Hersha Hospitality Trust (HT) Management on Q4 2021 Results - Earnings Call Transcript

Feb. 17, 2022 1:54 PM ETHersha Hospitality Trust (HT), HT.PC, HT.PD, HT.PE
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Hersha Hospitality Trust (NYSE:HT) Q4 2021 Earnings Conference Call February 17, 2022 9:00 AM ET

Company Participants

Neil Shah - President & Chief Operating Officer

Ashish Parikh - Chief Financial Officer

Conference Call Participants

David Katz - Jefferies

Aryeh Klein - BMO Capital Markets

Bryan Maher - B. Riley Securities

Jonathan Jenkins - Janney

Michael Bellisario - Baird

Chris Woronka - Deutsche Bank

Bill Crow - Raymond James

Anthony Powell - Barclays

Operator

Good morning. My name is Alex and I will be your conference operator today. At this time, I would like to welcome everyone to the Hersha Hospitality Trust Fourth Quarter 2021 Earnings Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]

Andrew Tomarchio [ph] Investor Relations for Hersha Hospitality Trust, you may begin your conference.

Unidentified Company Representative

Thank you, Alex, and good morning everyone joining us today. Welcome to Hersha Hospitality Trust fourth quarter 2021 conference call. Today's call will be based on the fourth quarter 2021 earnings release, which was distributed yesterday afternoon.

Before 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's 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.

Neil Shah

Good morning and thank you for being with us as we kick off fourth quarter earnings. Joining me this morning are Jay H. Shah, our Chief Executive Officer; and Ashish Parikh, our Chief Financial Officer.

When we last spoke in late October, demand for leisure and business travel was accelerating rapidly and we were optimistic, as forward bookings were shaping up for a very strong fourth quarter.

We are pleased to report that despite the headwinds we encountered from the Omicron variant in December, we achieved our highest cash flow producing quarter in 2021, meaningfully outperforming our internal forecasts and consensus estimates for the fourth quarter on both top line and profitability metrics.

We saw a pickup in demand for our urban portfolio, as well as continued robust performance at our drive to leisure resort markets. Today, we're excited to see another resurgence of travel activity following this Omicron wave, as case counts continue to fall and corresponding COVID restrictions are lifted.

In the fourth quarter, our strategically located portfolio of 33 consolidated hotels generated 63% occupancy at an average daily rate of $238, resulting in $150 RevPAR, likely one of the highest among all of our REIT peers during this time period.

We began the fourth quarter on strong footing, as the Delta wave receded and our portfolio RevPAR ended October at $153, approximately 12% higher than September, as increased urban demand translated into robust results across the portfolio.

Despite typical seasonal pullback, November demand remains strong in our resort markets and our urban markets experienced sequential growth, fueled by international travel and a small but noticeable uptick in business transient. Momentum carried into December. And despite a noticeable drop-off triggered by the rise of Omicron cases, December results improved sequentially from November for the portfolio.

During the fourth quarter, our revenue managers continued to execute their strategy of driving rates, resulting in our comparable portfolio ADR for the quarter matching that of the fourth quarter 2019.

Rate integrity remains key at this lodging recovery. And based on year-to-date performance from our resorts and our urban clusters, we believe strong ADRs will prove sustainable across our high-quality urban and resort-oriented portfolio.

Our aggressive asset management strategies also drove comparable GOP margins for the quarter to 45%, 150 basis points higher than 2019 GOP margins. We are encouraged to see both ADR and GOP profitability metrics surpassed 2019 levels well before a recovery in business transient and group gets underway in our gateway markets.

With domestic leisure activity anticipated to have another record year in 2022 and the recovery of business and group travel on the horizon, our portfolio's prospects for continued outperformance remain extremely favorable.

Shifting to our market performance. Our resort portfolio was strong again this quarter with weighted average occupancy of 66% and ADR growth of 31% driving weighted average RevPAR growth of 16% compared to the fourth quarter 2019. Our strong performance this quarter benefited from continued robust demand in South Florida, despite what is typically a slower period for travel to the region.

The Parrot Key was our best-performing asset during the fourth quarter from a RevPAR growth perspective as 73% occupancy and a $491 average daily rate resulted in a $359 RevPAR, which surpassed fourth quarter 2019's RevPAR by 48%.

You may remember that we executed a comprehensive $26.5 million repositioning of the Parrot Key Hotel and Villas in 2019. The keys continue to garner unprecedented demand and we expect the Parrot Key and Villas to continue its ramp well into 2023.

Once again, the Miami Beach market turned in great performance in the fourth quarter demonstrating promise for the peak season ahead as the Cadillac and the Winter Haven on South Beach each exceeded fourth quarter 2019 ADR and RevPAR levels. Even in the more business-oriented submarket of Coconut Grove we were able to drive 16% RevPAR growth compared to the fourth quarter of 2019.

Our South Florida hotels continue to generate robust rates into the first quarter with significant growth on the horizon as peak travel is set to return during the winter months. And we also expect to see very strong momentum from spring break travel and the Formula one Miami Ground Pri, which should rival some of the larger citywide events that are traditionally hosted in Miami like Arc Basel or the Super Bowl.

