Sunstone Hotel Investors Inc

NYSE:SHO

Earnings Call Transcript 2020-Q2

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sunstone Hotel Investors Second Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time.

I would like to remind everyone that this conference is being recorded today, August 4, 2020, at 12:00 p.m. Eastern Time. I will now turn the presentation over to Mr. Aaron Reyes, Vice President of Corporate Finance and Treasurer. Please go ahead.

[Aaron Reyes, Vice President-Corporate Finance and Treasurer]

Thank you, Roma, and good morning, everyone. By now, you should have all received a copy of our second quarter earnings release and supplemental, which were made available earlier today. If you do not yet have a copy, you can access them on our website.

Before we begin, I would like to remind everyone that this call contains forward-looking statements that are subject to risks and uncertainties, including those described in our prospectuses, 10-Qs, 10-Ks and other filings with the SEC, which could cause actual results to differ materially from those projected. We caution you to consider these factors in evaluating our forward-looking statements.

We also note that this call may contain non-GAAP financial information, including adjusted EBITDA, adjusted FFO and hotel adjusted EBITDA margins. We are providing that information as a supplement to information prepared in accordance with generally accepted accounting principles.

With us on the call today are John Arabia, President and Chief Executive Officer; and Bryan Giglia, Chief Financial Officer. After our remarks, we will be available to answer your questions.

With that, I would like to turn the call over to John. Please go ahead.

[John Arabia, President and Chief Executive Officer]

Thanks, Aaron. Good morning, everybody, and thanks for joining us today. As you are aware, we are in unprecedented times, and our second quarter results are nothing short of sobering as the hotel industry and much of our portfolio remain effectively closed with limited revenue in the quarter. But all is not lost. We are pleased to report that we are in the process of resuming operations at many of our hotels.

Occupancy trends at those hotels that have resumed operations are encouraging. Our estimated cash burn rate is less than we had estimated and should continue to gradually decline. And our low leverage and sizable cash position not only protect us during these challenging times but allow us to play offense when many others are likely to be focused on shoring up liquidity.

Today, I'll first review the progress made towards resuming operations at our hotels and provide some commentary on our operating trends. I'll then discuss revised estimates of our monthly cash burn rate, which has improved from the range provided last quarter and talk about recent steps taken to enhance our already sizable and enviable liquidity position. In closing, I'll provide an update on a few of our ongoing capital projects before I turn it over to Bryan to provide more details on our recent earnings, liquidity and dividends.

So let's talk about our recent operating results, starting with the pace at which our hotels resumed operations. Of our 19 hotels, four have remained in operations for the duration of the pandemic, including the Embassy Suites La Joya, Renaissance LAX, Renaissance Long Beach and Boston Park Plaza. Six hotels that had suspended operations have recently reopened, including Oceans Edge in early June and five other hotels in early to mid-July, leaving us today with 10 of our 19 hotels in operation and currently welcoming guests.

With only a small subset of our hotels operating, our second quarter revenues were only $10 million, while RevPAR and total portfolio revenues declined by 98% and 97%, respectively, compared to the second quarter of last year. Over the same period, our total property-level operating expenses were $54 million, resulting in property-level EBITDA loss of $34 million in the second quarter.

While perhaps hard to believe, property-level loss was several million dollars less than we had anticipated as we were able to work with our operators to streamline operations, eliminate nonessential services and reduce property-level expenses by an unprecedented 73% from the prior year. Like much of the industry, occupancy for our operating hotels during the quarter hit a low in April and gradually improved as the months progressed.

For the four hotels that have maintained operations throughout this year, witnessed an average occupancy of 39% in March, declined to a low of just 8% in April and then gradually increased to 13%, 16% and they're nearly 23% in May, June and July, respectively. Despite increased concerns about our recent spike in COVID cases.

Similarly, Oceans Edge, which resumed operations in early June, quickly ramped up to sustained occupancy levels near 50% by mid-June and remain there through early July, but has since witnessed occupancy levels in the mid to high-30% range as a result of the resurgence of COVID cases in Florida. The six hotels that resumed operations in June and July, in general, achieved occupancy percentage levels in the teens within the first two weeks of opening.

For these hotels, this low occupancy level is generally sufficient to reduce but not eliminate the operating losses and cash drag despite the increased cost of enhanced cleaning protocols and protective measures taken to keep the hotel associates and guests safe. On our last call, we've provided an estimate of our monthly cash burn assuming most hotels had suspended operations and those that were in operations would run very low occupancies as was the case in the second quarter.

Three months ago, we estimated that we would incur property-level cash losses of approximately $18 million to $21 million a month, and $10 million to $11 million a month of corporate expenses, debt service, preferred dividends and capital spend for a total monthly cash burn of $28 million to $32 million, which again, includes CapEx but does not include extraordinary items.

I'm happy to report that as a result of strong expense controls in the past quarter, our estimate of property-level cash burn has been reduced by approximately $4 million a month, resulting in total monthly cash burn of approximately $25 million to $28 million or a 10% decline, which is inclusive of approximately $3 million to $5 million of monthly CapEx.

