Earnings Call Transcript - SHO Q1 2020

Operator, Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sunstone Hotel Investors First Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. I would like to remind everyone that this conference is being recorded today, May 8th, 2020 at 12:00 PM Eastern Time. I'll now turn the presentation over to Aaron Reyes, Vice President of Corporate Finance and Treasurer. Please go ahead.

Aaron Reyes, Vice President of Corporate Finance and Treasurer

Thank you, Anna, and good morning, everyone. By now, you should have all received a copy of our first quarter earnings release and supplemental, which were made available earlier today. If you do not yet have a copy, you can access them on our website. Before we begin, I would like to remind everyone that this call contains forward-looking statements that are subject to risks and uncertainties, including those described in our prospectuses, 10-Qs, 10-Ks, and other filings with the SEC, which could cause actual results to differ materially from those projected. We caution you to consider these factors in evaluating our forward-looking statements. We also note that this call may contain non-GAAP financial information, including adjusted EBITDA, adjusted FFO and hotel adjusted EBITDA margins. We are providing that information as a supplement to information prepared in accordance with Generally Accepted Accounting Principles. With us on the call today are John Arabia, President and Chief Executive Officer; and Bryan Giglia, Chief Financial Officer. After our remarks, we will be available to answer your questions. With that, I would like to turn the call over to John. Please go ahead.

