Operator: Good morning and welcome to the Hersha Hospitality Trust Fourth Quarter 2020 Earnings Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Greg Costa, Investor Relations.

Please go ahead.

Greg Costa: Thank you, Grant, and good morning to everyone joining us today. Welcome to the Hersha Hospitality Trust Full Year and Fourth Quarter 2020 Conference Call. Today's call will be based on the full year and fourth quarter 2020 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 is now my pleasure to turn the call over to Mr. Neil H. Shah, Hersha Hospitality Trust's President and Chief Operating Officer.

Neil, you may begin.

Neil Shah: Thank you, Greg, and good morning, everyone. Joining me this morning are Jay Shah, our Chief Executive Officer; and Ashish Parikh, our Chief Financial Officer. We appreciate you joining us early this morning on such a busy day for earnings. I'm going to focus my comments this morning on recent performance and our announced asset sales before turning it over to Ash to provide some further details on our recent capital raise, the newly amended credit facility and what we are seeing in our portfolio year to date and through the first quarter.

The conclusion of the fourth quarter closes the most challenging year in Hersha's history. Our operating teams remained on property throughout the pandemic, allowing us to welcome first responders and those that have begun to travel in these early days of the recovery. And our above-property team members, many here in our offices today, enabled us to remain nimble, make prudent decisions and execute multiple levers to provide financial flexibility for the foreseeable future. Jay, Ash and I stand on our team's shoulders as we share some good news today. We begin 2021 with optimism towards the recovery as the rollout of vaccinations gains momentum and more and more people choose to travel.

January started off stronger than we anticipated for our portfolio returning to greater than $60 RevPAR with South Florida and Washington DC offsetting lockdowns on the West Coast and the Northeast. We had our first month of hotel level positive EBITDA in January and we are encouraged with February performance to date. The booking pace for Presidents' Day weekend across the portfolio was the strongest since the pandemic 1 year ago. We agree that leisure demand, aided by continued government stimulus will again come first, but with significantly more pent-up demand than was actualized last summer. We are also encouraged by data from the airlines.

Most corporate accounts anticipate returning to at least 50% of pre-COVID travel by the end of 2021 and more than 40% of these accounts expect a full recovery in corporate travel by 2022. The return to leisure travel will kick start this year's recovery to be sure. But the industry should see meaningful acceleration with return of business travel, which we believe could begin as early as the second quarter and ramp up through the back-half of the year. Drive-to resorts have been our strongest performer since the inception of the pandemic. This portfolio of hotels about 25% of our pre-pandemic EBITDA had a weighted average occupancy nearing 40% and realized ADR growth of 2% for the full year 2020.

Government mandated shutdowns in California impacted performance in December and January for our coastal California properties. But we are seeing immediate improvement in February with the lifting of these restrictions. Not only have leisure travelers returned, but we are also seeing early signs of business and small group activity. New corporate accounts for near-term projects and deposits for spring and fall weddings are building a base at the Sanctuary Beach Resort and Hotel Milo. Across the country in Key West, the Parrot Key Hotel & Villas was our best performing asset during the fourth quarter, generating 55% occupancy, and 8.4% year-over-year ADR growth to $306 for the period.

The holiday weeks were especially strong, most notably the period between Christmas and New Years, which had greater than 90% occupancy and saw ADR exceed 2019 levels at the hotel. We're expecting several strong quarters ahead at this exceptionally positioned resort. Our largest asset, the Cadillac Hotel and Beach Club on Miami Beach is seeing increased demand on weekends and during special events, generating occupancies approximating 90% with rate on pace to improve incrementally throughout the balance of the quarter. Momentum has been building year to date in Miami from leisure demand. And recent announcements around major corporate relocations highlight the tremendous draw to the region, which leaves us optimistic for this year's recovery and substantial market growth for years to come.

Urban destinations were essentially shut down from March to September of last year and then, again, from November through January. We believe that the reopening of museums, national parks, theaters, sports venues, and more bars and restaurants in the coming months will lead to a pickup in both pent-up leisure and business demand to our great cities. As travel begins to resume, which we have already seen in warmer climates such as South Florida and even at our lifestyle hotels up north over Presidents' Day weekend, our unique portfolio provides us multiple levers to capture market share, while continuing to operate in a cost-efficient manner as occupancy builds towards normalization. Washington DC has been a very strong performing market despite the significantly abbreviated inauguration activity. Although the public was unable to attend the event, the St.