And the Cadillac is another hotel that underwent a major $47.3 million transformative repositioning in 2018-2019 and we expect to easily surpass prior peak performance in the coming years. Back East our Annapolis Waterfront Hotel occupies a one-of-a-kind position on the Chesapeake Bay. We recorded 70% occupancy at an average daily rate of $330 last quarter, which led to a 20% RevPAR growth over 2019.

Annapolis typically thrives in the summer and early autumn, but the hotel saw significant demand continue into the fourth quarter with 83% occupancy in October, 80 basis points higher than 2019. Demand was fueled by the return of the boat show, smaller conferences and corporate groups, collegiate sports and alumni unions at the Naval Academy. We completed a major renovation in Annapolis in 2020 and this hotel also has several years of growth ahead.

In California the Sanctuary Beach Resort continues to lead our resorts from a rate perspective as its $510 ADR and 69% occupancy resulted in 32% RevPAR growth versus the fourth quarter of 2019. Our Hotel Milo in Santa Barbara, reported 29% RevPAR growth this quarter recording 64% occupancy at a $346 ADR.

Both of these hotels set record ADR levels and maintained pricing power even after the peak travel season to the California coast, further demonstrating that the leisure travel remains very price elastic for high quality well-located differentiated hotels. Our repositioning of the Sanctuary Beach Resort and the upgrades we made in Santa Barbara have clearly paid dividends during the pandemic. But the nearly absolute barriers to new entrants and the likely return of corporate group and international in the quarters and years ahead provide optimism to our team in sustaining significant growth in the years ahead at our Coastal California resorts.

The rapid recovery and continued robust performance of our regional resort destinations has led to record setting EBITDA performances at multiple properties. While this narrative echoes what others in the industry had experienced and has led to an unprecedented influx of capital into resort oriented assets, it's our core urban portfolio, consisting of 75% of our rooms that also saw steady demand increases to close out the year.

We believe this provides a clear trajectory of growth for Hersha's uniquely positioned portfolio in this next leg of the recovery. The fourth quarter provided us a lens into how a return of the business transient and international traveler will manifest in our core urban markets particularly in Manhattan. Weekday and weekend occupancies in Manhattan grew 2,230 basis points and 1,580 basis points respectively from September to November with weekends aided by the reopening of Broadway, the New York City Marathon, international travel and strong domestic leisure visitation.

Although December faced headwinds from the Omicron surge, weekday occupancy was up 2080 basis points versus September and rates remained resilient as weekend ADR in Manhattan surpassed 2019 levels by 390 basis points.

Omicron cases peaked in New York City in January and continue to plummet. February results have been encouraging and fuel our optimism for a rapid recovery in New York for the back half of this quarter and the second quarter. Events such as New York Now Winter 2022 with the Java Center, which occurred last week and the 2022 Big 10 NCAA Tournament at Madison Square Garden in March will not only help drive compression in the market but also act as an inflection point for the city. We anticipate as events continue to occur in person and case counts continue to fall that demand particularly for the business traveler will return to and surpass the levels we saw in October and November.

New York City has historically been the market leader in occupancy. And this quarter we achieved 74% occupancy in Manhattan by far the highest of our gateway or regional resort locations. And we remain confident that we'll revert back to prior levels over the next few years. Our market knowledge and cluster strategy provides us with significant data and operating leverage to consistently drive meaningful outperformance in New York and we remain optimistic that New York will once again be an early market leader in this recovery.

During the last cycle we had record demand for hotel rooms in New York, a year-over-year mid-single-digit supply growth resulted in a very challenging operating environment for owners. Although, we have seen new hotels open this year, with more on pace to open over the next 12 months, it is important to note that offsetting this new supply many hotels have permanently closed.

And although a few have recently reopened following the passage of the severance law in the city, the mid-term supply picture looks extremely encouraging. Based on our internal projections as well as third party studies, approximately 10,000 keys maybe removed from inventory for the foreseeable future, if not permanently by way of demolition, resizing or alternate use conversions.

On top of these changes, the special permit rules that New York City, City Planning Commission enacted at the close of 2021, which we have touched on in the past, have now come to fruition. Hotel developers will need to obtain a special permit before constructing a hotel in Manhattan converting an existing structure to a hotel or expanding an existing hotel by 20% or more. The special permit requires City Planning Commission approval, which is estimated to take at least two years to take.

When we factor in this analysis and the aforementioned new supply, net supply over the next few years will actually be negative 1% to 2%, especially as the cost of construction and financing remain exorbitantly high. And with the new regulations, over the longer term, supply should be limited to the low single-digit range for years to come and should significantly improve the operating environment for current New York hotel owners in the next cycle.

New York City weekday trends showed clear signs of acceleration heading into December, but the return to more stable business travel post-Omicron is closely correlated with employees going back to the office and resuming traditional travel to conferences and group meetings.

Although, many of the world's largest corporations have postponed their return to office plans, notable banks in New York including Citi, Bank of America, Jefferies and Goldman Sachs, who have instructed employees to work-from-home in December, have already called employees back into the office in some capacity. Other firms such as Microsoft, Facebook, BNY Mellon and American Express have all communicated a return to the office in March.

Conversations with our corporate accounts indicate we should continue to see a resumption in companies opening their doors and encouraging travel as case counts wane. Our view is that the Omicron variant delayed but did not halt the return of business travel. We anticipate the later part of this quarter and the spring as the next inflection point in demand growth from this segment.