John Arabia, President and Chief Executive Officer

Thank you, Aaron. Good morning, everyone. Let me start off by saying I hope you and your families are safe and healthy during this incredible time. We very much appreciate you taking the time out of your busy schedules to get what is a very important update on the company. Much has changed in the three months since our last earnings call as the country, lodging industry and our company have had to react to the health risks and economic threats posed by COVID-19. Today, I'll provide an update on the following: first, what has transpired at our company over the last three months; second, how we reacted quickly in the early weeks of the pandemic to protect our company, mitigate our damages, and preserve our already significant liquidity; third, the current status of our portfolio and the operating environment; and finally, our focus on methodically managing our business to not only protect our company, but to position our company to take advantage of the significant dislocation that is likely to occur. So let's begin with a review of the past three months. Following our earnings call on February 19, the world generally seemed to be business as usual. We continued to execute on our business plan, pressed forward with ongoing capital projects, worked on additional asset sales, and gradually bought back common stock as our share price declined. In fact, we were quite pleased with our portfolio operating performance as we began 2020, with hotel EBITDA exceeding our budget in both January and February. In early March, right after the Raymond James and Citi conferences, it became clear that concerns over COVID-19 were increasing; major sporting events, festivals, and conferences were being canceled. Stay-at-home orders and travel restrictions that were never before considered a possibility became increasingly common. By early to mid-March, it became apparent that travel was slowing materially and action was required. We reacted quickly. Working with our operators and in consultation, we began the systematic process of temporarily suspending operations at many of our hotels. Between March 12 and April 6, we suspended operations at 14 of our 20 hotels and dramatically reduced the service levels and amenities of those hotels that continued operations in order to mitigate the spread of COVID-19 and minimize financial losses. Our focus was squarely on maintaining liquidity and determining how much of our sizable cash balance we would use each month as hotel operations were suspended or significantly curtailed. Our significant cash position, low leverage, well-positioned recently renovated portfolio, and strong relationships with our capital partners gave us significant confidence that we were among the best positioned to weather this unprecedented storm. It was this confidence that allowed us the flexibility to balance our short-term needs for liquidity with our ability to manage and invest in our business to maximize long-term value. With this balanced approach, we did the following: first, we suspended operations at 14 of our 20 hotels and materially curtailed operating expenses at those hotels that remained operational. These steps were very difficult and resulted in a number of layoffs and furloughs. At the same time, in conjunction with our operators, we decided to maintain various disciplines in our hotels, including the hotel executive teams, engineers, security staff, HR personnel, and sales professionals. We elected to keep these disciplines to maintain the facilities, stay in contact with and help displaced associates, and to maintain relationships with customers to sell future business so we could get back to business as soon as practical. While this strategy will result in a slightly higher monthly cash burn rate, we believe strongly it is the right thing to do for our hotels, their associates, and our long-term value. Not all owners have taken this approach, as it is more costly in the short term. We think it is the right long-term decision. Second, we postponed approximately $35 million of capital projects, leaving approximately $40 million of our 2020 budgeted renovations. At the same time, we accelerated several very disruptive projects that were on hold waiting for a quiet time to be completed. These projects add up to roughly $6 million to $8 million of total capital investment and will be completed while the hotels have suspended operations, saving us many millions of dollars of operating displacement. Third, we have cut back on corporate expenses, likely resulting in cash savings of approximately $2 million to $4 million this year. Fourth, in abundance of caution and during the period while we were working to get a better understanding of our cash burn rate, we drew down $300 million on our credit facility. Following that draw, we're working through the process of attaining covenant relief that will likely be needed on our credit facility, term loans, and private placement notes. While we cannot assure you that we will reach an agreement with our capital partners, we believe we are in the later stages of obtaining a covenant relief package, which is expected to provide access to the facility funds and flexibility to manage our business without some of the financial limitations that highly-levered companies could encounter. Finally, as a result of discussions with our unsecured lenders, we proactively decided to temporarily suspend our common dividend payments and share repurchase activity. We view this as a small price to pay in the short term for added stability to the company and the flexibility we expect from our debt capital partners. Where does that leave us? Well, in the current environment with most hotels closed or virtually no revenues, we expect to incur property level cash losses of approximately $18 million to $21 million a month. Additionally, we expect to incur approximately $10 million to $11 million a month in corporate expenses, debt service, and other expenses, which includes roughly $3 million to $5 million of monthly capital investments and approximately $1 million a month in preferred stock dividends. When combined, we estimate our all-in cash burn rate to be approximately $28 million to $32 million a month on average. We expect this cash burn rate to gradually decline as we methodically reopen hotels and as occupancy and cash flow build. At the end of the quarter, we had approximately $547 million of unrestricted cash, excluding the previously announced $300 million line draw on our $500 million credit facility. Taken to an extreme, our significant cash position and access to our sizable credit facility could sustain the current limited to no revenue environment for roughly two-and-a-half to three years, if required. If the situation worsens, we could make incremental cuts to our capital spending, corporate expenses, and other areas. That said, we don't expect to need anywhere near that amount of financial runway, which will leave us with more capital to go on offense earlier than most. As all of you know, we have taken a conservative approach to our balance sheet based on our fundamental view that the significant operating leverage of hotel ownership should not be compounded with high financial leverage. This view has not always been popular nor appreciated. As we have always stated, we have positioned our balance sheet to endure a 50% decline in same-store EBITDA and still have offensive capabilities. While this downturn is worse than we had planned for, our conservative leverage profile provides the safety to weather a no revenue environment for an extended period of time while also positioning us to be among the first able to take advantage of the significant dislocation expected in the private hotel market. Very few other hotel owners share this enviable position, and we fully expect many hotel owners will be significantly impaired or worse for an extended period, particularly if the industry emerges from this pandemic only to face downturns in hotel demand and pricing levels. Our balance sheet was built for sizable recessions. Most owners were not. So now let's turn our discussion to our portfolio, what we are seeing on the ground and how we expect to reopen our hotels. As mentioned, between mid-March and early April, we suspended operations of 14 of our 20 hotels. The six hotels that remained open include Boston Park Plaza, Renaissance Baltimore, Hilton Times Square, Renaissance LAX, Renaissance Long Beach, and the Embassy Suites La Jolla. A couple of those hotels secured government business including housing the National Guard or military personnel and have recently run daily occupancy levels in the low 20% range. We first started witnessing group cancellations around the time of our last earnings call in mid to late February. Group cancellations increased meaningfully in March and April and have continued in early May as shelter-in-place orders extended and people remain reluctant to congregate. Through May 5, we have received group cancellations representing approximately 376,000 room nights and $137 million of group revenue, approximately 29% of our 2020 budgeted group revenues. Most of these cancellations are group meetings scheduled for March through June. Approximately 72% of our second quarter budgeted group room nights have canceled, and we anticipate most of our remaining second quarter group rooms will cancel as well. As of March 5, only 18% and 1% of our budgeted group room nights have canceled for the third and fourth quarters respectively. However, we expect these figures to continue to increase until there’s greater clarity around our ability to congregate and an improvement in the confidence of the traveling public to do so. Not all the news is negative. During the rapidly changing landscape in March, while significant numbers of current year group rooms were canceled, our hotel sales teams grew our portfolio room nights on the books for 2021 by 10,000 rooms and added an additional 14,000 room nights for 2022. Our strategy of maintaining several sales professionals on property is paying off. In April, while closing hotels, the hotel sales teams booked new group business, not including any canceled or rebooked events, but true new business for future years by nearly 23,000 room nights, showing that customers are looking to the future. We have already rebooked or are in the process of amending contracts on roughly 15% of cancelled group business, and another 25% of the cancelled group business indicated their intent to rebook and are working with hotel sales professionals. As these groups that have rebooked or intend to rebook comprise our larger events, they equate to nearly 50% of the rooms that have been canceled. What type of business will recover first? When will we reopen hotels? What are we doing to reopen hotels? We believe drive-to leisure demand is likely to come back quickly, given the evidence of significant pent-up demand to travel and vacation. We also believe there will be a gradual recovery in commercial transient business as air travel resumes, and finally, we expect a delayed recovery in large group business, particularly if social distancing mandates remain in place for an extended period. We are working daily with our operators to plan for the eventual reopening of our hotels. The truth is we don't yet know the specific timeline for resuming operations at each hotel. However, as it stands today, subject to change, we are likely to see a few of our hotels reopened in June and others reopening in July. The recovery will be gradual, and hotel operations and service levels will need to change to properly address health and safety concerns and the financial reality of low occupancies for some time. Our team is working directly with our operators daily to finalize the details related to new openings, cleaning and staffing standards, and the impact on our margins and financials. We will have more information to share as time progresses. All operating paradigms have been thrown out, and all operating models are being reviewed for the future. While this is a challenging process, I believe strongly that the long-term outlook for the industry will be better. Before I turn it over to Bryan, I would like to take a moment to thank our operating partners, including all of those at Hilton, Marriott, Hyatt and our independent operators for their herculean efforts over the past three months. This has been the most difficult operating environment our industry has ever faced and our operating partners and hotel teams have worked around the clock with fewer resources to handle this challenge as best as possible. I also want to thank our hotel executives, not only for their efforts in protecting our hotels but more importantly for assisting our out-of-work hotel associates, many of whom have worked at our properties for decades. I want to thank our team at Sunstone for jumping into action and reacting quickly to this crisis, putting us in a position not only to weather the storm but to come out of this stronger than before. And most importantly, to our hotel associates, the heart of our industry, please know that we are doing everything within our power to reopen safely and as soon as possible, so you can return to work and do what you do best. With that, I'll turn it over to Bryan.

