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Edited Transcript of HT.N earnings conference call or presentation 6-Aug-20 1:00pm GMT

Q2 2020 Hersha Hospitality Trust Earnings Call

HARRISBURG Aug 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Hersha Hospitality Trust earnings conference call or presentation Thursday, August 6, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ashish R. Parikh

Hersha Hospitality Trust - CFO & Assistant Secretary

* Greg Costa

Hersha Hospitality Trust - Manager, IR & Finance

* Jay H. Shah

Hersha Hospitality Trust - CEO & Trustee

* Neil H. Shah

Hersha Hospitality Trust - President & COO

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Conference Call Participants

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* Anthony Franklin Powell

Barclays Bank PLC, Research Division - Research Analyst

* Aryeh Klein

BMO Capital Markets Equity Research - Analyst

* Chris Jon Woronka

Deutsche Bank AG, Research Division - Research Analyst

* Jonathan David Jenkins

Janney Montgomery Scott LLC, Research Division - Associate

* Khoa Duc Ngo

Jefferies LLC, Research Division - Equity Analyst

* Michael Joseph Bellisario

Robert W. Baird & Co. Incorporated, Research Division - VP & Senior Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Hersha Hospitality Trust Second Quarter 2020 Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Greg Costa, Investor Relations. Please go ahead.

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Greg Costa, Hersha Hospitality Trust - Manager, IR & Finance [2]

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Thank you, Danielle, and good morning to everyone joining us today. Welcome to the Hersha Hospitality Trust Second Quarter 2020 Conference Call. Today's call will be based on the second quarter 2020 earnings release, which was distributed yesterday afternoon.

Prior to proceeding, I'd like to remind everyone that today's conference call may contain forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties, and other factors that may cause the company's actual results, performance or financial positions to be considerably different from any future results, performance or financial positions. These factors are detailed within the company's press release as well as within the company's filings with the SEC.

With that, it is now my pleasure to turn the call over to Mr. Neil H. Shah, Hersha Hospitality Trust's President and Chief Operating Officer. Neil, you may begin.

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Neil H. Shah, Hersha Hospitality Trust - President & COO [3]

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Good morning. Good morning, everyone, and thank you for joining us on today's call. Joining me this morning are Jay Shah, our Chief Executive Officer; and Ashish Parikh, our Chief Financial Officer. We understand it's a busy last few days of the earnings season, and everyone is quite familiar with the environment, so we will jump right in.

During the first weeks of this pandemic, we took decisive action and focused on capital pricing through several critical steps. We suspended dividend distributions on both our common and preferred securities, preserving approximately $72.5 million, and we deferred all planned capital expenditures for the balance of the year, saving approximately $20 million.

Additionally, at the corporate level, we reduced our SG&A run rate by 25% for 2020. While at our properties, we suspended operations at 21 of our 48 hotels, which led to a reduction in operating expenses, approximating 80% on a go-forward basis. These were difficult but necessary moves, and we undertook these actions to ensure we had sufficient flexibility through this pandemic.

Early in the quarter, we amended our credit facility to access our senior revolving credit facility and received a full financial covenant holiday for 5 quarters with the next covenant test on June 30, 2021. We've had a decade-long relationship with the lead banks in our bank group, and we appreciate their partnership during this unique time.

We have spent most of the second quarter reopening hotels. A word of thanks before I go any further for the courage and commitment of our frontline team members at each of our hotels. Each of them adapted to a highly-efficient operating model, provided anticipatory service from behind plexiglass and engaged a completely new guest profile. And they did so safely, graciously and effectively.

The lion's share of the 27 hotels that were opened in April and May consisted of our limited service drive-to resort offerings that were able to drive rate and occupancy, exceeding our internal forecasts. Early April is when we saw the trough for our open portfolio, bottoming out around 19% occupancy but incrementally growing through the balance of the quarter, ending June at 39% occupancy.

Most of the 27 hotels that have remained open throughout the pandemic and the 7 hotels that have opened since June 1 are able to run with a marginally-sized staff, allowing for lower breakeven levels and the ability to generate gross operating profit with occupancies around 25% to 30% or a 60% to 70% RevPAR decline for EBITDA level breakeven at properties.

Our focused service portfolio, whether branded or independent, offer significantly more flexibility as it relates to staffing levels and job sharing opportunities, minimizing costs and ultimately allowing us to either profitably maintain operations or reopen assets more expeditiously.

As we've discussed on past calls, our franchise model and close alignment with HHM and our operating teams also allows us to adapt our staffing and operating models in real-time. This close relationship, coupled with our cluster strategy to maximize revenues and generate marketing advantage and economies of scale for cost efficiencies and sales, has yielded consistent market share outperformance versus our comp set prior to the pandemic. This relationship has proven to be critically beneficial over the past 5 months in determining which hotels to open, consolidating demand to optimize breakeven and driving local decisions. This will continue to drive outperformance throughout the recovery phase.

We expect to have substantially all of our hotels operating by the end of September. And now more than ever, our ability to stay nimble and leverage our flexible operating model in close connection with our independent franchise operator allows us to reopen and operate our hotels in a cost-efficient manner, gives us the opportunity to reduce our cash burn rates and breakeven levels meaningfully and sets up our portfolio to generate cash flow as we navigate this recovery.

Drive-to resorts have been our strongest performers. Local regulations and travel bans dictated our opening of these hotels. But with each month of performance, we are seeing meaningful growth in occupancy and strong rate integrity. We expect a longer leisure season this year with disrupted schools, work-from-home employees, low gas prices and continued stimulus.