Furthermore, as hotels generally resume operations and occupancy slowly increases, our cash burn rate is expected to be reduced further. Assuming the 10 hotels in operations continue to operate at recent levels, keep in mind that five of these hotels did not open until July, our property-level cash losses would be reduced by roughly $1 million to $2 million a month to approximately $12 million to $15 million. When combined with our corporate requirements, our total cash burn rate on average is estimated to be between $23 million and $27 million or nearly a 20% decline from our previous range.

Again, we would expect this cash burn rate to gradually decline as we methodically resume operations at additional hotels and as occupancy builds has been – which has been the case over the past couple of months. So let's turn our discussion to group dynamics and what it means for near-term operating fundamentals.

As you can imagine, nearly all of our group business canceled in the second quarter. Other than a few government groups, 96% of our second quarter group room nights on the books prior to the onset of the pandemic canceled. For the third quarter, the trend is expected to be virtually the same as 95% of the group business on the books pre-COVID has already canceled.

As the pandemic continues, group cancellations for the fourth quarter have increased as well. Currently, nearly two-thirds of our fourth quarter group nights on the books pre-COVID have canceled. We remain hopeful that several of these groups will materialize in the fourth quarter, particularly as we begin to resume operations at a few of our large group hotels, including the Hilton Bayfront next week.

However, we believe that group business will not return in scale until there is a greater comfort in traveling and congregating. This means that group business is unlikely to return in a meaningful way until a vaccine and/or reliable therapeutics are developed, which we remain hopeful to be the case by the end of the year.

The silver lining in terms of group business is that our strategy of keeping sales professionals on property and taking care of our customers is paying off. Since March, we booked 86,000 new group rooms for all future months. In addition to the new bookings, we have, thus far, rebooked 138,000 group new room nights that previously canceled or 23% of all canceled group room nights since the start of the pandemic.

Furthermore, an additional 61,000 group room nights that have been canceled have expressed their intent to rebook and are at various stages of reworking their group contracts, which would increase our rebook percentage to 32% of total canceled group room nights. Taken together, recently booked groups and definitive or tentative rebook groups represent approximately $70 million to $75 million of group rooms revenue, and roughly $100 million of total group revenue.

We are confident we could not have captured all of this business if we did not keep sales professional on property to work with and take care of our meeting planners and group customers. I'd like to thank all the hardworking management teams and sales professionals that have rebooked this very important future business.

For 2021, while our pure group room night pace is down, we have approximately 577,000 group rooms on the books, representing $145 million of group rooms revenue. We have nearly 16% of our 2021 occupancy on the books, which is slightly below our three-year average of approximately 18% at this time of the year. As we continue to rebook canceled room nights, we could cross over into 2021 with significantly more groups on the books than we originally expected.

For context, we all knew 2021 was going to be down in terms of group business compared to our initial 2020 expectations. Furthermore, we continue to see relative strength in the leisure and government business at certain hotels, including those in Boston, Key West and Southern California. And while it is still early, we are starting to slowly see the return of business transient travelers at a few of our hotels, albeit starting from a very small base. So where does this leave us in terms of resuming operations at our remaining nine hotels? Well, we are likely to resume operations at two to three more hotels in August as well as another few hotels in September and October time period.

That said, it is important to mention that one or more hotels may not resume operations until later this year due to ongoing government travel restrictions and quarantine rules, or ill-conceived cleaning mandates brought on by various city councils across the country that, not only increase operating costs and therefore, delay the resumption of operations, but more importantly, increase health risks to both hotel associates and guests alike. Assuming we open hotels on this general time line and meet our estimated occupancy thresholds, we will likely reduce our monthly cash burn rate even further.

So let's switch gears and talk a bit about our significant and enviable liquidity position. By the end of the quarter, we repaid $250 million of the $300 million line draw that we completed back in late March at an abundance of caution. In July, we increased our liquidity through the previously disclosed sale of the Baltimore Renaissance. Excluding the $50 million of remaining line balance at the end of the quarter, and including the net proceeds from the sale of the Baltimore Renaissance, we held approximately $570 million of unrestricted cash at the end of the quarter on a pro forma basis.

With low leverage and significant cash balance gives us ample liquidity to weather this storm, even if it lasts for a prolonged period. To meet our commitments and to take advantage of opportunities that, we believe, will become available in the next several quarters. This is an enviable position and one that is not shared by many others.

Now let's talk about our ongoing capital projects. As you're likely to remember, we postponed approximately $35 million of capital projects this year, leaving approximately $40 million of our 2020 budgeted renovations. At the same time, taking a long-term view of our business, we accelerated $6 million to $8 million of very disruptive projects that were on hold awaiting a quiet time to be completed.

I'm happy to report that our largest project of the year, the repositioning of the Marriott Portland, will be ready to open in September, and the hotel looks fantastic. Furthermore, we have completed, or are close to completing, three of the projects that were accelerated, including the atrium flooring at the Renaissance Orlando, the escalators in porte-cochere at the Renaissance DC, and the addition of 32 beautiful lanai decks at Wailea Beach Resort, which significantly increased the appeal of these ocean front rooms.