Bryan Giglia, Chief Financial Officer

Thank you, John, and good morning everyone. As of the end of the quarter, we had $847 million of unrestricted cash including the $300 million draw on our credit facility. As John mentioned, we are currently working with our bank group and secured note holders to amend our in-place credit documents and expect to agree on a waiver of financial covenants over the coming weeks. The intention of the waiver is to provide relief during the time period in which trailing financials will be impacted by the COVID-19 pandemic. As we've discussed before, our balance sheet was built to easily maneuver through a significant recession. However, it unfortunately was not designed to withstand an ongoing global pandemic. That said, while we anticipate that we will emerge from the covenant relief period with higher leverage than where we stand today, we expect to have significantly more flexibility and ability to take advantage of opportunities than those that went into this with higher leverage. It is important to note and to reiterate a point that John made. Based on our current cash balance excluding the $300 million drawn from our credit facility, or any future draws on our credit facility, as of the end of the first quarter, our cash balance is approximately $547 million. We would have approximately 18 months of liquidity before we would need to raise any additional leverage from proceeds from our line or any other capital source, which could extend that liquidity to up to two-and-a-half to three years, assuming no change to the operating environment, meaning the 14 hotels that have suspended operations continue to be suspended. This also assumes that we continue with our current planned capital investment, which could be reduced if necessary, and that we do not implement any additional cost mitigation measures. This is an important distinction. When we emerge from this, we will have significantly more capacity than others. Our balance sheet was designed to handle a major downturn, so even if we emerge from the pandemic into a recessionary macro environment, which is likely, we will not need to access additional equity capital to shore up our balance sheet or right-size our leverage. This may not be the case with everyone in our industry. Shifting to first quarter operations, financial results are provided in our earnings release and supplemental. First quarter operations were negatively affected by the dramatic reduction in domestic travel resulting from the COVID-19 pandemic. First quarter adjusted EBITDA was $14.1 million and first quarter adjusted FFO per share was a loss of $0.01. First quarter earnings were negatively impacted by a $10.1 million expense related to current and future wages and benefits for furloughed or laid-off hotel employees. We recorded impairments totaling $115.4 million during the first quarter, predominantly due to an impairment at Hilton Time Square, which we wrote down by approximately $108 million to a value of $61 million, and Hilton Renaissance Westchester, which was written down by approximately $5 million to a value of $30 million. Additionally, a $2.3 million impairment loss was recorded to write off an abandoned expansion project at Hilton San Diego Bayfront. The Hilton Time Square impairment was due to deteriorating long-term profitability expectations and upcoming adjustments of ground rent and property taxes which could result in increases that would likely exceed our previous expectations, along with the mortgage's upcoming maturity and the catastrophic effects of COVID-19. The impairment reflects the cumulative impact of all these challenges and aims to represent current market value. On a current cash flow basis, we expect the hotel to lose between $6 million and $8 million of EBITDA this year, which could further deteriorate if the New York market doesn't see travel demand return in the second half of this year. Based on our projections for near-term losses, the significant increase in property taxes, and uncertainty around negotiations regarding ground rent increases and upcoming mortgage maturity, we are currently working with a special servicer, which may lead to the appointment of a receiver. This is a decision we do not take lightly, but given the challenging circumstances, we believe that this is the right course of action for our shareholders. While we did not anticipate the pandemic, we had identified several of these issues and had been working for over a year to explore every potential opportunity to salvage value. Ultimately, we were unable to reach an agreement with any counterparties that would have enabled the property to remain a viable business. Now turning to dividends, as John mentioned, in an effort to preserve liquidity, we have suspended our common dividend. Depending on the taxable income this year, we will determine when to reinstate our common dividend. Separately, our board has approved routine quarterly distributions for both series of our preferred securities. With that, I'd like to open the call to questions. Anna, please go ahead.