Our Sanctuary Beach Resort was the best-performing asset during the second quarter, ending the period at 71% occupancy with a $340 ADR, and success continued in July with RevPAR growth of 12.4% for the month. The ramp began in mid-April and extended throughout the quarter as travelers became more comfortable leaving their homes and socially distancing on the California coast. We opened Hotel Milo in Santa Barbara more recently, but it is ramping up quickly, particularly around the weekends, where ADR is close to prior years. On the East Coast, the Annapolis Waterfront Hotel on the Chesapeake and the Mystic Marriott, which opened in mid-June, are delivering operating profits this summer.

South Florida has been more choppy. Government-mandated closures impacted our portfolio as Key West was closed to visitors and nonessential personnel, and Miami Beach hotels were mandated to close to prohibit the spread of the virus. Restrictions at both municipalities were lifted on June 1, and this led us to reopening our Parrot Key Hotel in Key West and 2 of our Miami Beach hotels, the Winter Haven and the Cadillac.

Early results in both locations were promising, but notably at the Parrot Key, which saw travelers arrive from the Southeast and even from the Northeast and Midwest. But the recent rise in case counts across the Sun Belt led to the closure of Miami Beach and restrictions at bars and restaurants in Key West over the July 4 weekend, which hampered the rapid ramp-up we were seeing in these markets.

We believe occupancies at these hotels will reaccelerate in conjunction with decreasing case counts and easing restrictions across the southern states, but the third quarter may still be challenged with weather or headlines in Miami Beach. But judging from the number of New Yorkers still coming to Miami in even these conditions, we expect seasonally high fourth and first quarters to be robust once again in Miami Beach.

Our urban gateway markets have been hard at work. The headlines surrounding corporate travel, international travel and events remain bleak. But fortunately, the domestic travel restrictions and quarantines instituted by major coastal cities should ease in the coming weeks and months on a city-by-city basis and should open us up for more leisure travel.

Our operating model alignment with the teams at each of our hotels provides the speed of decision-making on innovative ways to drive operating profits from each of our locations. We've been able to open hotels as we source new business in each of our clusters, and our limited service business model allows us to staff very efficiently during this low-demand period.

Our sales and marketing teams have stayed nimble throughout the pandemic, remaining cognizant of travelers' increased selectivity as it pertains to authentic and relevant experiences but also proactively staying connected with local demand generators. This approach was very productive during the second quarter as our team secured contracts with local hospitals and frontline personnel across our portfolio, with perhaps the biggest success in New York City.

We housed government groups and medical staff at our JFK assets, police and fire department crews in Brooklyn and at our Hilton Garden Inns in Tribeca and Midtown East and, lastly, contracted with a leading medical institution in lower Manhattan at our Hampton Inn in the Seaport. All of this led to 61% occupancy for our 7 open New York City hotels during the second quarter.

Our sales team has since pivoted from first responder business to more normal business. Despite the bleak headlines on corporate travel among the largest companies, some parts of the economy are beginning to travel. Our sales in our local property teams directly have had success sourcing new business to our hotels.

In Philadelphia, the team secured Major League Baseball and the NFL to build a base for transient compression; in New York, baseball and hockey teams for shorter stays. In each of our markets, we have sourced significant design and construction business. There are a lot of buildings to prepare for a post-COVID build-out or projects under development.

In Boston, we contracted a buyout for The Boxer to a local university to house their students from September through May. For universities and even a hybrid model, travel demand will increase relative to the spring or summer.

We have secured business with TV broadcasters and news organizations in Washington, D.C. Content production and studios are beginning to mobilize in Southern California near our Courtyard Westside, and Netflix and other producers are producing on the East Coast cities as well. All of our submarkets are seeing a more general-purpose health care business, patients and family for elective surgeries, but also medical equipment and other technology vendors.

Consulting and financial services has been slower to get on the road, but we hear of the first banks beginning to travel or consider buyouts for meetings or allocating inventory -- hotel inventory for employees to avoid commutes or simply arranging daywork rooms. Early results from July are promising, with ADR only down 25% across the portfolio year-over-year as occupancy showed some signs of growth, especially in our urban markets outside of New York.

A few more thoughts on New York. Prior to COVID-19, New York was one of the toughest markets in the U.S. to achieve rate growth despite record visitation year-over-year as the city was seeing new supply increasing approximately 4% each year over the last several years. We have already seen the headlines of big-box hotels in New York closing their doors forever, as many as 5,000 rooms among them so far, and we think of this as the tip of the iceberg in terms of hotel closures. Industry researchers have estimated that 20% of New York's total room count, about 25,000 keys, could permanently close.

New York City is dominating the headlines as it pertains to hotel closures, but there are corners of every market filled with distressed assets that were troubled to produce margin even before the pandemic. They are now obsolete and will improve the supply picture.

The pandemic is also bringing about a decline in short-term rental demand as seen in recent data showing the top 25 markets experiencing significant year-over-year decline in inventory available. Five of the top MSAs, including Boston, New York and Los Angeles, are seeing year-over-year declines from 25% to 40%. Travelers are choosing the proven cleanliness of hotels versus the unknown of short-term rentals, and cities and landlords are finally enforcing current regulations and forcing transparency.

The pandemic will fundamentally change the models of these platforms as we've already seen in Airbnb strategy shift to longer duration stays versus short-term offerings, and these changes will be materially positive for hotel portfolios with urban gateway market exposure like Hersha's.