Gregory Hotel contracted with media outlets including CBS, BBC and Al Jazeera. The Hilton Garden Inn M Street and the Hampton Inn Mass Ave served the men and women of the National Guard, who were deployed to the city leading up to and through the event. The Ritz-Carlton Georgetown was able to hold a $1,000 ADR for the peak nights for the few leisure guests in town. Washington has begun 2021 on strong footing, ending January with portfolio revenues more than double our expectations at the beginning of the month. The new presidential administration is expected to lead to a pickup in activity among the lobbying, federal government and diplomatic segments.

And we're also looking forward to the upcoming Cherry Blossom Festival in the coming quarter. One of our better performing markets during the fourth quarter from our forecast perspective was our New York City portfolio, finishing the quarter with close to 40% occupancy, which came in spite of having few leisure-oriented attractions open in the city. We continued to see strong performance from our JFK sub-market, but also saw an uptick in first responder business at our Brooklyn and Lower Manhattan assets. These customers, the New York fire and police departments and a few medical groups continue to get rest at the Nu Hotel Brooklyn, and the Hampton Inn Seaport, resulting in January occupancy of 97% and 51%, respectively. Although, this business is transitory and related to the ongoing COVID-19 spread, we are grateful that these frontline workers are able to utilize our hotels to stay safe and guide us through this homestretch of this pandemic.

Urban market recovery is not only driven by vaccine distribution and the return of business and international travel, but as meaningfully enhanced with reductions or deterioration of supply. In markets around the country, aging hotels are being rendered obsolete, the Wardman Park in DC, the Embassy Suites in Philadelphia, the Buckminster in Boston. New York more than anywhere else, consultants have forecasted an array of figures regarding the permanent supply reduction in the New York. It may not actualize as high as 25% as some have predicted, but the confirmed closures in 2020 alone provide a concrete realism that the supply will contract. Adding to this is the newly announced proposal requiring special permits for new hotels and expansions in zoning districts throughout the city by the Department of Planning.

Public hearings on this proposal have commenced, and if passed, will materially impact hotel construction across the 5 boroughs, and provide a significant tailwind for hotel owners for years to come. Before Ash takes a deeper dive into our balance sheet and burn rates, I want to spend a few minutes on our capital allocation strategy and sources of additional liquidity. As we've outlined on our previous earnings calls, dispositions represented the lowest cost of capital, as we considered alternatives to raise liquidity and increase our financial flexibility. We ran wide and robust marketing processes with multiple brokers beginning this fall. Our strong locations and major gateway markets attracted tremendous interest from private equity firms, family offices, and residential developers.

These were fee simple hotels that have remained open throughout the pandemic, unencumbered of management and onerous labor contracts. Many run encumbered of brand, all of which made the bidding process quite competitive. Our goal was to generate $150 million to $200 million in proceeds from asset sales to pay down our senior credit facility. The 6 recently announced asset sales will generate net proceeds of approximately $191 million. The Sheraton Wilmington closed in December, while the Courtyard San Diego closed last week.

The residents in Coconut Grove, Capitol Hill Hotel Washington, and Holiday Inn Express Cambridge, are all expected to close by the end of the first quarter. While the sale of the Duane Street Hotel is slated to close in early Q2. Many of these hotels represented those with capital intensive projects on the horizon. And the successful completion of the sales will lower our CapEx budget by approximately $20 million over the coming years. As part of a long-term capital recycling strategy, the dispositions achieved liquidity and flexibility at a reasonable cost.

We transacted at a discount to pre-COVID value. But we focused our sales on mature hotels; hotels that we had owned nearly 10 years; hotels that would require additional capital investment during the recovery; and the slowest growth hotel in each of our geographic clusters. The successful sale of these hotels marginally improves the absolute RevPAR and EBITDA per key of the remaining portfolio. But meaningfully enhances portfolio quality, EBITDA growth rate, and reduces CapEx spending and disruption at these assets in the recovery. We were also pleased to announce last week and fund just yesterday our strategic financial commitment with affiliates of Goldman Sachs Merchant Bank, providing a $150 million unsecured term loan, which can be expanded to $200 million.

This capital infusion, in conjunction with asset sales led to the successful amendment of our credit facility, extending our covenant waiver until June 2022 and eliminating term loan maturities in 2021. We are pleased to have cleared the runway and provided the financial flexibility to focus on the ramp up of our portfolio in the coming year. As we've discussed on prior calls and investor meetings, we've been steadfast in our approach to capital allocation. Considering the cash flow profile and liquidity of our assets, and the upcoming recovery in travel and lodging, we were loath to pursue a transaction that would be unnecessarily dilutive to shareholders or constrain our strategic alternatives in the future. For this capital raise, we ran a fulsome process.