Operator, Operator

Thank you for your question. We will now take a question from Lukas Hartwich with Green Street Advisors.

Lukas Hartwich, Analyst

Thanks. For closed hotels, I'm just curious what markers you're using to gauge when to reopen properties?

John Arabia, President and Chief Executive Officer

Hey, Lukas, good morning. Our asset management team has been working daily with our operators to try and answer those questions. Obviously, this is something new to all of us and something we've never had to do before. What we're looking for is any indication of demand in markets whether that's indication of transients or groups that will show up short-term. So the real question then becomes at what point do we open? It's once we can do so safely. Once we have protocols in place to handle guests and staff safely, while not losing more money than we're currently burning. The good news is we've maintained our executive teams, engineering staff, HR professionals, and sales professionals on property. Our ability to turn these hotels back on will likely vary depending on the complexity of each hotel, taking approximately three days to seven days.

Lukas Hartwich, Analyst

Great, that's really helpful color. And then just to turn to values. I'm just curious at Sunstone; we're looking for acquisition today what discount would you require compared to where values were a few months ago?

John Arabia, President and Chief Executive Officer

Great question. Unfortunately, I don't have a great answer at this time. What we're seeing right now is snippets of information. In such a dislocated period, there is a significant bid-ask spread. We have heard sellers looking for liquidity and asking for discounts of 10% to maybe 20%, while buyers are looking for 25%, 30%, 35%, or more percent below what values were prior to COVID-19. However, that will change in this fluid situation as we better understand the virus, travel trends, and the debt markets.

Lukas Hartwich, Analyst

Right. And then maybe just one final one kind of bigger picture theoretical, as people get more comfortable with working from home and virtual meetings. The obvious question comes up: will lodging demand, business transient, et cetera be impacted long-term? I'm just curious what your thoughts are on that?

John Arabia, President and Chief Executive Officer

I don't think so, Lukas. I really don't. There's an enormous pent-up demand for people to get out of their homes and to do something fun and congregate. I've been on countless video calls, and I cannot wait to get on an airplane. I love my family, but I cannot wait to get out of my house. Business is best conducted face-to-face. While there may be systematic changes, I do not expect them to materially impact our business long-term.

Operator, Operator

Yes, sir, we will take our next question from Anthony Powell with Barclays.

Anthony Powell, Analyst

Hi, good morning. I guess on the question on Wailea it's obviously a leisure market in Hawaii, but what's the thought process about a reopening? And when do you think you may start to see travel resume there?

John Arabia, President and Chief Executive Officer

Yes, Hawaii in general has been shut down with an effective quarantine for anyone traveling to Hawaii for 14 days. Air traffic directly to Maui has essentially been completely curtailed. Until local health authorities lift that, occupancy there will remain low. However, inquiries and reservations for Wailea for the fourth quarter are off the charts, and I believe that once restrictions lift, Wailea will be just fine.

Anthony Powell, Analyst

Got it. Thanks. And going back to capital allocation, you bought back stock really in the quarter and suspended that. How do you view buying back stock versus buying hotels that could be available now? Are you looking at acquisitions once you get past this acute crisis?