Hersha has been a developer, owner and operator in New York for over 20 years. Post 9/11, we increased our development pipeline in Manhattan. Post GFC, we acquired troubled developers' hotels under construction. This time, we have sufficient exposure to Manhattan but expect to enjoy a strong recovery in New York in the next 12 to 24 months.

After 9/11 and after the GFC, New York rebounded with the highest growth rates in the country for the early years of the recovery. After 9/11, there were significant deletions from supply. So after a steep recovery in 2003 and 2004, the market continued to produce double-digit RevPAR for 3 more years. Post 2009, New York rebounded quickly in 2010 and continue to grow in mid-single digits for 3 to 4 more years, but new supply made the rest of the cycle a bit more choppy, although values continue to reach new highs.

This time, as demand returns, the supply story will be very different. More permanent hotel closures, no construction financing, zoning restrictions for hotel development, et cetera. And we expect our category killing select service portfolio in New York can meaningfully outperform.

Before transitioning to Ash to discuss our expense savings and burn rate reductions, I want to update you on our pending asset sales. As a quick reminder, we announced accretive binding sales agreements on 4 assets in our portfolio: the Duane Street Hotel in New York City; the Blue Moon Hotel on Miami Beach; and the exit of the 50% ownership in 2 South Boston Hotel, 2 hotels: The Courtyard South Boston, the Holiday and Express South Boston.

Since our last earnings call, we've had follow-up discussions with each of the buyers who have asked for additional time to close on the individual transactions. In conjunction with these requests, we negotiated the right to sweep the deposits on each of the consolidated asset dispositions and a buy/sell right for our JV. Along with the extensions, we have provided a reduction in purchase price for the buyers at each of these assets, resulting in total expected net proceeds of $70 million. We remain cautiously optimistic that these transactions will close as the buyers are not reliant on material financing, but we now anticipate these agreements will close in the fourth quarter or in early 2021.

In addition to these 4 asset sales, we have multiple levers to pull should the impact to the travel industry remain at depressed levels into the second half of next year, and we continue to explore various strategies to fortify our balance sheet.

Some investors have asked if we would raise additional common equity. We would not. It's hard to see a scenario where that level of dilution would make sense. We are more likely to sell additional hotels as the private debt market emerges in 2021. We are encouraged by a thawing, at least in the transaction markets that should gain momentum in the coming 3 to 4 months.

Our hotels are differentiated in the acquisitions market. Nearly all of our hotels are unencumbered of ground leases, management and often brand. They are newly built or recently repositioned with very little CapEx required for the foreseeable future. They are high quality and well located in prominent innovation-oriented submarkets in the leading gateway markets of the U.S.

Difficult times like these demonstrate the hustle and the accountability of our team. We have visited most of our hotels across the last few months and are grateful for the quality and character of our team at our hotels and our offices. It's a tighter group today, but it reminds us that small groups of committed people can do great things.

For Jay, Ash and I, this is our 21st year in the public markets. We have navigated 3 cycles and nearly a dozen major demand shocks together. Past demand shocks have proven that cities and economies rebound and America grows. Domestic and international travelers get comfortable getting back on planes, trains and automobiles to visit the cities that make up this great nation.

The last several weeks have showed that the recovery for lodging is unlikely to be linear, and near-term forecast indicated it's difficult to pinpoint how business travel will resume after Labor Day. But the steps we have taken to date and our highly adaptable and flexible operating model will sustain us until we achieve a more stable environment that can showcase the value of our exceptional portfolio.

With that, let me turn it over to Ash to discuss in more detail our cost containment initiatives, burn rate reductions and balance sheet.

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Ashish R. Parikh, Hersha Hospitality Trust - CFO & Assistant Secretary [4]

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Great. Thanks, Neil. Good morning, everyone. I'll focus the majority of my time today on the actions we've taken to date from a liquidity preservation perspective, most specifically as it pertains to newly implemented asset management initiatives that have allowed us to minimize our cash burn rate and breakeven levels as we navigate the pandemic.

Our top priorities at the beginning of this outbreak were amending our credit facility and attaining a covenant holiday, which we were able to do in short order and before our peers, but we also focused on cost-saving measures to preserve our liquidity profile and to minimize operational losses. Our franchise model and close relationship with our third-party independent operators leads to significant flexibility as it relates to executing cost savings initiatives at our hotel, and our ability to make these changes in real-time has led to and will continue to lead to substantial savings for our portfolio.

In our 33 currently operating hotels, we've not only rightsized our on-site staff but have also employed various asset management initiatives to lower our cost per occupied room, which resulted in a declining monthly cash burn rate through the balance of the second quarter. Our operational strategy allows us to run our hotels with very lean labor models until demand achieves levels warranting additional staffing, typically between 30% and 40% occupancy. We're able to do this by applying various cost-cutting strategies such as cross-utilizing management personnel, outsourcing and job sharing within the hotel and across our clusters to lower our overall expense base.

Our franchise model has also allowed us to minimize our property-level severance cost through this pandemic. At the end of the first quarter, we accrued less than $1 million for these costs, and we did not record any further severance costs during the second quarter and would not anticipate any further costs for the remainder of the year.

We've also zero-based budgeted our hotels and rightsized labor models with expectations to save 300 to 500 basis points when lodging returns to more stabilized levels. As demand begins to pick back up and occupancy levels start to materialize from these low levels, we will begin to phase back in staffing levels as necessary. We anticipate that the availability of labor will increase dramatically over the next few years with anticipated closures in restaurants, retail and other service industries, alleviating some of the increases in labor costs that we have witnessed during the past 3 to 4 years.