Gateway urban markets have been more impacted by the pandemic than any other segment and offer the longest runway for growth as we look forward to the next several years in the cycle. With 75% of our room situated in major gateway cities, the return to office along with the resumption of business travel, will present a major catalyst for us.

We have benefited from the strong performance at our resorts, which drove significant growth last year and allowed us to generate property level cash flow quicker than most of our peers. But because of our strategic approach of clustered hotels in urban gateway markets, our growth runway also remains long with the pending rebound of business travel demand.

Achieving solid profitability and generating free cash flow, as the industry continues to recover from the worst crisis in its history, is testament to the quality of our hotels, the effectiveness of our cluster operating strategy and our mix of urban and resort markets. Our ability to generate industry-leading margins and cash flow growth, highlight the operating leverage inherent in our portfolio. With a refreshed portfolio and few capital expenditures on the horizon over the next few years, we can focus on hotel operations to drive high absolute RevPAR on industry-leading margins and expect to generate significant EBITDA and free cash flow growth in the coming years. This operating leverage positions us for outsized growth in a stabilizing environment. And with the Omicron wave rapidly receding, local and international governments beginning to lift COVID restrictions and businesses returning to an office setting and ramping up travel, we expect 2022 will still be an inflection point for the lodging recovery.

From a strategic standpoint, we will continue to seek out ways to close the significant discount in our public market valuation to private market values for our assets and portfolio without diluting our shareholders or taking on long-term portfolio-wide encumbrances that limit our financial or strategic flexibility.

We have carefully and methodically assembled this portfolio over the last decade and believe that we have some of the strongest growth prospects in the industry as we look at our market exposures, brand affiliations, manager relationships and the market knowledge from the highly skilled and cycle-tested team here at Hersha.

With that, let me turn it over to Ash to discuss in more detail our financial performance and outlook.

Ashish Parikh

Great. Thanks, Neil and good morning, everyone. As the fourth quarter progressed, we continued to narrow the gap to 2019 operating results. October and November RevPAR trailed 2019 comparable month results by 30% and 21% respectively. While our December results trailed by 14%, despite the surge of Omicron cases late in the month, results in the portfolio were largely driven by continued robust performance in our leisure and resort portfolios.

That being said, the key differentiator between the fourth and third quarters was the resurgence of our core urban markets and most notably the emergence of weekday demand. Our fourth quarter results demonstrate the inherent operating leverage of our portfolio and the benefits of our franchise model and close working relationship with our managers that have led to continued cash flow generation despite the continuation of significantly lower occupancy than pre-pandemic period.

These factors allowed our portfolio to generate $29.4 million in property level earnings and $8.9 million of positive corporate cash flow, after all corporate expenses, debt service and the payment of dividends on all tranches of our preferred equity. Fourth quarter corporate cash flow represents an almost 100% increase from the prior quarter. This sequential top line improvement in conjunction with our continued focus on hotel operations and the ongoing asset management initiatives we have implemented across the portfolio drove meaningful margin growth in the last year.

GOP margins of 45% during the fourth quarter were approximately 150 basis points higher than the fourth quarter 2019 GOP margin. This growth was primarily driven by our resorts portfolio, which posted a 49% GOP margin, 970 basis points higher than fourth quarter 2019. The growth in GOP margin at our resorts benefited from our revenue management strategies and strong ADR resiliency as we registered 31% ADR growth compared to the fourth quarter of 2019. We once again witnessed sustained EBITDA margin improvement as well with a comparable hotel EBITDA margin of 31.6%, 160 basis points higher than the third quarter 2021 and just 70 basis points lower than fourth quarter 2019.

In terms of profitability, our resort portfolio continued to deliver meaningful EBITDA margin performance. The group ended the fourth quarter with a weighted average EBITDA margin of 37%, 850 basis points higher than fourth quarter 2019. And in South Florida, the Parrot Key and Cadillac each surpassed their fourth quarter 2019 EBITDA margin by at least 700 basis points, despite October and November being seasonally softer months for the South Florida portfolio.

West Coast results were highlighted by our Sanctuary Beach Resort and Hotel Milo, which both finished the quarter with greater than 30% EBITDA margin. In the Annapolis Waterfront Hotel aided by a strong start to the fall recorded a 48% EBITDA margin one of the highest margins in our comparable portfolio last quarter and a 700 basis point increase from fourth quarter 2019.

In the urban portfolio, the Manhattan and Boston markets led the way, as New York achieved a 38% EBITDA margin on par with fourth quarter 2019 and Boston posted a 35% EBITDA margin, 420 basis point gain from fourth quarter of 2019. Turning to wages and labor costs, which is clearly top of mind for us. Over the last two years, we have absorbed 10% to 15% wage growth in each of our markets. While wage pressure is expected to continue into the future, we do expect this trend to level out.

Despite this rate absorption, our total cost per occupied room remains approximately 15% below pre-pandemic level. We are encouraged by recent trends, but the hiring market, especially for hourly employees remains tight. Fortunately, our cluster strategy close relationship with a third-party management company allow us to run our properties with staffing levels capable of offering the top service our hotel guests expect, all while continuing to drive GOP and EBITDA.