John Arabia, President and Chief Executive Officer

We suspended our stock repurchase not out of a lack of desire but out of ensuring our balance sheet is solid as we navigate covenant amendments with our capital partners. The real question will be when we come off this holiday. I expect we will have some flexibility on capital allocation, but I cannot go into specifics right now. Regarding acquisitions, it's too early. The market for acquisitions is not robust at this time, and we are still gauging where pricing stands.

Anthony Powell, Analyst

Got it. And if you get the covenant waiver, could you be in the market for acquisitions by the fourth quarter or first quarter next year? What's the earliest you think you could get back to the market?

Bryan Giglia, Chief Financial Officer

Good morning, Anthony. We do not yet have a waiver in place, but generally speaking, those with lower leverage will have more flexibility when it comes to capital allocation, including acquisitions. The restrictions during the waiver period vary from company to company, those heavily leveraged will face more significant restrictions. We expect that, in the coming weeks, we should reach a more favorable agreement. The real distinction will be clearer when we emerge from this, assessing our leverage and acquisition abilities post-waiver.

Operator, Operator

We will now take our next question from Shaun Kelly with Bank of America.

Shaun Kelly, Analyst

Hi, good morning. John, Wailea sounds appealing, so I was hoping you could comment further. Bryan, your clarity on expectations was important. Do you expect the restrictions during the covenant waiver period for Sunstone to be lower, and will you have more flexibility for capital allocation than most?

Bryan Giglia, Chief Financial Officer

Good morning, Shaun. While I can't provide specifics, our credit profile compared to others will warrant slightly more flexibility compared to those with higher leverage. That's about as specific as I can be right now.

Shaun Kelly, Analyst

Understand, appreciate that. On the cash burn figure you provided, you mentioned the differences may be due to sales staff and executives remaining employed. Is that the biggest primary difference, or are there other factors?

John Arabia, President and Chief Executive Officer

From what we can tell, it’s the number of executives and salespeople retained. Some have taken a lock-the-door mentality due to liquidity constraints. There are certain owners who can’t sustain such cash burn, and they are cutting expenses aggressively. This will eventually manifest itself in the property’s ability to reopen quickly and provide safe environments for both guests and staff, and how it treats group customers long-term. We own a $4.5 billion to $5 billion portfolio; thus, it's vital to keep right engineers on property to protect those assets.

Operator, Operator

We'll now take our next question from Chris Woronka with Deutsche Bank.

Chris Woronka, Analyst

John and Bryan, good morning. We've gone through a couple cycles, and they're all different. Do you anticipate that occupancy will come back faster than rates, and what impact will this have on distribution and loyalty?

John Arabia, President and Chief Executive Officer

It's early days, and it depends on various factors, including the vaccine and therapy developments. I don't anticipate material long-term demand reduction should the economy face rocky footing. There could be temporary lower occupancies and reduced rates as economies adjust. The good news is we’re prepared for that. We’ve continuously maintained we’re set up to weather declines in same-store EBITDA and have offensive capabilities in play.

Chris Woronka, Analyst

Okay, understood. Regarding group meetings, do you see potential to invest in ways that might make smaller meetings feasible if distancing rules persist?

John Arabia, President and Chief Executive Officer

It depends on the case. Certain investments on hotels like Renaissance Orlando are being accelerated since we believe groups will eventually return. Thus, we’re investing in changes but are cautious not to overextend if there's a long-term impairment in group travel. We’re focusing on becoming the safest hotel option for traveling guests.

Operator, Operator

We will now take our next question from Smedes Rose with Citi.

Smedes Rose, Analyst

Hi, thanks. John, you mentioned that operating paradigms will have to change significantly. Once properties reopen, do you think labor costs as a percentage of revenue will go down as we adjust to a post-COVID world?

John Arabia, President and Chief Executive Officer

It depends on what we're looking at. As a percentage of revenues might be less applicable. Incremental costs for health and safety standards will arise, but we are reevaluating how we do things at the property level for efficiency, enabling new protocols while preserving our standards of service. This is a different environment and many questions are being asked, so we will see where it leads us.

Operator, Operator

We will take our next question from Michael Bellisario with Baird.

Michael Bellisario, Analyst

I want to go back to the Hilton Times Square. Your plan right now is to hand the key back to the lender all else equal, assuming current conditions persist?