We were delighted with the depth and quality of investors interested in financing our portfolio and look forward to future transactions with many of them. Ultimately, the Goldman Merchant Bank offered the prepayment flexibility, draw and pick features, and importantly the potential for future partnerships in the coming cycle. As we navigate through the tail end of the crisis and into the recovery, we remain bullish on our portfolio positions and the markets where we operate, innovation oriented urban gateway markets and regional resorts, a short drive away from them. 2020 showcase the allure of drive-to resorts for all segments of the traveler. And we believe this trend will not go away soon.

But we remind investors that innovation markets provided strong results prior to the pandemic. And these markets have the most to recover with the rollout of the vaccine. Since the pandemic, Facebook and Google have expanded office space near our hotels on Manhattan's West Side, and our Tribeca, Union Square and Midtown East hotels will all have major new office developments opening in the coming years. Amazon announcing the addition of 3,000 jobs in the Boston Seaport walking distance from our Envoy Hotel. Our Courtyard LA is well positioned in Culver City for the booming tech and studio related office growth in Playa Del Vista.

Philadelphia has attracted several new life science and pharma companies' downtown in state-of-the-art new space. Even our locations in Miami are attracting new Class A office space in Coconut Grove and on Miami Beach, as there is increasing momentum from Northeastern asset management firms and West Coast technology firms. All of this proving out that corporate expansion remains intact and will add to the already robust demand generators in our gateway markets, particularly for our carefully assembled sub-markets and locations. Our disposition announcements this year should also reinforce the high-quality nature of our portfolio. Our hotels are precisely the kind of hotels sophisticated investors seek.

Our hotels have a high absolute RevPAR, while still producing sector leading margins. The hotels are young and purpose built for today's traveler with minimal CapEx requirements for the foreseeable future. Our hotels are fee simple, and have pre-payable financing, and have few management or brand encumbrances. All located in the most valuable markets in the United States. Our portfolio is proven to be attracted to a vast buyer pool and still offers incredible operational and financial leverage to this recovery.

And with the increased financial flexibility from our capital infusion, and no near-term encumbrances following our credit facility amendment, we are able to focus on capturing market share and operating our hotels in a cost-efficient manner to drive cash flow. With that, let me turn it over to Ash to discuss in more detail our balance sheet.

Ashish Parikh: Great. Thanks, Neil. Good morning, everyone.

As Neil mentioned, I'm going to do a deeper dive on our recently announced capital transactions, bank amendments and their impact on our balance sheet and interest expense, before closing with an update on our operating results and current outlook. Last week, we announced this strategic financing commitment with affiliates of Goldman Sachs Merchant Bank to provide $150 million in unsecured notes, which can be upsize to $200 million at any point on or before September 30 of this year, with a maturity date on notes of February of 2026. We successfully closed on this financing yesterday and look forward to furthering our partnership with GS's Merchant Bank. When we began our capital raising process earlier this year to provide us additional liquidity and optionality, we prioritized 2 items, capital that was not dilutive to our equity and significant prepayment flexibility. And this bespoke solution satisfied both of these key criteria and several others that we had prioritized.

This capital is unsecured and fully subordinated to our bank facility, and allows us to defer cash interest on 50% of our financing for the first year, creating substantial near-term cash savings, and providing us additional runway during this period of recovery. This capital does not prohibit supplementary junior capital, and allows us additional unsecured debt as long as we maintain compliance with certain incurrence debt. These unsecured notes do not place any further restrictions on our ability to operate the business or enter into strategic ventures that may be available to us. Last week, we also highlighted that we went under contract to sell 2 additional hotels, bringing our year-to-date total asset value of dispositions to $178.5 million. The successful closing of the sales in addition to the Sheraton Wilmington which closed in December, and the Duane Street Hotel, which is expected to close during the second quarter will generate total proceeds of $216 million and following the repayment of the $25 million mortgage loan on Capitol Hill Hotel.

Net proceeds from these dispositions will amount to approximately $191 million, which we will utilize in tandem with the proceeds from our unsecured notes to pay-off our 2021 term loan and reduce our overall debt by approximately $150 million. With the resulting reduction of overall leverage, and the payment in kind feature of our unsecured notes, we estimate that our cash interest expense will decrease by approximately $4 million in 2021. And that our total interest expense including the deferred interest from the notes will remain similar to our 2020 interest expense. We completed these asset sales and closed on the unsecured notes placement contemporaneously with the amendment of our revolving credit facility. And we're very pleased with the continued support from our consortium of over 15 bank group members.