Although, wage pressure has been prevalent across the industry, the primary source of savings at our hotels has been the significant reduction in total labor in the early stages of the recovery. We were able to run our properties in a lean staffing model with occupancies between 35% and 60% in many of our hotels. And as demand picked up again in the spring and continued into the fall, we began to expand our open position across our portfolio to rehire staff to support the increasing occupancy.

Over the past few months, our on-property and corporate level management and HR team have been very focused on our recruiting efforts. And from June to December of 2021, we've seen a 200% rise in applicants for new posting, with total hires in December up 10% versus August following the expiration of additional unemployment benefits.

As RevPAR and out-of-room revenue increased in 2022 and beyond, our current operating model will yield much higher levels of absolute GOP dollars and allow us to amortize our fixed operating expenses as well as our property taxes and insurance expense.

Our portfolio and operating model allow us to maintain a high level of confidence in achieving our margin growth objective, which we see as a clear differentiating factor in the lodging sector as we emerge from this pandemic and in the years following. Our portfolio has experienced sequential F&B revenue growth each quarter since the height of pandemic in the second quarter of 2020.

In the fourth quarter, we recognized $11.9 million in F&B revenue, up 23% from the third quarter. This was led by the Rittenhouse in Philadelphia, which generated $2.3 million across its numerous F&B offerings, 56% higher than the third quarter 2021. Meanwhile, our time in renovation and expansion of the rooftop and kitchen, along with our ability to maneuver the arduous approval process is helping us produce strong results at Boston's Envoy Hotel, which generated $1.9 million in food and beverage revenues.

The rooftop enclosures allowed us to continue our strong performance as the lookout rooftop bar, proving this can be a revenue driver in all four seasons despite the harsh Boston winter.

So a few closing remarks on our balance sheet and outlook for the first quarter, we ended the year with $72.2 million in cash and cash equivalents and deposits. As of December 31, 78% of our debt is fixed or swapped, with a weighted average interest rate of 4.42% and 2.7 years life to maturity for our total debt. As we move forward, we are in active dialogue with members of our bank syndicate and are evaluating a range of refinancing options providing flexibility and extending the duration of our debt. We are very comfortable with our ability to refinance our upcoming debt and to simultaneously lower our overall cost of financing.

In the years before the pandemic, and as the prior cycle came to a close, Hersha invested approximately $200 million in ROI capital projects across the portfolio. We've already begun to see significant returns on this investment at locations such as Parrot Key, Hotel and villas Cadillac Hotel and Beach Cloud the Annapolis Waterfront Hotel and the Sanctuary Beach Resort. These investments have helped fuel the robust performance of our resort and leisure portfolio and enabled us to drive cash flow faster than most of our peers. Because of this proactive capital infusion, we've been able to limit our capital expenditure strictly to maintenance and live safety renovation, without sacrificing the quality or longevity of our portfolio.

During the fourth quarter, we spent $2.9 million on capital projects bringing the 2021 total spend to $10.9 million more than 58% below our 2020 spend. As we enter into the next cycle, we project very little disruption or capital spend for our portfolio across the next few years, which is materially beneficial from a cash flow perspective.

It is no secret that, the Omicron variant has caused disruption thus far in 2022. Despite the negative impact on corporate and weekday travel, it is our view that this will meaningful delay the impending recovery and increased pent-up demand as we emerge from this wave of cases.

The first quarter typically has the softest demand in our portfolio. And while Omicron cut into our expected production in January, we have already recovered that loss in February and are seeing a stronger booking pace every week since mid-January. We view the timing of this surge as more palatable than that of Delta, as second and third quarters are typically among the strongest in our portfolio.

Despite, the impact of the spiking cases, which have already dropped significantly in our major markets, we have experienced some green shoots in our portfolio. Cadillac and Parrot Key set ADR records between Christmas and New Year's. Despite the surge in COVID cases, these locations maintain great resiliency and the momentum has continued into 2022, beating our top line expectations for the month of January.

Our Metro New York City portfolio also beat our initial top line budget, as we were able to secure room blocks from New York City Health and Hospital and first responders to the outer boroughs. We will continue to focus on hotel operations and leverage our extensive revenue management and sales footprint to drive efficiency as we navigate post Omicron.

As case counts continue to fall and restrictions are lifted in the US and abroad, we remain confident in the significant and sustainable growth of our portfolio in 2022 and beyond. With our balance sheet rightsized to allow for accretive opportunities through the recovery and our on-property operations set to capture continued demand at our hotels, we look forward to continued robust leisure demand at our resort portfolio and an inflection point in the return of meaningful and sustained business travel that will drive outperformance across our portfolio for the next several years.

So this concludes my portion of the call and we are happy to address any questions that you may have. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question for today comes from David Katz of Jefferies. David, your line is now open.

David Katz

Hi. Good morning, everyone. Thanks for taking my questions. I wanted to just circle back on one element of all this and that is the debt on the balance sheet. Could you just talk about what opportunities you could have to either refinance, or are there opportunities that might be coming forth to pay some debt down and how you sort of think about going about that?

Ashish Parikh

Sure, David. As we look at the financing environment, it's the best financing environment we've seen clearly since the beginning of the pandemic. Right now, it's not just for the bank group and our traditional lenders that we look forward to working with, but it's also the life companies, the CMBS market, the institutional term market, the high-yield market. I mean they're all wide open. And we would be remiss to say that we're not exploring all of them at this time. We think that there's a lot of flexibility that different financing sources could offer for us. And we feel that it's an opportune time as Omicron is really fading and the markets continue to improve and the outlooks continue to improve to refinance this debt. So we are in active dialogue and we feel very confident in our ability to refinance all of our debt including the unsecured notes that we took on last year.