The good news is that most of our capital projects were heavily loaded in the first half of the year, and our capital investments are expected to decline to only $18 million to $22 million in the second half of the year. To sum things up, we believe the worst is behind us. 10 of our 19 hotels are operating and we expect to open additional hotels in August and September. The hotels that remain open or have resumed operations have witnessed encouraging occupancy trends and are reducing our overall losses and cash burn.

And finally, our significant cash on hand before drawing down on our credit facility, not only provides us with incredible stability during these uncertain times but will allow us to fund attractive investments earlier than others to maybe more focused on shoring up liquidity.

With that, I'll turn it over to Bryan. Bryan, please go ahead.

[Bryan Giglia]

Thank you, John, and good morning, everyone. As of the end of the quarter, we had $540 million of unrestricted cash, including $50 million drawn on our $500 million credit facility. Subsequent to the end of the quarter, we completed the sale of Renaissance Baltimore for gross proceeds of $80 million. Adjusting for the sale, our pro forma cash balance is over $600 million.

Following the end of the quarter, we also finalized amendments to our unsecured debt, providing a covenant holiday through the first quarter 2021 with the next covenant test being Q2 2021. The amendment provides the necessary relief during the pandemic-impacted time periods, while also providing flexibility to invest in our portfolio and to pursue acquisition opportunities.

Our balance sheet strength and ample liquidity have positioned us not only to survive the economic shock we are experiencing but to also come out of this with more flexibility and ability to capitalize on opportunities than many others will have. We continue to focus on managing our costs and minimizing hotel expenses, while maintaining our properties in good condition and opportunistically investing in projects that would have resulted in material displacement.

Working with our operators, we have reduced operating expenses by approximately 73%. Based on our current projected cash burn rate of $23 million to $27 million per month, which reflects the hotels open as of the end of July, we estimate that we have approximately two years of liquidity based on existing cash.

Again, that is nearly 24 months of liquidity before we would need to take on any additional leverage from proceeds from our line or other capital sources, including asset sales, which could extend that liquidity up to another two to three years. It is important to note that our estimated cash burn includes $3 million to $5 million a month of capital investment in our portfolio.

We could always curtail that investment if it was needed. This is a very important distinction. When we emerge from this pandemic, we will have significantly more capacity than others. Our balance sheet was already designed to handle a major downturn. So even if we emerge into a recessionary macro environment, which is likely, we will not need to access additional equity capital to shore up our balance sheet or rightsize our leverage. This may not likely be the case with everyone in our industry.

Shifting to second quarter operations. Financial results are provided in our earnings release and in our supplemental. Second quarter operations reflect the most dramatic decline in domestic demand the industry has seen. Second quarter adjusted EBITDA was a loss of $47 million, and second quarter adjusted FFO per diluted share was a loss of $0.31.

Second quarter earnings were negatively impacted by $7.5 million, which included $6.4 million related to current and future wages and benefits for furloughed or laid off hotel employees, and $1.1 million of severance pay related to workforce restructuring. Additionally, during the second quarter, we incurred an impairment totaling $18 million related to the sale of the Renaissance Baltimore.

Now turning to dividends. As John mentioned – as John previously mentioned, in efforts to preserve liquidity, we have suspended our common dividend. Depending on whether or not there is taxable income this year will determine when our common dividend will be reinstated. At this time, we do not anticipate taxable income or the need for any additional distributions in 2020. Separately, our Board has approved the routine quarterly distributions for both outstanding series of our preferred securities.

With that, I'd like to now open the call to questions. Roma, please go ahead.

[Operator]

Thank you. [Operator Instructions] We will now take our first question from Lukas Hartwich from Green Street Advisors. And caller, your line is now live.

[Lukas Hartwich, Green Street Advisors]

Hello.

[John Arabia, President and Chief Executive Officer]

Good morning.

[Lukas Hartwich, Green Street Advisors]

Good morning, guys. Just curious, I think everyone's surprised a little bit with how well technology is helping everyone do business in this current environment. I'm just curious, looking out further than the next year or two, maybe three to five years out, I'm just curious what you think the potential long-term impact could be on business travel demand, particularly business transient?

[John Arabia, President and Chief Executive Officer]

Very good question, Lukas. And fortunately, I think this is everybody's first pandemic, so we're trying to figure out both the short-term and the long-term implications of this. I would agree that technology has made it easier for people to do their business at home. I continue to believe that face-to-face interaction is critically important. And every time I've heard the technology will end up eliminating corporate travel, that proves not to be the case, particularly when some of these competitors go out and get the business.

So I do think on the margin, particularly in the near-term, I think that it's – business travel is likely to be down. Longer term, particularly in those areas where we are located with what I believe is long-term relevant real estate, I feel comfortable that we'll be fine.