We've also focused on revised cleaning protocols, decluttering and scaling back in-room amenities, such as bedding accessories, and other nonessential amenities, pens, bill pads, paper menus, et cetera. And we forecast this reduction should generate substantial savings on guest supplies for occupied room moving forward.

Prior to the pandemic, many of our limited service offerings included a complementary breakfast buffet for our guests, which we have eliminated for safety reasons. At these hotels, we have turned to a more informal grab-and-go style option, which has not only been well received by our guests, but has significantly brought down our cost per occupied room for this category.

In conjunction with our EarthView sustainability team, we've been implementing additional cost-cutting and efficiency measures to curb energy expenses, which will continue creating savings and margin improvements even after the impact of COVID-19 recedes. We're reducing utility costs through operational and energy-saving initiatives, such as lowering heating and cooling setpoints for rooms and public spaces, while also working closely with our engineering teams on preventative maintenance procedures. All of these measures allowed us to reduce our operating expenses by 77% during the quarter. And on a long-term basis, we expect many of our newly applied expense mitigation practices to extend beyond the pandemic.

In addition to expense savings measures, we have leveraged our EarthvIew platform to generate new revenue opportunities, such as a green and wellness strategy that provides various sustainable meeting room options and wellness rooms.

So all of these operating strategies have also positively impacted our breakeven levels. During the second quarter for the 21 comparable hotels that remained open throughout the period, we were able to effectively breakeven on an EBITDA basis even with severely depressed operational levels as these 21 hotels had a RevPAR decline of 78% and approximately 34% occupancy.

Based on this history, we are comfortable that on a property-level basis, our entire portfolio breaks even with a 65% to 70% RevPAR decline with occupancies approaching 40% and a 25% to 30% ADR decrease. At the corporate level, our RevPAR breakeven occurs at 40% to 50% decline, factoring in 50% to 55% occupancies at a 15% to 20% ADR discount.

With our current operating model, we were able to generate gross operating profit at 80% of our open hotels during June and would anticipate that nearly all of our open hotels can generate positive GOP during the third quarter. As I mentioned, with the execution of the aforementioned expense savings initiative, we're able to breakeven at below 40% at our open hotels, and we're forecasting that our next 25% to 35% occupancy gains should flow through at approximately 80% to the GOP line.

On our prior earnings call, we outlined our cash burn rate forecast, which was originally projected to be $11 million per month, including all hotel operating expenses, corporate SG&A and debt service expenses. During April, which we would deem to be the trough of the industry with our comparable portfolio ending the month at 14% occupancy, our corporate cash burn rate actualized at $10.5 million. Our burn rate sequentially decreased through the balance of the quarter, reducing to $8.6 million for the month of May and closing the quarter at $7.8 million for June. Our cash burn rate for the second quarter totaled $26.9 million, 18% below our downside scenario and 13% below our internal forecast at the beginning of the period.

During the second quarter, we spent $5.4 million on capital projects, bringing our year-to-date spend to $16.4 million. We anticipate a significantly reduced CapEx load for the back half of the year with estimated spend for 2020 at approximately $20 million, half of what we had planned to spend at the beginning of the year.

Since 2017, we've allocated close to $200 million for product upgrades and ROI-generating capital projects across approximately 50% of our total room count. This puts our portfolio in great shape coming out of this crisis in terms of capital allocation needs and market share gains, and most of our hotels will not need substantial capital infusion for the foreseeable future.

Last quarter, discussions with our lending group resulted in a 5-quarter covenant holiday with our next covenant test set to occur on June 20 -- June 30, 2021. Parameters around the covenant tests are yet to be set, and we'll continue to have an active dialogue with our bank group as we move through the balance of the year and into 2021 as to what these tests will look like.

As of June 30, we have drawn $95 million on our $250 million senior credit facility and ended the second quarter with $23.2 million in cash on hand. During the second quarter, we also took advantage of the low rate environment and entered into a new interest rate swap on the debt at the Courtyard L.A. Westside at 3.425%.

As demand scenarios remain unpredictable, we continue to fortify our balance sheet through liquidity-enhancing and cost-savings measures to navigate this crisis. Until then, our sales and marketing teams will remain acutely focused on driving incremental revenue through unique opportunities, while our asset management and sustainability teams will continue implementing strategic initiatives to significantly reduce our cost structure, which will lead to a resumption of our industry-leading portfolio free cash flow generation as the recovery progresses across the coming quarters.

So that concludes my portion of the call. We can now proceed to Q&A, where Jay, Neil and I are happy to address any questions that you may have. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Anthony Powell of Barclays.

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Anthony Franklin Powell, Barclays Bank PLC, Research Division - Research Analyst [2]

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Question on the current business mix. If you look at your entire portfolio, what percent of the current business is leisure versus non-leisure? And could you maybe talk about any seasonality issues of the non-leisure piece? How much of that is maybe temporary due to things like traveling nurses or doctors? And how do you expect that kind of part of the business to evolve over the next couple of quarters?

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Neil H. Shah, Hersha Hospitality Trust - President & COO [3]

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Hesitant to give just a wide percentage kind of across the portfolio because it's changing so much, but I'd say it's primarily in a city like -- in most of our urban gateway markets, the first responder kind of health care, traveling nurses, the setups and breakdowns by national guard of testing facilities and things, most of that has now left the market, for sure, throughout the Northeast, just left the market that might be bits and bobs in a handful of West Coast and still in the southeast. But that has been replaced primarily with leisure and with some of the kinds of business demand that I've mentioned before, where it may still be health care-oriented, but it's not COVID-related.