David Katz

Understood. And if I can just go back to the portfolio in total. The likelihood or prospects or thoughts around selling some incremental assets and what would we need to see before you start to play some offense? And is that -- or is that maybe another year away?

Neil Shah

David, thanks for the question. In terms of dispositions or sale candidates, I think we've mentioned that we're going to be pretty opportunistic about sales. We sold six hotels. We had some very good execution on some sales last year. And we really focus on assets that had capital upcoming or have significant competitive pressures in the market that would allow -- that would not allow those assets to grow at the same rate as our existing portfolio. Today, as we look at our portfolio and we think about dispositions, we do have one asset in the marketplace right now in Seattle, our Pan Pacific Hotel. We believe that the New York market is going to -- as we continue to see this midweek recovery and we see the rebound in business in international, we think the New York market may provide some attractive sale opportunities for us as the year goes on.

So, it's not a very big focus, but we're always in the marketplace talking to buyers and exploring it. And I think right now those are the areas that we've been focused on. We have been seeing a lot of interest in -- with this kind of resurgence in or this expected resurgence in business travel this year, there has been also a pickup in interest in urban select hotels. And so there's a lot of parts of our portfolio we've always claimed and believe that it's very liquid and very attractive to the private market. And so we'll take advantage of it when the time comes.

On the acquisition side, it's really just a matter of two things. One the opportunity set finding opportunities that provide true accretion to our growth rate and provide real cash flow at a time like this. And so we're not seeing anything that compelling on the acquisitions market particularly in light of our cost of capital right now.

Until this discount is closed a bit, I think it's going to be hard for us to find opportunities that are compelling on the buy side. But we remain open and flexible in looking at opportunities. But right now we think we'll be able to benefit from selling into it a little bit with a few assets.

David Katz

Okay, perfect. thank you very much.

Operator

Thank you. Our next question comes from Aryeh Klein of BMO Capital Markets. Aryeh, your line is now open.

Aryeh Klein

Thank you. Can you talk to the to your views on the sustainability of rate and demand at resorts as we move through 2022 and comps get tougher? And then the Cadillac and Parrot Key, I think pre-COVID puts renovation -- EBITDA is expected to stabilize at $20 million, $25 million. Sounds like that should be higher than that now. But can you give us a sense of what it was in 2021 and where you think it can get to?

Ashish Parikh

Yes. So, Aryeh in 2021, those two assets combined did about $22.4 million in total in EBITDA. So, a range of 20% to 25% and we're right in the middle of that. And we would say we're still pretty far from stabilizing these assets at this point. So, I think $25 million seems very realistic if not a lot conservative.

Neil Shah

Yes, I think that's what's important. When you look at our resort portfolio, our resort portfolio went through meaningful transformative renovations pre-pandemic. And so we do expect all of these hotels to perform well above prior peak. And these weren't just kind of a refresh of a room or something. We added 27 rooms to one hotel. We added major event space, a spa and lifestyle amenities to our resort on the West Coast. We added air conditioning to a hotel that didn't have it because of the landmark codes.

We took Cadillac and Parrot Key up at a full kind of star segment. We went from 3.5 to 4.5 star kind of positioning and added suites and the like. So, we do expect that our resort portfolio will continue to have a very strong 2022. And we believe we were going to continue to have some significant growth into 2023 just based on the repositioning of these assets and their stabilization in their new kind of market position. If you think of our resort portfolio California Coast, PCH, big kind of international destination, you think of Miami, not only do we have no international today, but we don't have any major roof events like there's -- it's a big convention market.

And so we'll have that coming in the next several years. And so we feel like, you have to own resorts and on the Sunbelt broadly you have to focus on what are the assets and what are the markets, I think there has been kind of commodity assets close to major destinations have had an inordinate run that will replace overtime.

But when you have truly differentiated high-quality assets at Main & Main that have gone through major renovations and transformative executions we expect a significant runway.

Aryeh Klein

Thanks. And then, Ashish, you mentioned cost per occupied rooms and stable despite the wage headwinds and growth. Does this change at all as you hire more people back and service -- more services come back? And then where are you on staffing versus where you ideally want to get to?

Ashish Parikh

Yeah. On the second part of that question, we're still probably at around 60% to 65% of our FTE count that we had pre-COVID. We think that as we get to full occupancy later this year or into 2023, we probably get to 80% to 85% of our pre-COVID FTE counts. We really don't foresee getting to 100%, due to just efficiencies that we've garnered through the pandemic, different housekeeping protocol, just ways that we -- found ways to use technology to reduce the number of bodies in the building.

So, we're still long ways away from getting to that, because occupancies are still significantly lower than what we would consider stabilized occupancy. On a cost per occupied room basis, we think that the -- when you look at the amortization of the fixed cost we can still bring our cost per occupied rooms down even with the wage increase, one with just the lower number of bodies. And you're going to have a lot more absolute gross operating profit as our occupancies grow. Right now our fixed costs are very high. As we grow occupancies, we just need to add some variable cost, housekeeping, front desk, doorman, things to that effect which aren't really -- which goes lockstep with increasing the revenue and the GOP.