[Lukas Hartwich, Green Street Advisors]

That's helpful. And then I was also curious, with this experience we're going through, has this altered at all Sunstone's strategy in terms of what types of hotels you want to invest in, What markets, things like that?

[John Arabia, President and Chief Executive Officer]

Not really. While this is obviously a major blow to the economy, to all of us, to major markets. I still believe in the long-term relevance of several of the areas that we are located. You take a property like Wailea, and even though it's effectively shut right now and it could be one of the hotels that opens up last in our portfolio, not last, but at the longer end, so to speak. I continue to believe that, that is a hotel and that is a market that will be highly sought after from the traveling public.

I would say that there are probably a couple of markets that will end up doing better or have moved up in the rankings and a couple of markets that I think have probably moved down in the rankings. New York, I'd put a market that, I think, is going to struggle for some time. San Francisco, who I think – which I think was probably the darling of the industry for so long and people didn't get enough San Francisco exposure. Given some of the challenges, I think, in that market, I think a little bit of the bloom has come off the rose there.

[Lukas Hartwich, Green Street Advisors]

Great, thank you.

[Operator]

Our next question comes from Smedes Rose with Citi. Caller, your line is live.

[Unidentified Analyst]

Hi, good morning. This is Seth on for Smedes. We were just wondering what the timing of potential assets that would be of interest to you guys. What are you seeing in terms of assets potentially coming to market? Thanks.

[John Arabia, President and Chief Executive Officer]

We started seeing just a trickle in terms of potential opportunities. And those were fairly highly sought after by a fairly large group of folks. In fact, it was a bit surprising how many people were bidding on the one or two hotels that we've already seen come to market. Other than that, I still believe it's early days in that regard. Lenders are providing forbearance. People are trying to figure things out, so to speak.

And so I do believe that it's going to take a few quarters to sort many of those items out. And we believe that, at a certain point, lenders will stop giving us much leeway in terms of forbearance or other. And so I think it's going to force some people's hands. In the near-term, I don't believe that there's a lot of opportunities, but I think in a few quarters, that's going to start working its way through.

[Unidentified Analyst]

Great, thanks.

[John Arabia, President and Chief Executive Officer]

Thank you.

[Operator]

Our next question comes from David Katz from Jefferies. Your line is now live.

[David Katz, Jefferies]

Good morning, everyone. Good afternoon, depending on where you might be. Thank you for including me. I wanted to just ask, obviously, the core thrust of the opportunity you have could include buying assets. Or – and I know if this is repetitive for me, I apologize, but entire companies, have you set any boundaries around whether corporate acquisitions are included or excluded?

[John Arabia, President and Chief Executive Officer]

I think it's always something we would look at, but the hurdle is pretty high, David. First and foremost, it would have to include a significant portion of long-term relevant real estate. I'm not really interested nor is our Board or management team interested in just bulking up for sizing. But I find that, that does very little, in fact probably goes the wrong way. And in the current time period, balance sheet strength, the relative balance sheet strength would also play into that because there's a couple of us, a few of us that I would say have a real strength in terms of the balance sheet. And it'd be a real struggle to take over somebody that was on the opposite side of the spectrum.

So there are at least two hurdles in addition to the other hurdles: Does the price make sense? And can you get over the social issues? But as you know, we've actively underwrote two of the three M&A opportunities that have presented themselves over the past few years now, and something that I am sure we would be invited to the table if something came up.

[David Katz, Jefferies]

Got it. And just following up, how do you think about the balance between being opportunistic and sort of buying low if we were to hypothetically pick a market like – this is maybe a bad example, but Hawaii, where assets could be challenged for a little while and therefore, maybe an opportunity versus kind of immediate accretion, where – right, I mean, you may be buying something that's in a little better operating position today that you may have to pay for, right?

[John Arabia, President and Chief Executive Officer]

Yes, not as focused on the short term. You just need to be able to make sure you get through the other side. And what I mean by that is we would fully anticipate anything we're looking at here in the near-term, probably has very challenged near-term cash flow scenarios, just like a good portion of our existing portfolio. But if we are confident in the market, confident in the asset, confident of what we could do with it, even though the cap rate might look tragic, so to speak, in the short-term and if we believe in the long-term value, we have no problem pulling a trigger on something like that.

[David Katz, Jefferies]

Okay, good luck. Thank you.

[John Arabia, President and Chief Executive Officer]

Thanks David. Have a good one.

[Operator]

Our next question comes from Anthony Powell from Barclays. Your line is now live.

[Anthony Powell, Barclays]

Hi, good morning. Just a question on asset sales, I guess. Could you walk through maybe the sale of Baltimore asset and whatnot into the price? And what's the profit of future sales over the next couple of quarters?

[John Arabia, President and Chief Executive Officer]

Sure. So Baltimore, we've actually been working on some time and even before the pandemic. I think it's widely known that we have had that property under contract to sell for closer to $100 million pre-pandemic. Our buyer held things together. And even though we fell out a contract at least once, if not twice, and put the project down, they kept coming back to us, and we ended up transacting at 20% lower. Now that's an asset, like many assets, it's probably going to have a short-term cash burn.