We generally -- before COVID, we felt that in our urban gateway markets like New York, we had become more leisure-oriented across this cycle as occupancy increased in New York City, for example, and so we were at kind of a 60-40 mix in our transient between corporate and leisure.

Today, I wouldn't say it's that much. It's not noticeably or meaningfully different than that split. It's probably maybe tending more towards these kinds of business transient, but I would include all of the government business in that or other contracted kind of business versus the kind of transient leisure that's there, our folks coming in for friends and family, to visit children, to drop off kids, things like that. But it's still just so early to give you a percentage across any given hotel or any market yet.

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Anthony Franklin Powell, Barclays Bank PLC, Research Division - Research Analyst [4]

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Got it. So I guess the business travel that's in the hotels currently like the sports teams and medical. There's no real reason to expect that to drop off materially in the fall or kind of change in any way over the next few quarters?

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Neil H. Shah, Hersha Hospitality Trust - President & COO [5]

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No, that's -- we do not expect that.

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Anthony Franklin Powell, Barclays Bank PLC, Research Division - Research Analyst [6]

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Got it. And maybe just one more on the equity comment. You mentioned that you weren't issue -- interested in issuing equity. I'm assuming that comment is depending on price. Obviously, you wouldn't do that now, but let's say next year if the world's looking up after a vaccine or whatever and your stock is higher, would you consider issuing equity then? Or would you still primarily focus on asset sales?

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Neil H. Shah, Hersha Hospitality Trust - President & COO [7]

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Yes. No, Anthony, absolutely, it is dependent on kind of where equity levels are, equity prices are, but it's hard to see it today for the foreseeable future. We generally believe that we could -- most of our portfolio is very liquid. And when there is a little bit more forward visibility, we expect there to be more of a debt market.

And in that environment, we think that some of our assets will be highly attractive for buyers. So if we needed to raise liquidity, that's still our first step because we could sell 1 or 2 assets at a discount to pre-COVID values but still release meaningful amount of proceeds without suffering from dilution across the entire entity.

Now that said, if we were trading close to our replacement value or our market value for these assets. Obviously, anything is on the table, and we do consider it all. But at this stage, we're very far away from thinking about any kind of common equity offering.

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Operator [8]

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The next question comes from Michael Bellisario from Baird.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP & Senior Research Analyst [9]

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Just first question, I think I heard you correct that you said $70 million of net proceeds is the new number for the dispositions.

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Neil H. Shah, Hersha Hospitality Trust - President & COO [10]

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That's right.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP & Senior Research Analyst [11]

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I think you had maybe -- I think you had said $97 million before. Is that the right, almost 30%, discount that you agreed upon with the prospective buyers on those transactions?

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Ashish R. Parikh, Hersha Hospitality Trust - CFO & Assistant Secretary [12]

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No. Michael, we had $97 million of debt reduction before, so the original pricing on these was going to provide us net proceeds of roughly $76 million. $21 million of that was allocated to the joint venture debt in South Boston. So we've effectively given 10% price reduction to the buyers of these hotels.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP & Senior Research Analyst [13]

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Got it. That's helpful. And then just bigger picture on the transaction market at your comments, Neil, on prospective asset sales. What are you seeing? What are you hearing from buyers and sellers in the market? And kind of what's the going rate for discounts today versus pre-COVID pricing? And kind of where do you see your portfolio shaking out today relative to those expectations?

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Neil H. Shah, Hersha Hospitality Trust - President & COO [14]

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Yes. I think there's probably like a meeting of minds around kind of a 20% discount to pre-COVID values. Today, kind of a 15% to 20% kind of discount. There's probably -- would be more transactions at that level if there was a debt market to support it.

Unfortunately, there isn't a debt market to support it today, so that leads to wider discounts on perceived value just because it becomes a more unleveraged trade. I think in cases where there's assumable debt, why you're seeing a lot of these preferred equity transactions of late is that they're stepping into existing debt, helping a investor pay it down and leaving the investor with a hope note on the back end, but the -- giving the new capital and opportunity to capture economics on the equity side without having to find debt capital.

So right now, it's still -- I think the moment there is debt available. I think this kind of 20% -- 15% to 20% discount could shrink a little bit more or at least you'd see a lot of volume at that level.

And Mike, as you -- I know how closely you cover this market. It's just still -- it's still very limited, the number of transactions that we can report on and trade. But there's a lot of discussions, I think, where you'll see some activity in the coming 2, 3 months are nonperforming loans in a lot of markets, and you'll see some JV preferred equity kinds of transactions, but I think we're likely a quarter away from meaningful kind of single asset or portfolio equity transactions that require new debt.

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Operator [15]

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The next question comes from Aryeh Klein of BMO Capital Markets.

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Aryeh Klein, BMO Capital Markets Equity Research - Analyst [16]

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Maybe from a staffing standpoint, how much of the savings that you realized you think are permanent? Or in other words, when we do get to more of a normalized environment, would you expect to have fewer employees per hotel? Is that the right way to think about it?

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Ashish R. Parikh, Hersha Hospitality Trust - CFO & Assistant Secretary [17]

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Yes, all right, we would. We just think the operating model is going to change. I mean, certainly, going from 35% to 40% occupancy to 60%, you don't need to bring back that many people. You need to bring back a few. But when we get back to our normal levels of 80% to 90% occupancy, you're going to be able to charge much higher rates. You'll have to provide more services, bring back more staff.

But things are -- things have just changed through this pandemic, and we do think that operating protocols will also change, less people at front desk, a little more contactless check-in, less people at breakfast buffet stations, things to that effect that we would imagine that, in general, our hotels can run similar occupancies with less people going forward.

