valuable capital allocation returns we're going to get are around a combination of both internal growth within our portfolio conversions being the biggest driver there, as well as acquisitions as a subset of that for external growth. On debt and deleveraging, we think that our leverage levels that we entered into are appropriate. We understand that this was a once-in-a-thousand-year flood or whatever. And we think that our balance sheet actually was able to allow us to thrive on a relative basis during this pandemic. And so I think that actually validates our view around where our leverage levels were. And so I think from a balance sheet perspective, our priorities are around thinking through our debt maturities. Frankly, we don't have any until 2022, but the markets are accommodating. So we're looking at proactive and opportunistic financing opportunities, but that's going to be around the opportunities in the marketplace today. Specifically around the preferreds, under our credit agreements, we're not allowed to buy back preferreds even if we want to. And so I think that on a relative basis, that's really not an option for us today. Historically, pre-COVID, they always traded at a premium to par. And so that made the math difficult around that, even if that was something that we want to pursue.
Tyler Batory, Analyst
Okay. Very helpful. And this is a follow-up question. On your revenue management sales strategies, can you talk a little bit more about what you're doing right now? But I'm also interested in how those strategies might evolve over the next several months here as some demand starts coming in? And then also interested if you have an idea of potentially roughly how many hotels in some of your markets, some of your competitors, how many are still closed? And yes, there are instances where properties that we opened recently, what that is doing to market trends?
Sean Mahoney, Executive Vice President and Chief Financial Officer
I’ll begin with the question on revenue management, Tyler. Currently, our strategy is focused on filling rooms. Entering the fourth quarter, leisure travel was the primary segment, as Leslie indicated, while group bookings remained around 7% to 8%. We are now experiencing a slight shift in this mix as we move into the first quarter, with group bookings rising to nearly 11%. This aligns with Leslie’s earlier comments regarding social events, weddings, and sports groups. We are optimistic that business travel will begin to recover, but it currently stands at about 12%, primarily involving the medical, pharmaceutical, insurance, and project-related sectors. From a revenue management perspective, as restrictions ease, we are seeing chances to increase rates in those markets. For example, in warm weather areas like Key West and South Florida, demand is strong enough that we can raise average rates compared to when occupancy was around 30% or 40%. However, midweek occupancies at that level mean we are primarily targeting last-minute bookings. Encouragingly, we are receiving more group leads and bookings. For instance, this March, compared to last year when all professional seasons were canceled, we now have bookings for events like the NBA All-Star Game in Atlanta and the NCAA tournament in Indianapolis as attendees are allowed back into stadiums, along with spring training bookings. As we notice more group opportunities and occupancy rises, we will continue to focus on increasing average rates and adapting our mix. Regarding the status of our hotels, most of our select service properties are open, with the last ones being the larger convention center hotels in urban areas like New York and San Francisco. Overall, very few select service and compact full-service hotels remain closed, with market conditions driving this trend.
Operator, Operator
Our next question is from the line of Chris Woronka with Deutsche Bank.
Chris Woronka, Analyst
I think you mentioned that you're going to be going ahead on working on three of the Wyndham conversions and repositionings this year. I guess is there any appetite to begin working on more than three, given that you're still going to be running kind of below peak occupancy probably for most of the year? Are you able to accelerate some of those even if you don't have the final brand decision made yet?
Thomas Bardenett, Executive Vice President of Asset Management
Yes, Chris, that's a great question. To clarify, only two of the projects are Wyndhams; the third is an Embassy Suites at Mandalay that we are converting to Curio. We want to coordinate the relaunch of all these hotels with an improvement in fundamentals. Therefore, we are timing the openings of Santa Monica, Charleston, and Mandalay Beach for 2022 to take advantage of this uptrend. These projects are very complex, and we must ensure that the relaunches from Wyndhams, which have performed well during the pandemic, are executed properly. It requires considerable effort to get the design and rebranding right, so we don’t want to rush this process. We prioritized Charleston and Santa Monica because we see more immediate opportunities there. We plan to roll out a couple each year, allowing us to give each project the attention it needs while providing short-term benefits for our company. Additionally, these new conversions will enhance our fundamentals in the future as well.
Chris Woronka, Analyst
I appreciate that. I think we've observed a trend post-COVID where there may be less office space in certain urban areas but an increased need for meetings in locations near those cities, and you have properties in those areas. I'm particularly considering possibly the embassies. I'm not sure about the meeting space situation there at the moment, but do you believe there's an opportunity to capture the trend of regional, smaller meetings? Can you take advantage of that, or would it require some changes?