The amendment eliminates all term loan maturities until August of 2022 and extends our covenant waiver holiday with our next financial covenant test occurring on June 30 of 2022. The first test will be applied to the annualized second quarter performance with the third quarter test annualizing second and third quarter results, and so on. The amendment allows us to pay off the accrual of our preferred dividends and maintain quarterly preferred dividend distributions moving forward. At this time, we anticipate clearing our accrual on the preferred dividends by the end of the first quarter. The completion of these capital transactions allows us to continue to focus on our operational performance and accretive opportunities that may emerge in the recovery.

Results that our properties have incrementally improved over the past 6 weeks, and ultimately led to the validation of our breakeven forecast during January, in what is seasonally the slowest month of the year, our properties generated positive property-level cash flow during the month of January on 40% occupancy, with RevPAR level 60% below January of 2020. In January, 20 of our 36 operational hotels broke even on the GOP line, with 14 achieving EBITDA breakeven levels. These results represent a 75% increase and 40% increase in properties that broke even on the EBITDA line compared to November and December respectively. Based on January's results and our forecast for the first quarter, we are comfortable with our previous estimates that the entire portfolio breaks even at property level with GOP with a 60% RevPAR decline. At the corporate level, our RevPAR breakeven occurs at a 40% decline.

Our franchise operating strategy allows us to run our hotels in very lean labor models until improved demand warrants additional staffing. Applying various cost-cutting strategies such as cross-utilizing management personnel, and outsourcing and job sharing within the hotel, and across our clusters lowers our overall costs. The model affords flexibility to continue to operate at current staffing levels at our breakeven occupancies approximating 35%, up to 55% to 60% at some of our hotels. As occupancies increased at our hotels, we are seeing flow-throughs as high as 75% on the GOP line. And as we push both rate and occupancy, we anticipate maintaining them for the remainder of the year.

The flexibility of the model and the resulting cost efficiencies economically justified continuing operations at our urban independent resort destinations throughout the pandemic, mitigating cash burn over the course of 2020. Our total property-level cash burn for the fourth quarter was $5.9 million. And in January, the property generated property-level cash flow for the first time since March of last year. Corporate cash burn of $4.3 million in January represents a 60% reduction compared to April of 2020 at the depths of the crisis. We expect our February performance to be in line with January, with March operating results projected to surpass that of January and February as the pace of vaccination distribution, easing government restrictions, spring break travel and warm weather along the Northeast should yield increased bookings across the portfolio.

Before I close the comments regarding our balance sheet, a quick update on Hersha's relationship with our New York City joint venture partner Cindat Capital Management. As you may recall, following our 2016 transaction, where we sold a majority of this portfolio and in which we netted a gain of $213 million, we retained a subordinated minority interest in the portfolio, which was junior to Cindat's equity position. Earlier this month, the equity interest of that portfolio were transferred and we have no remaining equity interests or economic or legal commitments to the joint venture. We removed these 7 hotels from our portfolio account, and they will no longer be part of our operating results after the first quarter. We ended the fourth quarter with $23.6 million in cash and cash equivalents and deposits.

During the quarter, we received $8.1 million in business interruption proceeds from Hurricane Irma's impact on our South Florida portfolio. And these receivables had a positive impact on our AFFO performance in the quarter. We spent $4.3 million on capital projects last quarter, bringing our 2020 spend to $26 million, approximately $15 million below our forecast at the beginning of the year. Our 2021 CapEx load will be primarily focused on maintenance CapEx and life safety renovation. And we anticipate it'll be roughly 35% below our 2020 spend.

As we have very minimal CapEx moving forward, after the $200 million we've spent on capital projects since 2017 and the recent disposition of lower-growth higher-cost hotels, our portfolio will experience very little disruption or capital spend for the coming years. As highlighted in our earnings release last night and our capital allocation transformation release last week, we have materially strengthened our balance sheet. The unsecured notes facility from Goldman Sachs Merchant Bank, combined with the announced asset sale, will be utilized to reduce our leverage, provide liquidity and pay off the accrual on our preferred dividends. These actions increased our weighted average debt maturity to 3.6 years, and result in more than 88% of our debt being either fixed or swapped. Over the past year, we've taken aggressive and swift action to minimize our operational losses.

We successfully zero-base budgeted our hotels, allowing for margin improvement well into the recovery. We reopened all of our wholly-owned hotels. And we incrementally reduced our cash burn rate to the lowest it has been since the onset of the pandemic. All are a testament to our aggressive asset management and nimble franchise operating model. Following the strategic transactions announced last week, we right-size the balance sheet, and turned our focus to operational performance of the portfolio as demand reemerges and accretive opportunities become available across the recovery.

This concludes my portion of the call. We can now proceed to Q&A, where we're happy to address any questions that you may have. Operator?

Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Michael Bellisario with Baird. Please go ahead.

Michael Bellisario: Good morning, everyone.

Neil Shah: Good morning, Mike.

Michael Bellisario: Neil, first question for you, just as you think forward about the ramp-up in fundamentals, what's your updated view on the portfolio's target leverage level? And then, what else do you think needs to be done between now and then on the balance sheet front to get there?

Neil Shah: Mike, really follows kind of just the broader recovery, which is just so uncertain still today. I think industry analysts can look to a kind of recovery of EBITDA back to 2019 levels in 2023 or 2024. Until that time, I think most hotel portfolios, most public hotel portfolio in the U.S.

are going to remain at leverage levels higher than they'd like to be at. And I think we'll likely, as the market recovers, we'll continue to have leverage levels that are higher than pre-pandemic levels, just as there is a recovery in cash flows. And that's going to be according to the pace of this recovery, which we're uncertain about. But we think we've taken the steps to make a meaningful reduction reduced over 10%, 20% of the total debt load as of today. And as the year goes, and cash flow begins to ramp up, we'll be able to significantly improve those metrics.

I think there are a lot of other public portfolios that will continue to burn significant amounts of cash through the end of this year. We don't expect that to be the case for our portfolio, which we think will show some differentiation over time. But, again, on overall metrics, until you get out to 2023, 2024, it's unlikely for debt to EBITDA metrics to feel normalized, because the world won't be normalized until then.

Michael Bellisario: Got it. And then, just on the flipside there, you mentioned the Goldman investment and I think you said future partnership opportunities.

What could that look like? And how are you thinking about that relationship longer term?

Neil Shah: Yeah, the Merchant Bank and the various facilities and investment funds have a lot of - first off, have a lot of capital. They're looking to invest in sectors that are clearly facing a kind of cyclical recovery. And so, there's just a dedicated - maybe hundreds of billions of dollars of access of capital, which is very attractive. They're a firm that this entity as making this investment looked very carefully at our portfolio. We even explored it for some time having a larger facility in order to kind of address future maturities in 2022 and 2023.

In the end, we determined that we would be - we could do so much more cost effectively in the future. And because we have this kind of relationship with a firm that is, can expand their facility, we can just time it for when we need it, if we need it. And so, it's - on one hand it's a capital source that I think it served us well in during this recovery period. We also think that it's - we've really focused on the prepayment and the prepay-ability of this unsecured notes. Another way to think of it, there were another positive part of it, could be depending on how the market recovers is its portability.

And it's being a piece of capital that a potential buyer of the portfolio could keep in play or expand according to their plans. We don't know what's going to come in the coming years, but we are really pleased to have, as Ash mentioned in his remarks, it's become kind of a trite term in the financial services world. But this is truly a bespoke solution, really fitting exactly what our cash flow profile, liquidity profile and business plan has in store for us. So it just provides a lot of flexibility and potentially a strong partnership moving forward.

Michael Bellisario: Very helpful.

Thank you.

Operator: Our next question will come from Ari Klein with BMO Capital Markets. Please go ahead.

Ari Klein: Thank you. And maybe a little bit of a follow-up on the balance sheet.

You've done a lot of the heavy lifting, as far as the asset sales are concerned. How are you thinking about that moving forward? Are there still assets that you're marketing? Or are you largely done for the time being?

Neil Shah: Ari, yeah, we are largely done for the time being. We'll always remain opportunistic. But at this stage, we are not marketing any assets for sale. We've discussed our joint venture assets in South Boston.

And those discussions continue with our joint venture partner, but we no longer have any assets for sale in the broader marketplace.

Ari Klein: Okay, and then just, as far as the improving trend that you're seeing, how broad based has that been? When you look at a market like New York, are you seeing bookings pick up in markets like that? And then, just on the resorts, they've obviously held up quite well throughout the pandemic. How sustainable do you think some of those trends are? Is part of it just a function of limited places for people to travel to? Are these things that are trends that you would expect to continue moving forward?

Neil Shah: Maybe I'll start with the second one. In terms of the resorts trend, we do believe that it's here for - here to stay at least for the next several years. I think it will take some time for everyone to want to travel overseas, and really take some of the additional risks of going into countries where you don't know the level of healthcare or what you would do in an emergency and the like.

So we think that there is, for our domestic market in the U.S., we think there will be more domestic travel in the coming years than we had seen pre-pandemic. And we think that will be a boon to our drive-to resort portfolio. I think that when international demand does rebound, that will be an additional kind of tailwind for some of these resorts markets, particularly our California coastal markets. Those are very attractive to European travelers and Australian travelers and Asian travelers, coming to see the PCH and things. So we think it's a - they performed very well to date.