And so it's an asset in a market, even though it's a nice physical asset, it is not a market that we felt strongly about that hit our strategy long term. So to us, it was a little bit of a hedge in that, if group comes back quicker, well, we have other group hotels that will do just fine, probably even a little better. If group takes a while to come back, then we're probably way okay letting that go at a 20% discount. And in terms of other sales, we are contemplating other sales, although we're not interested at all in fire-selling them at fire-sell prices. But if something that strikes us, we'll see, but it strikes us that we'll need to have a debt markets come back a bit before we have a better transaction market.

Right now, the CMBS market has come back, but not just for – but not for hotels. Bank market has come back, but not for hotels. So there is a challenge in the hotel market right now that, with the exception of maybe a few strong relationship owners/financier relationships, it's pretty difficult to get anything done without debt right now.

[Anthony Powell, Barclays]

Got it. Thanks. And similar to Hawaii, we all know that there's restrictions on traveling to Hawaii, do you think if those were to be lifted, would you be able to get to hotel EBITDA positive at that hotel either once the current restriction are lifted? Or once maybe the quarantine, I guess, the [indiscernible] are lifted? And I guess the question is, if you're going to get a hotel open, what could your hotel cash burn be reduced by if you got to some kind of short-term normalized level there?

[John Arabia, President and Chief Executive Officer]

Yes. Hard to say in terms of how quickly that would happen, but I would just leave you with this, Anthony, that I do believe that there's a significant amount of pent-up demand for leisure in a destination like that or a resort like that. I feel comfortable that once we turn the switch on and we – the airlines, et cetera, particularly if there are better therapeutics, et cetera, that there will be demand for that hotel and those hotels along that strip. So overall, I feel good about it.

[Anthony Powell, Barclays]

Okay. Thank you.

[John Arabia, President and Chief Executive Officer]

Thanks, Anthony.

[Operator]

Our next question comes from Dori Kesten from Wells Fargo. Please go ahead.

[Dori Kesten, Wells Fargo]

Good morning, guys. Bryan, can you walk through the various outcomes that you could see for the Hilton Times Square?

[Bryan Giglia]

We gave an update last quarter on the status of Hilton Times Square. At this point, since that last call, we don't really have an update. We continue to be engaged in conversation with our lender and the ground lessor, but don't have anything additional to disclose at this time.

[Dori Kesten, Wells Fargo]

Okay. Thanks.

[Operator]

Our next question comes from Bill Crow with Raymond James. Please go ahead.

[Bill Crow, Raymond James]

Yes. Good morning.

[John Arabia, President and Chief Executive Officer]

Hey, Bill.

[Bill Crow, Raymond James]

Hey, John. Can you just clarify on the few hotels that have come to market that were decent fits, I guess, with your portfolio, have you made bids on those? You were surprised by the level of activity? Or…

[John Arabia, President and Chief Executive Officer]

We were in the bidding process, yes, on one asset, in particular, at least – yes, we are in the bidding process. So that's an asset that would probably be announced here in the next month or two, the final buyer. But there's just a real dearth of high-quality assets for sale. I would anticipate that log jam will break as people continue to struggle – high-levered owners continue to struggle and are looking for liquidity and as banks start forcing those hands a bit.

[Bill Crow, Raymond James]

Yes. Understood. You talked about the government-imposed, I guess, kind of union-originated cleaning restrictions, in certainly, San Francisco, it's been talked about. Is there a fear that there is some contagion in that process? We're hearing about some [indiscernible] in Hawaii from workers fearing – theoretically fearing going back to work. Can you just kind of tell us how you're thinking about some of the challenges in some of these markets? Chicago, New York, et cetera?

[John Arabia, President and Chief Executive Officer]

Well, Bill, you hit the nail on the head. I do think that there's going to be – in certain markets, there's going to be greater challenges, which will delay reopening. Let me say this. I mean, the first and highest priority is the safety of the associates and the guests. And working with our operator, we've come up with extensive protocols. We come up with extensive protections to keep the health and safety high, and again, as the first priority.

I do though believe that some of the mandates that have been originated by city councils, et cetera, it's not about health and safety, it's about trying to bring back as many people as possible in the near term, which I think is very shortsighted, because what's happening is some of those protocols, not only will delay reopening, which is unfortunate, but it is what it is, but more importantly, we believe, put people's health and safety at risk. So those conversations are going on. And unfortunately, they've taken a turn that – I don't think it's all that productive. But yes, it will delay the reopening of certain hotels.

[Bill Crow, Raymond James]

Yes, appreciate those comments. One final thing from me, John. What are TripAdvisor scores doing for those guests that are coming to this new operating environment? Are they being understanding of the changes? And are they expecting less? And are they surprised by what they get? Or how are you monitoring that?