Leslie Hale, President and Chief Executive Officer
Yes. I would say that what you're describing is sort of some of the puts and takes, right? If people work from home more, their need to visit the home office increases or team offices increase. And I would tell you that our product type and our overall portfolio, that type of meeting is right in our sweet spot. Group historically has only represented 20% of our contribution. But small meetings have represented 65% of our demand. And so that what you were describing is right in the sweet spot. And as we think about 2021, the trend that is emerging is small group meetings, most of it's smurf related, social related, but we also saw some team training. And as we see BT upticking on the back half of the year, we would expect to be able to capture a meaningful portion of that.
Operator, Operator
Our next question comes from the line of Gregory Miller with Truist Securities.
Gregory Miller, Analyst
I'd like to follow up on one of my favorite topics, given many mornings that I have spent at the breakfast buffets lines at brands such as Embassy Suites and Residence Inn. Last quarter, I believe we heard from Tom that you're having conversations with the brands on revised F&B standards. Could you update us on that timing given that customers may become more demanding for normal buffets as we emerge from the pandemic?
Leslie Hale, President and Chief Executive Officer
So first of all, I just want to say that Tom owes me $1 because I betted him that this question will come up, and I'll let him answer. Go ahead, Tom.
Thomas Bardenett, Executive Vice President of Asset Management
Greg, we will feed you again. I'll just let you know when and how. First and foremost, as you know, everybody, whether you're a full-service hotel or select service hotel has really modified the breakfast experience because that was the first thing to go to. So as you think about the current environment that we're in, and this is an update in regards to what the brands are thinking about after we all kind of start to move past, let's say, 30%, 40%, 50% occupancy is kind of the threshold to make a change. But the first current environment that we're in is still doing a bottle water, a yogurt, maybe a breakfast sandwich, just to be able to say that here's something for you if you gave free breakfast in the past. The ramp-up is all being looked at as the second phase because we're still not to hotel profitability, as you all know, until you start to get into the 40%, 50% occupancy range, where you start to feel like you can put services back and the customer, actually, the consumer is changing, too. As Leslie mentioned earlier, it's a significant leisure customer and your core customer, BT and group, has not come back to the great degree that we want it to be. So what the ramp is going to do is now start to move towards more of a, what I would call served breakfast. So Greg, in the past, you would go and you would have that buffet opportunity to meander around and decide what you wanted to grab and go. Now you have to go and actually have it served primarily because of sanitation and the safety protocols that we have in place. We also believe, though, that's a good thing long term because it's going to remove waste, and it's also going to change the amount of labor that you're going to have by having people go to have it served to you versus having it be a free-for-all. What I would think is going to happen over the next 60 to 90 days is what's that future going to look like after the ramp. That's where the brands are spending time and energy right now. And I can tell you that it's not going to be what it was; it will be less than what it was. So for instance, the evening reception for an Embassy Suites, what we're talking about is the potential of having 1.5 hours with a two-drink maximum and having the opportunity to upsell at our bars that are open for people to purchase alcohol. So I think it's evolving. The brands are really taking it seriously because they know not only the hours of operations that Leslie spoke to in regards when to open and how long, but the actual deliverables that happen. But I do think, Greg, it won't be what it was. And we adjust at the end of the day in regards to how that gets to that final phase when we get to the back to the 70s and 80% occupancies as the portfolio used to operate at.
Gregory Miller, Analyst
I appreciate all that insight. And I hope I do contribute too much to the labor costs when I get a chance to get back to traveling again. My second question is a variant of Neil's first question. We've received questions from investors recently, RLJ investors, relating to the differences in post-COVID margin expansion opportunities at compact full-service hotels versus select service hotels. And while I recognize that your portfolio has a broad geography with labor and operating models that are not uniform across markets or city centers versus suburbs. Could you provide some high-level thoughts on if you anticipate more long-term margin expansion opportunities from your compact full-service hotels or from your select service hotels?