We think that this new stimulus will lead to a very robust year for resorts in 2021. And then in 2022 and 2023, we do expect that international demand and group and just the general recovery will continue to lead to very strong results on the resort side. I think that right now, what we tried to stress in our prepared remarks was that there's just - sentiment is just so negative towards urban markets. And we see that is perhaps something that's been underappreciated, is just the amount of recovery and the level of recovery that can come in markets like New York, Boston, Washington, Silicon Valley, Los Angeles, and you're seeing it already. We don't have enough data to beat on a drum here.

But we are seeing - if you just look at the TSA data for the country, just every day there's more people traveling than there ever has been, since the pandemic and that's despite frigid conditions and reacceleration of case counts and the like. And you're still seeing people moving around and cities getting going and airports getting moving. And so, we do love the resort markets. And we're glad that we have about a 25% position there. But the 75% of our portfolio that is gateway urban, innovation oriented, we're expecting really strong things from in the coming year or two.

Ari Klein: Thanks.

Operator: Our next question will come from Dori Kesten with Wells Fargo. Please go ahead.

Dori Kesten: Thanks. Good morning.

I believe, initially, your plan was to move on to luxury or the higher-end sales after this current round of dispositions, but with the notes facility placement, you don't need to move forward with those. Did you ever test the market with these assets? I'm just wondering if you have a sense of pricing at this point.

Neil Shah: On the luxury assets, Dori?

Dori Kesten: Yeah.

Neil Shah: No, we didn't formally market any of our luxury hotels. And our reasoning there was that the market just hadn't developed yet for luxury assets and trophy sales.

What we feel - what we as well as kind of the brokerage community and the investment community feel was that what was difficult to market luxury hotels and to get strong values was a function of a few things. One, just the significant amount of cash burn that exists in the luxury segment in a time like this, so it's very hard for investors to be able to underwrite when they didn't know when the bleeding would stop. So that's a rational reason I think for investors to have been hesitant. Another second and maybe even more important reason was that the luxury markets have generally been dominated by international buyers that really do need to see a hotel before they buy it. And because there was no international travel, there clearly wasn't any international investor travel to buy hotels and so we think that the luxury trades are something that will become potentially more attractive towards the end of this year as the vaccine is distributed and you just see more international travel begin.

And you see cash burn moderate, so that investors can think about growth rather than focus on the bleed. So we think probably more - if there was a good time to market luxury hotels, we think it's later in 2021. But at this stage, we were not anticipating any kind of further marketing of assets in the portfolio. We do think that the hotels that we have remaining in our portfolio are in particularly fine shape and are going to have great leverage to the recovery, which we do want to hold on to.

Dori Kesten: Okay.

And you just mentioned that the 75% of the portfolio that's more urban focused, is expected to recover well in the next 1 to 2 years. Do you think New York City leads in that, lags in that, it's kind of neutral to the, I guess, the rest of the top 25?

Neil Shah: We're probably neutral, probably neutral. We think New York…

Ashish Parikh: Probably for ours.

Neil Shah: Yeah, neutral for ours recently, so that's a good point. At least for our locations and our kind of non-union newly built boxes, we think it's going to be neutral to the urban set.

As a market, it is working through a lot of new supply. And still a market that is dominated by large employers that aren't back to work and back to travel yet. So we are sensitive to the pace of recovery in New York, but the positions we have there, the locations we're in, we're still very confident about. We put the early recoverers in the - in kind of, we've put Washington as an early recovery market. Southern California is an early recovery kind of urban market.

While New York and Boston are more kind of midterm kind of recovery markets in our view.

Dori Kesten: And just to finish that, what would you consider to be late?

Neil Shah: There's just some dynamics at play in Philadelphia with some new supply coming on the horizon and some real uncertainty around when the convention center really gets going again, which due to make us a little bit more concerned about the pace of recovery in Philadelphia. Now, that said, we have 3 exceptionally located assets here. And we will capture more than our fair share and the like, so we're not overly concerned. But there's some concern there.

Silicon Valley and Seattle, we're just - it's just still question marks a little bit on just when things get back and when people start traveling, or when the remote workers come back for business meetings at corporate center in Silicon Valley and things. So not laggards, but just questions still.

Dori Kesten: Okay. Thank you.

Operator: Our next question will come from Bryan Maher with B.

Riley Securities. Please go ahead.