[John Arabia, President and Chief Executive Officer]

Yes. We are monitoring that. So for example, Oceans Edge, we've been very pleasantly surprised that we've received some very good TripAdvisor scores that the hotel was incredibly clean, they felt safe, all the protocols were in place. They had enough room to not feel like they were being pushed by others or felt impeded on by others. And so we've been pleasantly surprised in a place like that. I don't have anything more than anecdotal evidence for you, though, Bill, because there's been so few people staying at these hotels, and we're just starting to reopen now. Remember that five of our hotels – five, six of our hotels, six of our hotels just reopened in the past couple of weeks. So we should have more information for you in the near term.

And also, another thing to think about is some of the business that we have picked up wouldn't typically be – the guests staying at some of the hotels that we have opened right now. We have relied more on some contract business, government business, et cetera. And also in this time period, I think people are understanding that not everything is going to be open. I mean, not everything is open down the street. The restaurants are open maybe down the street, et cetera, et cetera. So I think people are becoming more used to the fact that it's not completely business as usual.

I have heard that some of the higher end, this is just completely anecdotal, Bill, but I have heard that some of the very higher-end hotels that have made cutbacks, but are also charging very, very high rates because they're open, service levels are not being delivered to people's expectations, and that could be a problem.

[Bill Crow, Raymond James]

Interested. John, I also appreciate the comments. Thanks.

[John Arabia, President and Chief Executive Officer]

Thanks, Bill.

[Operator]

Our next question comes from Rich Hightower from Evercore. Please go ahead.

[Rich Hightower, Evercore]

Hi, good morning, guys.

[John Arabia, President and Chief Executive Officer]

Hey, Rich.

[Rich Hightower, Evercore]

John, I want to go back to some of the prepared commentary around group piece, touch-and-go as it is. But are you able to give us any indication of the pricing and the terms associated with some of those group contracts that are either tentatively being negotiated or renegotiated or really kind of how those elements are expected to play out maybe in 2021, 2022 at this point?

[John Arabia, President and Chief Executive Officer]

Sure. So of the groups that we have rebooked, clearly, one of the pieces of conversation is what happens if COVID continues. And so they're looking for flexibility as one – as you can imagine. We're providing that flexibility given the unknowns in the world right now. Our operators are providing that flexibility. So that's, I would say, is a primary importance in these discussions. Finding spots has also been part of the discussion in terms of when we go into, let's say, our third quarter of next year, where some of these groups – a good portion of the groups are now going, we're kind of running out of room, believe it or not, in some hotels.

The good news is the hotel – excuse me, the groups that have been rebooked in the near term, so call it, 2021, the rates are flat to where they were. Those going in, in 2022 and beyond, we're actually seeing increases in rates. And the group planners have been accepting those increases in rates, et cetera. So the groups, in general, are just a tad bit smaller. It happens – excuse me, let me clarify that. The groups that are rebooking tend to be the larger groups, but what they're coming back with is slightly smaller number of group room nights, which makes sense. That helpful?

[Rich Hightower, Evercore]

Okay. Yes, that’s a helpful color. And then secondly, I think we've all got a pretty good idea of where Sunstone stands relative to other REITs in terms of balance sheet capacity, flexibility and that sort of thing. But John, what's your view of the competitor set in the private markets? And as you think about private equity balance sheets or other players, whether traditional, nontraditional, I mean, how competitive do you think that group of folks is going to be targeting the same opportunities that Sunstone is going to be targeting over the next couple of years?

[John Arabia, President and Chief Executive Officer]

Very good question. So let's start with what they currently have. Private equity tends to run at higher leverage levels. It's not uncommon to see 70% to 80% leverage. And one of the reasons that I think some of the opportunities are delayed is, at that pricing level, there's – the implied equity value is not significant, if anything. And so that is going to delay transactions or those assets actually coming to market. But in terms of other private equity being active, I do believe that some of the larger household name private equity funds are very well capitalized right now. And while they are dealing with their own issues of assets that they currently own. I do believe that private equity will be active in competing for some of those assets as well.

[Rich Hightower, Evercore]

Okay, great. Thank you.

[John Arabia, President and Chief Executive Officer]

Thanks, Rich.

[Operator]

Our next question comes from Chris Woronka from Deutsche Bank. Please go ahead.

[Chris Woronka, Deutsche Bank]

Hey, good morning, guys.

[John Arabia, President and Chief Executive Officer]

Hey, Chris.

[Chris Woronka, Deutsche Bank]

Hey, good morning, John. I wanted to ask you, coming out of this, which may seem like a long time away, but the day will come, and we've heard a lot of your peers talk about reimagining the operational model, and you guys have always been, I think, it's kind of the forefront of running a hotel the right way. So in the context of some of these things we've seen in these markets like San Francisco, where they're trying to be onerous in a time of the spare, I mean, is it reasonable to think that there's still going to be productivity gains coming out of this? Is there any way to think about that right now?