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Aryeh Klein, BMO Capital Markets Equity Research - Analyst [18]

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Got it. And then just on the contract business, it sounds like you have more of that than you normally would on the books for the second half of the year. How would that compare to maybe pre-COVID levels? And what kind of pricing discount are you seeing -- or ADR discount are you seeing in those negotiations?

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Neil H. Shah, Hersha Hospitality Trust - President & COO [19]

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I hate to always answer with it. It really depends, but it has been. It depends on the kind of business and what that business is serving for the hotel. We will take more discounted rates in order to compress the hotel very significantly. And so if it's for a larger hotel or a higher-end hotel, we might take contract business at 20%, 30% discounts to what we might have last year just to compress the inventory and give us a shot to drive rate on the rest of the transient.

But with a lot of our business customers, we're also very careful not to set the wrong expectations among our consumers. So generally, with the media accounts, for example, they've been at within 10%, 15% of what we would have maybe contracted within a normal environment. We are -- we've -- on certain hotels, it goes cluster by cluster, and we play a different strategy with any given hotel in the cluster to kind of optimize demand in that marketplace. But in some, we are holding rate. While other assets, we might be willing to win business with lower rates and if that leads to breakeven.

So I'll take an example like in Miami Beach, we have the Cadillac and the Winter Haven. We're using 2 very different rate strategies and going after very different kinds of business, but they are both autograph collection hotels. They are both high-quality oceanfront assets, but we can play different strategies.

Or In Washington, D.C., we have the 2 hotels we have opened today. We have the St. Gregory, which is a recently repositioned, almost newly built-out a hotel at a great corner in Dupont across the street from some of the highest quality new office buildings in Washington. So we're trying to kind of really preserve our rate position at that hotel. But just 3, 4 blocks away, we have a Hilton Garden Inn, also a very high-quality box but one that we're willing to take lower-priced government contract business at.

And so it's really -- it is asset-by-asset and not enough data or trend yet to share anything meaningfully more than those anecdotes, I think.

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Jay H. Shah, Hersha Hospitality Trust - CEO & Trustee [20]

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Yes, I'll also add, as typically, this is the time of year kind of known as RFP season at the property level, where a lot of corporate-negotiated rates are put in place for the coming year. This year, the whole process has been pushed back, and our operators are preparing for it. I think it's going to be about a month later.

And one of the strategies we're using there, to follow up on Neil's point, this is a difficult time to be setting long-term rate expectations. And so we've been very, very sensitive to it. If it allows us to open a hotel or generate a base of business, we're taking discounted business. And if it's incremental and flowing, we'll take that kind of business.

But I think when it comes to negotiating rates across the year, we're -- and our operators are aligned with us on this, we're going to really not be offering discounted rates but offering discounts to the bar rate, and that gives us the ability to keep our bar rate closer to pre-disruption levels, and certainly, it will be discounted relative to last year, but we won't have to take deep discounts on the bar rate. We'll be able to discount off of that for our corporate folks, and that allows some dynamicism in the pricing model as we move through the recovery.

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Operator [21]

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The next question comes from Tyler Batory of Janney.

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Jonathan David Jenkins, Janney Montgomery Scott LLC, Research Division - Associate [22]

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This is Jonathan Jenkins on for Tyler. In your drive-to leisure markets specifically, can you just provide some color in terms of occupancy on weekends compared to what you're seeing on weekdays?

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Neil H. Shah, Hersha Hospitality Trust - President & COO [23]

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Sure. I'll leave it with color rather than data, which we could follow up with you on. But the weekends have been much stronger performers, both on occupancy and on ADR. With our drive-to resorts, we're finding that our weekends, we're getting very close to pre-COVID levels on ADR so far. And now it's looking like we are going to exceed ADR in the coming quarter on weekends for our drive-to resort properties. I think that's a function of this environment that we're in today and the lack of alternatives for leisure travelers domestically.

And so anything else we could share there? Yes, and then on the weekdays, weekdays, it's -- rates aren't plummeting, but harder to maintain that kind of rate integrity because occupancy is still building. And that's going to -- that's, I think, is something that just with each week, you get more comfortable going out to -- getting on -- getting in the car and going 2, 3 hours away and checking into a hotel. We saw that pick up very quickly in Northern California throughout April and May. Throughout San Francisco in Silicon Valley, they were looking for places to go.

In L.A., on the other hand, it's been a little bit slower. But today, there is actually a really active effort locally in Los Angeles among residents to encourage staycations at area hotels, but also up and down the Coast. We have to kind of offset the lack of international travelers in Southern California, and we do expect that some of this leisure travel will start to happen a little bit more than it has so far on the weekdays.

In -- on the East Coast, it's also been similar kind of occupancy building through the week, still probably 20%, 30%. But by the weekends, we're getting the occupancy up to the 70s, 80s, even higher in some cases. And when we do that, then the ADR can get to prior levels.

I think it's a function of weekdays, weekend, and it's also kind of how long the hotel has been opened. Because it's like in this environment, post-COVID, it's like opening new hotels, like as if we're builders again and ramping up. And with each week a hotel is open, they're really building ADR capability. I think for our 4 hotels that were open throughout this last quarter, ADR in the beginning was like $139, and then it ranged up. I think by June 30, we were at $290.

And so that's a -- was that last $290, was that a weekend? It might have been a weekend.

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Ashish R. Parikh, Hersha Hospitality Trust - CFO & Assistant Secretary [24]

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Week ending.