Bryan Maher: Good morning, guys. Maybe taking a little bit different of attack, and maybe there's nothing to talk about, but we'll see, with the new - and other quivers that you have, is there an ability at all? And what are your thoughts on going on the offensive in 2021 and looking at acquisitions? Or is that just off the table? And more specifically, when we look at the Chicago Waldorf trading at like $55 million, and other potential opportunities out there, and with where stock valuations have moved. How are you thinking about growing the portfolio over the next year or 2?

Neil Shah: Yeah, Bryan, it's not off the table.

But we're not seeing compelling enough opportunities to make it a common conversation in the office these days. We're just not seeing anything to really get excited about. There are discounts to pre-COVID for sure. But this recovery is still uncertain about the pace of it. And so the values, although - perhaps, attractive for an absolutely new investor to the space for a company that has 40 really exceptional hotels and some of the best markets in the country.

Our expected growth on our existing portfolio, I think, makes us less focused on the acquisition environment today. As you know, we're always in the marketplace where buying and selling and our manager is a very active buyer in the marketplace today. But we're just we haven't been compelled to date by anything now, that is some of the flexibility in the capital solution that we have. We can clearly sell more hotels, and we think this is a very liquid portfolio. And as New York starts to recover towards the end of the year, and there could be some additional recycling to take advantage of acquisition opportunities.

Or there could be a scale up of our financing either with Goldman or with some of the other investors that we've met through this process. We're just not there right now. We're just not seeing opportunities to make us find a way to get deals done today.

Bryan Maher: Okay. And as a follow-up question, when we look at ADR, it seems like the industry has done a decent job of holding up ADRs during this morass for lack of a better term, much better than we saw happened during the great recession, when it was just cut rate, cut rate, cut rate? Do you feel like the industry has lessons learned from 10 years ago and it's acting more rational? And do you expect that to continue at least through the first half of 2021?

Ashish Parikh: Yeah.

Hey, Bryan, I said, there probably, there are some lessons learned, we always worry about our weakest competitor that could drop rate. But I think when you look at these cash burn analyses, and we like every other owner and operator is running them, you discount rates enough, and you're driving occupancy, but you're not really moving the needle on cash burn by doing that. So I think some of it is also a function of just the occupancy levels, and the demand levels have been so low, that people can't really induce demand by just lowering rates. And I think that the industry has become better at understanding that concept. And maybe it's a little more sophisticated institutional investors that own these assets as well that has made a difference.

Bryan Maher: Great. Thank you.

Operator: Our next question will come from Dany Asad with Bank of America. Please go ahead.

Dany Asad: Hey, good morning, everybody.

You guys have been in the past, given us a bridge to getting to a $200 million EBITDA target look clearly a lot has happened since then. But we're just trying to think of in a normalized environment, can you maybe help us walk through like what an updated bridge could theoretically look like for Hersha?

Neil Shah: I was thinking about your $2 target, Dany.

Dany Asad: It's no longer too. But…

Ashish Parikh: Yeah, Dany, look, I think that we would look at this portfolio, and say, we have sold now roughly give or take $18 million or so of EBITDA. So that will reduce the overall target.

But we've also consequently reduced our leverage from the sales. So when we look at the bridge, it's probably we went into 2020 with really high expectations on the ramp up from assets like the Cadillac, Parrot Key, White Plains, Pan Pacific, Ritz Coconut Grove, things that we've put a lot of money into. And unfortunately, the pandemic really impacted operating results. So we do believe that there's significant ramp up in those assets that could help bridge that gap. But I think it's difficult for us to right now sit here and say, look, we have a target for 2023 or 2024, we just know that at least 50% to 75% of what we lost in EBITDA from asset sales, we can make up through the ramp up of this portfolio.

Dany Asad: Understood. And then just my follow-up is just again thinking about like this coming cycle. So, look, we know Hersha has this hybrid model of a high margin limited service assets and higher end lifestyle hotels with a little bit more to offer on the service side. So just with that in mind, can you help us think about the longer-term margin opportunity at the 4-wall operating levels of the portfolio?

Ashish Parikh: Yeah, absolutely. Look, I think that the basic operating premise, whether it's a 3-star, 4-star, 5-star hotel in our portfolio is somewhat limited F&B or - if it is F&B kind of a focus on high margin beverage business, and trying to run all of these assets as much as we can except for the luxury ones with really a select service model.

And what we found through this pandemic, by actually going to zero based budgeting, because we had to close a lot of them is, you're not going to bring back as many people, you're not going to bring back as many services until you are well into the recovery. And, I think, even then it's hard for us to look at this and say, we'll bring the FTE count back to 2019 levels, because we found more efficient ways to do things either through technology, mobile check in, having virtual meetings on our salespeople going out to - in less sales needed, or less kind of contact points needed at this time. So, I think, the margin opportunities for our portfolio are going to be really on the labor side on utilizing our EarthView platform to reduce utilities and operating costs. And we do get 150 to 200 basis points of margin improvement even in a stabilized level in a few years.