[John Arabia, President and Chief Executive Officer]

I do believe that there'll be productivity gains over the near and medium term, even long term, as we find out more efficient ways to conduct business. That will probably be easier to implement in certain markets versus others. But I do believe in that premise longer term. I do believe that it's also a little bit early to put a number behind those, but those conversations are already transpiring with a sizable group of influential owners and our brand partners, our operating partners, who, by the way, I think, are doing an excellent job with us, working with us. The dialogue with our operators I don't think has ever been any better. And really, my hats off to several of our operators, both in the trenches at the hotels and at the corporate level.

[Chris Woronka, Deutsche Bank]

Okay. Fair enough. And then as you look to open more hotels, and maybe you can draw a little bit on the experience from the hotels you have reopened thus far, how much of an impact is there from the market perspective of you opening a hotel? Is it – there's that much demand is there? Or is this reliant on kind of taking share from these players that reopened or remained open?

[John Arabia, President and Chief Executive Officer]

Really tough to tell. We're all trying to reopen, some of us around the same time, but we've been pretty pleasantly surprised that once we've reopened hotels in markets where we have been monitoring that demand was coming in, that we've reopened at occupancy levels kind of in the mid-teens in general for several of those – for most of the hotels that we just recently reopened, which is a level where we can improve upon our current cash burn. What we've also found is opened hotels tend to garner more business than closed hotels. And so we're pretty pleased that the occupancy levels at a few of our hotels have actually increased quicker than we had thought.

As one of our hotels that on one day last week ran an occupancy level in the high-70% range, which – it's only one day, and it was a fair amount of government business, but we are pleased to get that business, obviously, at lower rates. And what we've also started to see, which we weren't anticipating is, we're actually starting to see some BT business come back to a few of our hotels. It's not a huge amount of business, but it's great to see that some of our corporate travelers are starting to come back at a few of our hotels in a small and growing way. So that's been an upside surprise that we weren't anticipating that I'm hopeful that continues.

[Chris Woronka, Deutsche Bank]

Okay. Very helpful. Thanks, John.

[Operator]

Our next question comes from Patrick Scholes with SunTrust.

[Patrick Scholes, SunTrust]

Good morning, Bryan.

[John Arabia, President and Chief Executive Officer]

Hey, there.

[Patrick Scholes, SunTrust]

John, you – in a previous question, in the U.S. market private equity interest in individual assets. I wonder what you think about what might be the interest right now from private equity for purchasing [Technical Difficulty]. And to be clear, I'm not saying [Technical Difficulty] but just in general, what will private equity interest [Technical Difficulty] what's your guidance? Thank you.

[John Arabia, President and Chief Executive Officer]

Well, in limited discussions with a few of our colleagues or friends on the private equity side, it seems that there has been an increased level of interest actually in REIT share prices. I have heard through direct conversations in these states, generally view that hotel REIT share prices are creating at notable discounts to revised NAVs based on asset values that have declined meaningfully. And so they are – while it's not something that they normally do, they are happy parking caps in the shares of some of the more higher-quality public companies. So that is what I've heard anecdotally.

We have seen, obviously, a couple of private equity firms taking positions or smaller positions in some of the REITs. So that seems to be happening. In terms of whether or not somebody could take down an entire company, probably, we'll probably be a little easier if and when the debt markets return. However, there are certain private equity companies that have top-tier status with the banks, and so that will come down to their relationships with those lenders to try and find capital.

[Patrick Scholes, SunTrust]

Okay. Thank you for the color on that. That’s it.

[John Arabia, President and Chief Executive Officer]

Sure.

[Operator]

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

[Michael Billerman, Citi]

Hey, it’s Michael Billerman here on for Smedes. John, I just had two follow-ups for you. One was just in terms of putting capital to work. How interested are you in buying sort of paper on assets and then working with the lenders to get hold of the fee? And also, one of the comments you made was the lenders are providing forbearance and sort of kicking the can down the road. I guess, are you actively talking to the lenders about trying to put yourself in a position for them to foreclose, and then you would be the equity partner to recapitalize the asset?

[John Arabia, President and Chief Executive Officer]

Sure. Hey, Michael, so first question, are we interested in buying paper to try and get to the asset? We have looked at paper recently. That, in my experience, is always a much more difficult and bumpy road than it seems on paper, no pun intended. And so that's one where the discount would have to be so self-evident given the vagaries and uncertainties of foreclosure deed in lieu bankruptcy process, which always in – what I've seen in limited experience, always tends to be less certain, more expensive and longer than anybody anticipates. I wouldn't cross it off the list of things that we would do, but we would enter into it, I think, with an appropriate level of conservatism, perhaps.

To your second question, are we in discussions with lenders about providing an eventual home? Yes. We have had those conversations. And folks know where we stand in terms of our overall liquidity. It's not an infinite bucket, Michael, until we see improved share prices, and I'm not talking, Michael, about share prices going back to where they were pre-COVID or back to NAV levels pre-COVID, but share prices going back to reflect even the current values – the current private market values. And at that point, we've seen this in the past, I know you've seen this in the past, that there is a certain time period that the REITs are afforded an equity cost of capital that is accommodative to growth, and that's what we're hopeful for.