Aryeh Klein

Thanks for the color.

Operator

Thank you, Aryeh. Our next question comes from Bryan Maher of B. Riley Securities. Bryan, your line is now open.

Bryan Maher

Good morning. Just curious with, the inflationary pressures out there impacting consumers with their day-to-day costs and how high-ADRs have been able to run especially at the leisure resort. How are you thinking about, ADRs over the next couple of quarters to couple of years, relative to the fact that you're still not running at 80% 90% 100% occupancy at most of your properties? How are you weighing the two within the portfolio?

Neil Shah

Bryan thanks for the question. Clearly, ADR has been the bright spot of this recovery and we have been able to push ADR well-beyond, what kind of erstwhile rules of thumb used to be. Like we used to think you couldn't push ADR and so you got to a certain level of occupancy in these markets. But as you've seen we're 20 points down in occupancy in a place like Manhattan but we're actually pushing rates higher.

I think it's a function of the consumer is very healthy. There's a lot of wealth in the world. There was a lot of wealth created from the stock markets from stimulus payments and the like. Now most of our hotels and the pricing that we have is really -- I don't think we have that much business from unemployed folks just kind of collecting checks. But I think it's just a function of a very strong consumer. And so we are expecting that to continue.

Business travel just hasn't kicked in. Group compression hasn't kicked in and that should lead to even more ADR potential. How much can the consumer bear? I'm not sure. I don't know how to answer that one Bryan. But you're seeing it not only in lodging but in all parts of the economy. There's -- people are willing to pay more for what they had before or than they did before.

So I think the big story really is less about the consumer. The consumer I think will continue to be at least for the next -- for this coming year will continue to be in a very similar position but it's the business balance sheets that are also very healthy that I think we're going to see. And you see this great need to hold on to top managers and top team members. And the best perk is travel for young people. And so we still have lots of I think ADR growth ahead in a portfolio like ours.

Bryan Maher

Thanks. And my follow-up question would be we're getting a lot of calls, increasing amount of calls from institutional investors who are gearing in on those companies that halted their dividends entirely or took them to a penny. And their thought process is look it's going on two years, we own or want to own these things for yield. And when are they going to come back? And I know that your balance sheet and upcoming maturities maybe make it a little bit more challenging than some of the other peers, but what is management and the Board's thought on maybe the back half of 2022 or early 2023 reinstating a dividend at some level at least to grow upon?

Ashish Parikh

Bryan, I think that like you said the first possible time for doing potentially the back half early next half. But right now we're focused on refinancing all of our debt, making sure that the operating results are coming in line with where we want them to be and just ensuring that we are -- we have enough balance sheet flexibility. I think that it's not inconceivable for 2023 to think about the dividend. And we may even think about it as kind of a special dividend instead of a recurring quarterly dividend that starts in 2023. It could be something midway through the year. It could be something at the end of next year. But I think to give any kind of set time line for dividend for us right now would be a little premature.

Bryan Maher

Yeah. Thanks.

Operator

Thank you, Bryan. Our next question comes from Tyler Batory of Janney. Tyler, your line is now open.

Jonathan Jenkins

Hi, good morning. This is Jonathan on for Tyler. Thanks for taking our question. First one from me, wanted to dive into the comments on the strong bookings in the prepared remarks. And I'm curious if you can provide any additional details there, and perhaps as it relates to the fourth quarter where things were trending before? And any commentary in general on what you're hearing from your corporate accounts?

Neil Shah

Yes. On the fourth quarter -- why don't I just start with kind of the start of this year? It's early January. We had Omicron out there but we are starting to see some real pickup across all of our markets. It's still a little too early to be able to share any kind of significant data, but we are seeing incremental velocity in net bookings week-over-week since January 15, in our urban markets. We're seeing a reduction in cancellation activity, and we are expecting a very strong presence day, weekend ahead. I think we'll have much more insight one month from now on how that's progressing. As you know our portfolio is highly transient-oriented not a lot of group. And so we don't have as much visibility.

But as I mentioned in the prepared remarks, a lot of the major corporate clients are starting to travel again. It just hasn't picked up to a level where we can compare it even to prior years. It's just building, but we expect kind of the cadence in February, March, April to be somewhat similar to what we saw in October, November and December, that kind of building. And I think that for the foreseeable future like right now, we have more visibility in some ways than we've had since the vaccine was announced or since the summer. And so, I think we're in a good position, but there's not much data we can share yet.

Jonathan Jenkins

Okay, great. I appreciate all that detail. And somewhat of a follow-up. I'm wondering if you can provide some color on your thoughts Neil on the pent-up corporate demand. I mean will it be comparable to what we saw in leisure travel, given I know it's a heavily transient portfolio but just curious your thoughts on that?

Neil Shah

We do think there is some pent-up demand for travel, just as we speak to our investors and we speak to our bankers and the like. They are on the road at a higher -- like the ones that have started travel, they are allowed to travel, they're traveling more than they have in years and very similar to what they were doing pre-pandemic as they just go out and try to see their clients again. So we do see that. But again, there's just not a lot of data that we can really point to yet on it. It's -- but it's something that's building.

Jonathan Jenkins

Okay, great. Appreciate all the color. That’s all for me.

Operator

Thank you, Tyler. Our next question comes from Michael Bellisario of Baird. Michael, your line is now open.