Sean Mahoney, Executive Vice President and Chief Financial Officer
Certainly. Let me begin, Greg, and then I'll hand it over to Tom. Overall, we don't see a significant difference in the performance between select service hotels and compact full-service hotels. The advantage of the compact full-service model is that we operate them with streamlined cost structures similar to select service hotels. Regarding long-term costs, as Leslie mentioned, we believe there is an opportunity for EBITDA to return to pre-COVID levels before revenue does, which suggests some margin expansion. We haven't specified what that might be, as it's too far in the future and there are many variables involved. However, we are confident that we can reduce costs in our model compared to pre-COVID levels. Some of these cost reductions will come from food and beverage, as Tom discussed. Labor will also be a significant factor. Remember, leading up to COVID, labor cost pressures were a persistent issue in our industry. We believe we can manage labor costs better moving forward. Additionally, as Leslie pointed out, we're exploring the possibility of increasing the scope of operations within our hotels, allowing for deeper functionality beyond just a general manager or an engineer. Lastly, we anticipate potential cost synergies in corporate allocations from brands, which historically operated on a less efficient basis. Moving forward, we expect a model where you'll choose to participate rather than opting out. I’ll let Tom or Leslie elaborate on housekeeping and the related synergies.
Thomas Bardenett, Executive Vice President of Asset Management
Yes. So I would just add one more thing. And that is when we looked at labor throughout 2020, 60% is rooms, about 15% R&M, and 12% food and beverage. So when you think about the labor side, rooms are your predominant player. And what Leslie mentioned earlier, which I think is worth repeating, is the take rate. And the way the consumer acted in the past is they went to the desk, and we had to ask them if you didn't want your room clean. Now it's a real reversal in regards to you need to ask if you want your room clean. So that productivity is really the driver, no matter if you're a compact full-service or you're a select service hotel. And so I just think if you pinpoint where the most opportunity is, it's probably in that category. And we'll have to see when BT comes back, as well as group, because they're going to be a different consumer paying a higher average rate and probably have a preference potentially where that take rate might go up. So I think that's what we're going to monitor and evaluate as we go forward, Greg.
Leslie Hale, President and Chief Executive Officer
Yes. I think the things that we have identified that give us incremental confidence and the ability for the efficiencies to sustain past recovery are universal to all hotels. They are not specific to full-service or limited service. So the housekeeping, the F&B, the above-property cost of clustering, that is agnostic to the type of hotels.
Operator, Operator
Our next question is coming from the line of Anthony Powell with Barclays.
Anthony Powell, Analyst
I have a question regarding capital expenditures and the renovations. I had anticipated a slightly higher capital expenditure this year, so I'm curious if the scope of the Wyndham and Mandalay Beach renovations has changed at all. Additionally, looking beyond 2021, what should we expect in terms of annual capital expenditures as you continue to renovate the properties?
Sean Mahoney, Executive Vice President and Chief Financial Officer
Yes. Anthony, the scope of the renovations has not changed. We believe our branding choices still align with our baseline. We don't have a comment on your modeling, but from our perspective, it remains unchanged. Historically, our total capital has been around $100 million for a portfolio of our size, which is probably a good baseline for long-term modeling. However, there have been years when we've increased capital in markets to position the hotel for better performance, and we may do so in the future as we consider the sequencing of the capital. Overall, a long-term run rate of $100 million is a reasonable estimate.
Anthony Powell, Analyst
Got it. Okay. I have a question about the balance sheet. Before the pandemic, you were considering refinancing your 6% notes due in 2025. I understand that during the pandemic, pricing conditions made that seem less favorable. However, we've noticed that some of your peers have successfully issued convertible notes at very low interest rates. Could that be a potential option for you to replace those notes with better pricing?
Sean Mahoney, Executive Vice President and Chief Financial Officer
Yes, Anthony, that's one of the options we have. From a financing standpoint, addressing the 2022 maturities is a priority for us regarding opportunities. Additionally, the capital we raised is currently more valuable for internal growth and acquisitions. However, the FelCor debt is relatively high cost at 6%. We will consider that opportunistically. You're correct that the high-yield and convertible markets have been favorable this year, so we won't rule anything out, although it's not as high on our priority list as it was last year. Last year, the focus was on bank debt due to the arbitrage between the 6% we have and new bank debt, which we estimated could be around 3%. That situation hasn't returned yet, especially in bank debt, but we will keep monitoring for opportunities. Expect us to be active and opportunistic regarding all aspects of our capital structure.
Operator, Operator
At this time, we've reached the end of our time for today. I'll turn the floor back to Leslie Hale for closing remarks.
Leslie Hale, President and Chief Executive Officer
Well, thank you, everybody, for joining us. We hope that all of you are able to get your vaccine soon as we sort of move into the beginning of the year, and that everybody sort of stays safe and healthy. Thank you again for joining us.
Operator, Operator
Thank you. This does conclude today's conference. You may disconnect your lines at this time, and we thank you for your participation.