[Michael Billerman, Citi]

Right. Yes, I was just thinking there was so much lodging debt on bank's books obviously, there's a ton of lodging debt within CMBS, which are a little bit harder to have an active dialogue on. I would just have thought that trying to – I assume a lender would be more than happy not to provide forbearance and actually get someone who is willing to pay the interest on the debt if – and you certainly have the balance sheet capacity to take on highly leveraged assets. So I would have thought that would be the biggest area for you to get some discounted assets into the company.

[John Arabia, President and Chief Executive Officer]

Yes. The problem right now, Michael, just speaking openly, is you have some owners that are holding on to assets that know that they might be under water, but don't want to give up hope that they'll be underwater in the medium or long term, and so they're going to fight to stay in. And that's the problem. In the spot market, they might not have any equity, but it needs to work itself out.

[Michael Billerman, Citi]

Right. And then I wanted to come back to your comments that you made to Green Street just in terms of the impact of technology, and I agree with you from a face-to-face, as someone who hosts a major conference for our industry, I know that, that group interactions and being together in one place makes sense. But I don't think you can say the same thing about every single group and activity that's done in the hotel world. And, while I appreciate the element of your portfolio in the markets that you're in, this whole – where technology is today is so different than where it was 10 years ago and certainly 20 years ago, and this has been a forced adoption to everybody.

And I think there has been some element of working these things into your day-to-day into the future. And so – I guess I was taken aback by your comment that everything is going to go back to normal when we have a vaccine or a therapeutic. You don't think there's been a permanent – some level of permanent impairment – like I look at like retail, you look at the retail market, there is a permanent impairment on retailers, do not think there's a permanent reduction from a lodging perspective by the same impact?

[John Arabia, President and Chief Executive Officer]

No, I don't believe that, that was my comment, but let me restate. I do believe in the near term, that technology and the shift to the economy is going to have a near-term impact – near- and medium-term impact to business travel. The comment was really more towards, we don't anticipate group coming back in any meaningful way until there is a therapeutic or vaccine, et cetera.

Longer term, I think, for the right assets in the right markets, I'm not as concerned about the technology edge, but I agree with you that the improving technology is likely to have an impact on business travel. I'm not disagreeing.

[Michael Billerman, Citi]

Yes. Thank you.

[John Arabia, President and Chief Executive Officer]

Thanks.

[Operator]

Our next question comes from Bill Crow with Raymond James. Please go ahead.

[Bill Crow, Raymond James]

Yes. Thanks for the follow-up. John, it really goes back to acquisitions, not necessarily about Sunstone or private equity, but just if you think back about the period after 2009, it was kind of the debt markets that ruined the party for REITs to be able to buy a lot of assets on the cheap, and refi became a good alternative. If we think about what might happen four, five, six months from now, if we do get an effective vaccine, even if we haven't distributed it yet, you would anticipate the REIT share prices would certainly jump on that news. But private market values would jump too, right? So is it possible that the only real window we have is over the next four to six months?

[John Arabia, President and Chief Executive Officer]

I don't think so, Bill. I mean, when I take a look back at the last cycle, we actually – we were pretty active in acquiring hotels not in the downturn, of course, our balance sheet was a different balance sheet at the time. But when I take a look at the opportunities, the opportunities went for a while. Now I want to set everybody's expectations. I mean, to say that there could be opportunities, it doesn't mean that they're going to be bargain basement. I think that there'll be more attractive opportunities than what we saw in the past three years. I think that will be reflected in declines in price per key, et cetera. No, but Bill, I think there'll be opportunities past then.

[Bill Crow, Raymond James]

Okay. Thank you.

[John Arabia, President and Chief Executive Officer]

Thank you.

[Operator]

Our next question comes from Anthony Powell with Barclays. Please go ahead.

[Anthony Powell, Barclays]

Hi guys. Just one more follow-up from me. You mentioned a couple of times about business transit coming out at some hotels. So maybe some more detail, which hotels, which markets, what kind of industries were those customers coming from? Thanks.

[John Arabia, President and Chief Executive Officer]

BT accounts is a few of our hotels, particularly in Southern California, Long Beach, Embassy Suites La Joya, and we've actually seen it in our hotels in Boston just a little bit. Pretty small numbers, Anthony, but it's nice to see that we're actually getting some of that business coming through the BT lines.

[Anthony Powell, Barclays]

[Indiscernible] what kind of industry?

[John Arabia, President and Chief Executive Officer]

Project work on a couple of them.

[Anthony Powell, Barclays]

Okay. Thanks.

[John Arabia, President and Chief Executive Officer]

Thanks, Anthony.

[Operator]

This concludes today's question-and-answer session. I would now like to turn the call over to Mr. John Arabia.

[John Arabia, President and Chief Executive Officer]

Great. Thanks, everybody. Thanks for your interest. Thanks for being here today, and we are around if you have any follow-up questions. I appreciate your interest. Have a great day.

[Operator]

Ladies and gentlemen, this concludes today's call. You may now disconnect.