Bryan Giglia, Chief Financial Officer

In addition to what we've disclosed, we’re looking at multiple options, including working with a special servicer. If a receiver goes in, it could lead to foreclosure. That's our current stance on it.

Michael Bellisario, Analyst

Got it. And are you funding debt service today? And do you plan to fund that shortfall between now and November? How should we think about that?

Bryan Giglia, Chief Financial Officer

We did not make the May 1 debt service.

Michael Bellisario, Analyst

Got it. Regarding Renaissance DC, what's your approach towards addressing that? Is the $100 million-plus loan included in your cash burn?

Bryan Giglia, Chief Financial Officer

It's too early to discuss that, but we do have a long-standing relationship with the lender and several options available. Assessing liquidity, this loan isn't included in the cash burn analysis.

Operator, Operator

We will take our next question from Stephen Grambling with Goldman Sachs.

Stephen Grambling, Analyst

Thanks. John, you mentioned the market expecting small owners to sell assets post-crisis. Are there things you're thinking about re-positioning your portfolio regarding acquisitions or dispositions?

John Arabia, President and Chief Executive Officer

It’s early, but yes, I do think there will be assets available that fit our long-term strategy. There are properties acquired in the past cycle that may need a new home. We have a handful of hotels not aligned with our strategy that we would like to sell, but we are not pressured to do so and would not give them away.

Stephen Grambling, Analyst

Great, and regarding potential working capital expenses while reopening properties, are there any expenses we should consider that could pressure margins or cash flows?

John Arabia, President and Chief Executive Officer

Not materially. There will be some restocking of supplies and expenses related to pulling staff back, but nothing I see would be substantial enough to change our projections.

Operator, Operator

We will take our next question from David Katz with Jefferies.

David Katz, Analyst

Hi, good to hear everyone. Can you lay out portfolio-wide break-even occupancy and EBITDA levels for us?

John Arabia, President and Chief Executive Officer

We've done some work on that. Our break-even occupancy is generally between 35% and 45%, depending on various variables including occupancy level, ADR, and incremental costs. While two particular hotels might deviate slightly from this range, overall, this is where most hotels sit in our current analysis.

David Katz, Analyst

Understood. Regarding upmarket hotels, are we observing a trend towards full-service properties cutting back on services that impact profitability?

John Arabia, President and Chief Executive Officer

It really depends on each hotel. Some hotels will require significant services, while others might offer fewer based on brand standards. This crisis is the time to reevaluate what consumers really want, but it’s premature to share those views as we’re still in discussions.

Operator, Operator

We'll take our next question from Bill Crow with Raymond James.

Bill Crow, Analyst

John, you mentioned advanced reservations and looking towards the end of the year. Is consumer response driven by discounting, or with safety concerns?

John Arabia, President and Chief Executive Officer

Discounting will be a factor, and there will be evidence of significant pent-up demand as seen at some resorts. We’re receiving reservation requests, especially as we approach the fourth quarter. While there’ll be some discounting, I believe that overall demand will surge after a prolonged lockdown.

Bill Crow, Analyst

Thank you, John.

John Arabia, President and Chief Executive Officer

We have been prepared to enter into acquisition opportunities earlier this cycle than before.

Bill Crow, Analyst

Just one more thought regarding the pressures on property taxes and other taxes. Is lodging under a greater risk for taxation down the road?

John Arabia, President and Chief Executive Officer

That's certainly a possibility. Local governments seek revenues during this time. With property values declining, there will also be a projected offset. However, municipalities and states need revenue to address their depleted coffers.

Operator, Operator

We will take our next question from Patrick Scholes with SunTrust.

Patrick Scholes, Analyst

Hi, good morning. Can you put a dollar amount around the deferred non-essential capital improvements from your prior guidance for $65 million to $85 million? What should we think about for this year?

Bryan Giglia, Chief Financial Officer

Our revised guidance is around $35 million to $45 million. The prioritized capital includes projects such as ongoing renovations and important system upgrades. The non-essential items can be shifted into next year or the year after, depending on the market recovery and cash flow. We will assess the situation dynamically as we move forward.

Operator, Operator

And that does conclude today's question-and-answer session. I would like to turn the conference back over to Mr. Arabia for any additional or closing remarks.

John Arabia, President and Chief Executive Officer

Wonderful, thank you, Anna. Thank you everyone for joining us today. Stay safe, stay healthy, and we look forward to seeing you in better days. Thanks everybody.

Operator, Operator

That does conclude today's conference. We thank you all for your participation. You may now disconnect.