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Neil H. Shah, Hersha Hospitality Trust - President & COO [25]

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Week ending. Okay. That's week ending. Yes. So you see that just there's the ramp-up of an asset in a drive-to resort market, drive-to market that's leading to ADR growth. But for sure, to your point, the weekends are providing confidence to us to keep some rate integrity on the week as well as occupancy builds.

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Operator [26]

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The next question comes from Khoa Ngo from Jefferies.

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Khoa Duc Ngo, Jefferies LLC, Research Division - Equity Analyst [27]

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The question is really around -- the data around COVID and the recent spikes are now starting to head back in the right direction. I'm just wondering if you guys are thinking about contingency plans as we head back into the fall and back to work, back to school, college is opening up. How you guys are thinking about the contingency plan if things start to spike again?

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Neil H. Shah, Hersha Hospitality Trust - President & COO [28]

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I think -- Khoa, I mean in the end of the day, like our contingency, we always have in places that we can with our operating model. It takes us 3 to 5 days to open a hotel. It will take us a couple of days to close a hotel. So worst-case scenario, that is what we would do. If demand drops so far, and we don't have enough contract business to breakeven at the gross operating profit level, then we would be comfortable suspending operations again on individual assets.

We don't suspect that, that will happen because we've been able to find the kinds of business that we think will allow us to kind of continue to pay down fixed costs and ramp, but that is what we would do if there was a big drop off again in demand.

In Miami as a market, Miami Beach, where there clearly was a flattening of demand in late June, early July, around the July 4 closures, and throughout this month, it's been very choppy with the hurricanes and the hurricane warnings and the headlines around the case counts and things. But it didn't fall off to the level where it was better to close the hotel.

Could it happen in the future? It very well could, and that's what we would do. That would be our contingency to deal with that.

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Ashish R. Parikh, Hersha Hospitality Trust - CFO & Assistant Secretary [29]

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And Khoa, as I mentioned, we don't really foresee adding a lot of employees for the next quarter. And even though we would anticipate some increases in occupancies, at this point, all the tough decisions that we've needed to make, we have, and we don't think staffing levels need to change very much until 2021.

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Operator [30]

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The next question comes from Chris Woronka of Deutsche Bank.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [31]

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I wanted to ask you how much work you've done to maybe figure out in markets where you're continuing to kind of build occupancy. How much of that is a benefit from other hotels possibly remaining closed?

And I guess kind of secondarily to that, would you expect any kind of negative impact as more and more hotels open?

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Neil H. Shah, Hersha Hospitality Trust - President & COO [32]

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Chris, absolutely. There's -- we're definitely benefiting from so many hotels being closed today. In this super-low demand environment, it is really helpful to have a lot of hotels closed.

As we mentioned in some of our remarks, we do think there will be a significant number of permanent closures across New York City in particular, but other major cities as well. But we do expect that the kind of short-term closures, which are hotels that can't breakeven at these low levels of occupancy, they will reopen as the year progresses as well as into next year. And so we'll always be dealing with kind of new hotel supply coming online or existing hotel supply reopening across the several upcoming quarters.

The impact of that will likely be -- I think the openings will be commensurate with the amount of demand in the marketplace. And so we expect that when they open, they're opening for that much more business being in the market and that we'll be able to find better business or additional business at that time. But that will continue to be something across the next 12 to 18 months. But I wouldn't call a headwind, but I would call a reflection of a rebounding market.

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Jay H. Shah, Hersha Hospitality Trust - CEO & Trustee [33]

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Yes. And Chris, I think in the early part of the recovery, just as these hotels open, we will just remain very, very focused on market share, driving as much share of the recovery as we can. And I think just being open early and on the ground and establishing some of those channels will be helpful. It might make rate sluggish until you get back to full openings on a market-by-market basis, but it won't be dissimilar from some of the dynamics we saw in New York last -- after 9/11.

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Ashish R. Parikh, Hersha Hospitality Trust - CFO & Assistant Secretary [34]

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That's right.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [35]

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Okay. Very helpful. And then just to kind of stay on the New York theme, I certainly agree with your comments and your forecast that a decent amount of supply is going to exit the market. I guess the bigger question, right, is kind of on the demand side. I know people underestimated New York for a long time. And it's -- over a long period of time, it's been proven wrong. But it does feel like there's some differences here, right, with the work from home and things like that and kind of dedensifying and all this other stuff.

So I mean -- and I know it's asking for a crystal ball here. But I mean what kind of concerns do you have about the longer-term demand picture, especially given where the rates have been and have made it difficult for some folks to make it profitable?

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Ashish R. Parikh, Hersha Hospitality Trust - CFO & Assistant Secretary [36]

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Yes. I think to the last point you just raised, I think that will lead to meaningful supply reductions, just the fact that it is a harder market to operate in than it's been for the last 5 years, and now there is no restriction on hotels converting back to other uses. As you remember, in this past cycle, there's been a lot of restrictions on that actually happening. So we do expect there to be a lot of hotels that won't reopen.

But on the demand side, I think it's -- you -- it's hard to -- in a moment of fear, it's hard to remember all the great things about the city. But after 9/11, there was real fear about life and death, immediate life and death in New York. And there was debris. There was a scent in the air. There were just so many people that moved out of the city, and it took about a year, 1.5 years for it to really come back very strongly and much better than it ever had been.

So we look to past cycles. You hear about New York, or our major gateways in the U.S. are similar to the ones in Europe, really. And these cities all around the world have gone through wars and pandemics, and they always come back relatively strongly.