Michael Bellisario

Thanks. Good morning, everyone. Just one question for you. I want to go back to kind of capital allocation on the first question that was asked maybe zoom out a little bit though. You talked about closing the public versus private market valuation gap. Can you walk us through what you're thinking about aside from and maybe an opportunistic asset sale in Seattle? And then, kind of what can be done to narrow that spread?

Neil Shah

Michael, I think there's -- there are some capital allocation things we could do to help narrow that spread just for the market to see value that we're able to trade at some of these assets and to be able to sell hotels at very high multiples. I think all of that can help.

But, frankly, I expect -- we expect that the data is just -- building and that's continued. We've had a couple of Delta and Omicron slowed it down a bit. So it's -- I think our -- the discount didn't close as early as we might have expected last year. But I think, with what we're -- the performance we're starting to see and what we hope to be able to report across the coming months, we expect to that in itself will help close the gap.

Michael Bellisario

Got it. That's helpful. And then just as a follow-up, do you have any updated view on the way you think about NAV or comparable asset transaction valuations that either share your estimate of NAV higher or lower versus 90 or 120 days ago?

Neil Shah

Yes, we don't -- Michael, we don't change it all that often. There's no question that replacement costs are escalating. And there's no question that the replacement cost of our portfolio is well over $500,000 a key.

But on private market value, we think of kind of performance pre-pandemic. We think of performance expected in those markets. And then, we kind of triangulate between recent transactions in those markets and a more financial analysis to come up with our sense of NAV.

Some of the other analysts have also published kind of NAV estimates and things. And I think they're all kind of in the range of where private market values are between $400,000 and $450,000 a key.

Our portfolio, Mike, as you know, we have -- our portfolio is almost 50-50 between luxury and lifestyle and urban select. Both of those portfolios are performing and the urban select, clearly, is having a bigger rebound this year, but we expect significant growth from both of these sets of assets.

And we'll see kind of where the transaction market looks like as the year goes on and I think we'll be able to -- we'll be able to trade some assets at some attractive multiples over the course of this year. Again, if the performance itself doesn't close the gap, we hope some of those moves will.

Michael Bellisario

Helpful. Thank you.

Operator

Thank you, Michael. Our next question comes from Chris Woronka of Deutsche Bank. Chris, your line is now open.

Chris Woronka

Yes. Hey, guys. Good morning. Thanks for taking my question. Wanted to ask, I think, you guys mentioned 10% to 15% increase in labor costs over the last couple of years. How many of couple markets in the U.S. with union renegotiations coming up in the fall? And I know you're not a union company. Like, what are your thoughts around whether that's going to cause another potential reset in costs to hire later this year? Thanks.

Ashish Parikh

Hey, Chris .As you mentioned, most of our portfolio is not union. So we're not bound by the contracts. But I think, for us, it's really -- we believe that the minimum wage in most of these markets has now somewhat stabilized. We've seen huge jumps over the last five years in most of our markets.

A lot of it is also just availability and availability of employees and we're seeing that improving as well. So we don't -- we are not forecasting the same type of 10% to 15% wage growth for this year or closer to 5% in our portfolio. And we think that with more people on joining the workforce, case counts going down just the overall environment improving, benefits expiring, we should be able to stay in that range.

Chris Woronka

Okay. Fair enough. And then on the Pan Pacific sale, can you talk a little bit about whether that's your call on the market or the brand or to sell? And do you expect to be able to get out of there with the net win on price?

Neil Shah

Chris, the Pan Pacific Hotel in Seattle, for us, it's a phenomenal asset. South Lake Union is one of the hottest markets in the whole nation for life science tech office demand. And the hotel is a very special asset. We've always considered Pan Pacific as nearly kind of an independent kind of execution and we had a very pay-as-you-go kind of licensing deal there. And we really focused our first -- we acquired the hotel about three years ago – three, four years ago. And we really focused rather than putting a significant capital in, or repositioning, rebranding, we just tried to bring some value in operating the hotel better and driving returns.

As we look forward, for that hotel to form and to grow at the same level as our existing portfolio and to really achieve its ultimate business plan, it does require capital that will be disruptive and significant. But meaningful capital can really position this asset at a different level. So for us kind of like last year, assets that we're identifying as all candidates are generally assets that would require some capital in order to grow at the same rate as our portfolio. So that's a good example of that.

To add to that, Seattle is a very hot market. So we expect that we can trade at a very high multiple. Second, it is only one asset that we have there. You'll remember when we acquired the asset, we were expecting to continue to grow in that marketplace. But some of the disruptions related to the convention center there and where just pricing got in that market, led us to not build out a cluster in Seattle. And so having a single asset definitely makes it a little bit easier for us to sell.

Yes, so that's really -- that's the Pan Pacific story. And we remain very price sensitive. So we'll see how the transaction goes. We're in the marketplace. We'll start to get feedback in March. But it's not something that we would trade without a fair reasonable price, which we think, we'll get -- will be above our basis is what we would expect at this time.

Chris Woronka

Okay. Very helpful. Thank you guys.

Operator

Thank you, Chris. [Operator Instructions] Our next question comes from Bill Crow of Raymond James. Bill, your line is now open.

Bill Crow

Good morning. Very quickly for me. When you talk about refinancing the debt in the Goldman Sachs, are you also talking about deleveraging at the same time?

Neil Shah

Not necessarily, Bill. The cash flow profile of this portfolio is very significant. And in the private markets the levels of debt that we would -- that we currently have are kind of in the range. I think frankly, I think we could do a CMBS financing to pay off all of our bank facility and our unsecured notes and keep rates kind of somewhat similar. So our deleveraging is going to be a function of EBITDA growth. And when we think of refinance...

Bill Crow

You've complained for a while about the disparity and I agree between public and private market valuations. But if you're running leverage like private market the public market may not give you the credit in the future even as fundamentals continue to strengthen. Is that something you think about?

Neil Shah

Yes. We absolutely think about it. We get a lot of reminders from you Bill and your friends on the call. But we're sensitive to it. We're open to it. Like we sell hotels clearly that will lead to meaningful paydowns. But we just don't think that should be the main focus for investors today. Financing is available. Cash flow will likely cover it. And we're in an inflationary environment. It's kind of a -- we would suspect that leverage will become less of a focus as EBITDA starts to grow more meaningfully. Now if we're wrong about that Bill we can obviously sell hotels to bring down leverage and the like. But we do think that our performance and our EBITDA growth profile will be more of a focus for investors.

Bill Crow

Okay. All right. Thank you.

Operator

Thank you, Bill. Our final question for today comes from Anthony Powell of Barclays. Anthony, your line is now open.

Anthony Powell

Hi, good morning. I guess a question on I guess supply in Boston and New York. I think some of your peers have sold large hotels in those markets that appear to be tested for redevelopment into other uses. I know at the beginning of the pandemic there was a thought process there's going to be a lot of I guess hotels being converted and that may have reversed a bit as you got further into the pandemic. What do you think now about I guess conversion of the hotel stock into other uses and how that impacts supply growth over the medium term?

Neil Shah

We do think that there's going to be a significant number of kind of permanent deletions. Like some of the really big box has kind of increasingly becoming obsolete kind of assets like the Roosevelt or the Hotel Pennsylvania. Those have all been kind of announced and discussed and there are thousands of rooms and their low rated supply that's getting taken out of the system. One of our peers sold a hotel on Lexington Avenue. That is likely going to a student housing kind of use. We're seeing a lot of demand even for affordable housing in New York which is going to continue to lead to a bunch of conversions.

So we do think that as much as 10% of the supply can be permanently deleted at least for the midterm be deleted. And the hotels may be -- well there might be a hotel portion to some of these projects like the Grand Hyatt. It will just shrink in size as part of the mixed-use development on that site. So I think the supply picture Anthony is it looks really good for the coming couple of years. We have some -- we have a lot of supply that's opening right now, that was delayed during the pandemic. So I think this next 12 18 months we'll see some new openings but they are offset by the amount of hotels that are closed. So we think that the supply-demand picture in New York for the next, if we take a three- to five-year view is less than 2% kind of supply growth.

Anthony Powell

Got it. Thanks. And maybe just one on your technology clients and how that impacts Silicon Valley. It's been two years and it seems like those companies are a bit less eager to get back as more work from home. Any context with those clients. Are they saying that they're going to be back traveling at the same level, or is it a permanent decline? And what's the time line there for that segment of the business traveler?

Neil Shah

Yes. The time line is -- we placed some of them. Like Microsoft made announcement Apple's made some announcements in Silicon Valley and in Seattle for early March. So the expectation is for March April to really start seeing that come back. Our sales team has been in constant communication with Google, Facebook it's all of the major tech clients that we work with and they are all producing a little bit right now. We just don't have the significant kind of training business that's coming in and out of the hotel that used to come in and out from Google and Facebook on just kind of on a series basis throughout the year.

But all the discussions that we have with the travel planners who are all still employed by these tech companies, is that it's going to come back. They just don't know in what volume and in what month, it's really going to pick up. So our expectation and how we're pricing inventory and things is, that in March we will start to see some real midweek pickup in markets like Silicon Valley and Seattle. So if you look at rates 45 days out you'll see significant midweek rates. And you'll see that throughout the industry actually.

And then you'll -- and that's what's helping because people aren't just lowering rates across the board. They might lower for the next 30 days, but if you want to book on Wednesday in a particular market 45 days out from now most people are expecting that rates are going to move up very quickly. And I think just even at the consumer you can see that just checking around in hotels.

Anthony Powell

I may have missed this earlier. I wasn't on the first part of the call, but was part of the decision that maybe market in Pan Pacific just due to uncertainty about technology, or is that purely more of an opportunistic Seattle market kind of...

Neil Shah

Yes. they're more than opportunistic. Opportunistic, Anthony. It's a phenomenal market. It's a phenomenal asset. But in order to achieve its business plan goals that would require capital that would be disruptive. And since, we expect that we can get a very good price for the asset, we're thinking we can trade out of it and pay down leverage a bit.

Anthony Powell

All right. Thank you.

Operator

Thank you, Anthony. There are no further questions at this time. Mr. Neil Shah, I turn the call back over to you.

Neil Shah

Well, thank you. Thank you to everyone, for joining us on this busy day of earnings. We're going to be around most of the day. If you have any further questions just reach out to any of us. Thank you for your time.

Operator

Thank you for joining today's conference call. You may now disconnect.

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