I think on the corporate picture, it's -- on the corporate picture, it will likely be slow. But I think the moment it turns, it turns quick. I mean just think of the office inventory in New York that's been under construction. In a dedensifying environment, there are places that people will be able to spread out in, there are new buildings being built throughout the city.

And who are the top buyers of -- and leasers of New York City real estate? Or take L.A., same thing. It's all the largest tech companies in the world. It's Google, it's Facebook, it's Amazon. Since the COVID, there's been, I think, probably more of the leases signed in New York and like the Farley Office Building purchased by Facebook, talk around the Neiman Marcus going to Facebook too and the Hudson Yards. These folks are still taking down space because I think they see in the long term, these businesses do require the talent and energy and global kind of connectivity that these major cities provide. And so that continues to give us confidence to see new space being taken down and being tenanted, and so that gives us some confidence on the corporate side.

On the events side, clearly, it is concerning for -- until there's more congregating. And then you have the UN back, and you have some of those things back, it's -- it will be tougher without that compression. That likely requires a vaccine or something or very significant therapeutics that will help us get that lift.

But I'm sure that the -- some of the New York City office guys have some more succinct answers for you, Chris. But there's reason, I think, to be optimistic on the corporate side. And on the leisure side, it's just -- it's a bit of time, and there's a time lag to all the headlines and the concern.

But I think the case counts being down now for months in the northeastern cities, I think it will lead to more leisure demand, and I think it will be noticeable in the coming months. You need more demand generators open, obviously. Washington, D.C., you need the Smithsonian Institution to be open. In New York, it will be great when you have theater again.

But until then, you do have restaurants and bars. You do have just the street life, which -- frankly, Chris, you're in New York, right? It's pretty impressive done in the West Village in the East Village, Soho, Tribeca. There's activity and life again. I know it's still pretty tough in Midtown West and Midtown East.

In Washington, D.C., you have indoor dining again, and so you're seeing a pretty good mix of people. You're seeing folks dropping off kids, you're seeing locals, you're seeing the first business meetings happening outside or in these kinds of spread-out restaurant facilities. And so I think there is some of that leisure life coming back as well. Long-winded, but those are our thoughts.

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Operator [37]

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Our next question comes from [Kyle Mangas] of B. Riley FBR.

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Unidentified Analyst, [38]

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This is [Kyle] on for Bryan Maher. Just had a couple of questions. So first off, you spoke on the last call about group business being rescheduled. I wanted to know if you could give us an update as if those have been subsequently canceled or pushed out further as the pandemic persists.

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Neil H. Shah, Hersha Hospitality Trust - President & COO [39]

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We have only 4 hotels that derive meaningful group business, like in our portfolio pre-COVID. Several of those hotels, we've decided to remain closed for longer periods of time because our expectation is that there isn't going to be -- that there will be cancellations on a lot of the group business that we had on the books and that we would have opened for.

It's just not a huge part of our business, so we don't have a lot of data to share. But most of it was canceled and pushed back to September, October. And it depends market by market and asset by asset, whether we think that, that will actually come to fruition or not.

What we've recently booked across the last 2 to 3 months? We have lots of kind of confidence on in the short term. But things that have just continued to be pushed back from March to middle of the summer to early fall, less confidence on.

The hotels that we have opened that have group facilities today, we are touring people through much more than we ever have in the last 100 to 120 days. Weddings will pick up. There's no question about it, that we will have a lot more social business in '21. And on the group business, we're just seeing the first bits of kind of new corporate kinds of group opportunities. But I think some of our more group-oriented peers will have better data to share.

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Unidentified Analyst, [40]

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Great. And then any thoughts on the timing and strategy to reopen bars and restaurants at the hotels?

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Neil H. Shah, Hersha Hospitality Trust - President & COO [41]

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We're doing it on a case-by-case basis, and it depends on kind of local regulations and the safety that we can ensure our guests as well as our team members. But in certain cases, it makes a lot of sense. So we've opened up at the Envoy in Boston. We have an iconic rooftop there that has been a top destination for many years.

But if you'll remember, we spent some time last year expanding that space, adding a kitchen, more overhead cover. And so we have opened that facility up, and we're seeing very strong production there. And it's very much beverage-oriented, which is leading to higher profit margins than we might expect from food and beverage restaurants and bars pre-COVID.

That will be probably our biggest restaurant and bar contributor, but we have also opened up at the Sanctuary Beach Resort, where we're providing -- we're getting rates in the $400, $500, $600 a night. And there, it's less to drive meaningful profit, but it's to provide the amenities that our guests are craving, and they are looking for notable food and beverage. And so we've opened up there at Parrot Key, down in Key West. The month of June, we actually did better F&B production, food and beverage production, than we had prior year. In July, it looks like we'll do the same.

So we are -- case-by-case basis, we're opening up restaurants and bars. In the most of our urban gateway markets, we've been more hesitant to do so until there is just more volume and cities truly open up. But I think in a city like Philadelphia, it will likely be towards the end of the month that we'll start to provide dining at least at Scarpetta, if not LaSalle.

And in Miami Beach, for example, where we have a strong partnership with a lease operation there, they've opened the day we opened the hotel, and so we've been able to provide food service at the beach as well as by both of our pools. Yes, but the biggest one is the Envoy that we started with.

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Operator [42]

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That's all this concludes our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

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Neil H. Shah, Hersha Hospitality Trust - President & COO [43]

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No. Thank you for your time, everyone. With no more questions, we'll just -- we'll stand by for -- after your other calls or whenever questions come to mind, please feel free to reach out to us. We're all in the office here in Philadelphia. We look forward to speaking to you soon.

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Operator [44]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.