Dany Asad: Got it.

Thank you.

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

Bill Crow: Hey, good morning, guys. Just 3 quick, hopefully, quick balance sheet questions.

How much pressure was exerted by the bank group in order to provide the covenant labor extension? And that pressure is what led to the Goldman Sachs financing?

Ashish Parikh: Yeah, it will. Look, I think that we had good conversations with the bank group. They were a very constructive in commercial. But at the same time, we knew that we had to raise some level of junior capital in conjunction with what we had already planned on asset sales to ensure that we had full commitment from the bank group on the waivers and the amendment. I think that it was expected.

From our standpoint, we knew that the markets were going to improve in 2021 from and that's why we didn't undertake a debt offering or any kind of dilutive offering in 2020. And, it played out exactly as we anticipated, we started the amendment process right after the new year, we started the capital raising process. And we were able to get both of them done. But I think there was a clear expectation that we would raise some level of junior capital, whether it was unsecured notes, or convert or something else, and this is what we felt was the best option for us.

Bill Crow: Right.

I think it was the very first question about the goal on the balance sheet looking ahead. You talked about EBITDA levels, getting back to 2019 - pro forma 2019 levels by 2023 or 2024, which I think everybody uses that's kind of a correct trajectory. But, I guess, my question is simply getting back to the leverage levels you had pre-pandemic, where it was - they were materially higher than the rest of the regroup and certainly weighed on your equity performance, is that the goal? Or is the goal to get 3 times or 4 times, and get more kind of uniform with the rest of the industry?

Neil Shah: I think, Bill, probably not for the early part of the recovery, I wouldn't hold your breath for 3 to 4 times. But by the middle - end of the recovery, we think that that would be our goal. When the early part of the recovery, until existing EBITDA normalizes, the only way to get to meaningfully less leverage would be through acquisitions of unencumbered assets using equity to buy hotels, and we just don't see opportunity for that to where we would be willing to dilute for those kinds of acquisition opportunities.

That could very well change by early 2022, or 2023, we've gone through many cycles now together as a team and we've always found that there was great acquisition opportunities for 3 to 4 years there early part of every cycle. And your cost of capital was a lot better in year 3 than it was in year 1. So if you were really trying to be quantitative about it, there was really no reason to jump in very early on unless you were blessed with a lot of cash or a particularly attractive cost of capital. So that's - it's by end of cycle like we definitely would want to in the public markets run at a significantly lower leverage profile in mid to ends of cycles, but we don't think that that will be the case in the early part of this recovery.

Bill Crow: Right.

Right. One more for me real quick. And over we're relieved just getting this financing done. But as you look ahead to 2022 fairly sizable maturity, any strategies on how to address that as you think it has?

Ashish Parikh: Yeah, Bill, as we did this year. You will continue to monitor our cost of capital, we have the flex to raise additional junior capital.

But we don't think that something that we would entertain in the next few quarters, I think that as the recovery progresses, and clearly, you look at where people were raising either equity or debt last summer or last fall, I mean, the cost of the capital has gone down so significantly on every level, whether it's the high yield offering, or bespoke offering like ours. So we feel like we can be patient now. The next real maturities don't happen until August of 2022. We can be patient in monitor the markets, and we have support from the bank who have been will find ways to extend out those maturities and to raise additional capital if needed.

Bill Crow: Okay.

Appreciate it. Thanks for the time. Thank you.

Neil Shah: Yeah. Thank you.

Operator: Our next question will come from Tyler Batory with Janney. Please go ahead.

Jonathan Jenkins: Good morning. This is Jonathan on for Tyler. Thanks for taking our questions.

First one from me, just wondering if you could provide some additional color on how the conversations with group business have been going and there's been any noticeable changes in those discussions recently.

Neil Shah: This is just anecdotal here. But we're seeing weddings again, which is great. This past weekend in Coconut Grove, we had 172-person wedding, where booking weddings now at most of our hotels that have that kind of meeting space, not only resorts, but even in our urban gateway markets. So the wedding business is starting to pick up and there's clearly tons of pent-up demand for that business and as anyone in the group business will tell you that's the best kind of group business you could have on the social side.

On the corporate side, we're also seeing it actually, we - I mentioned our prepared remarks about some of our California resort properties, actually getting some corporate group business, some small retreat business, getting employees together brainstorming kinds of sessions and the like. We've been having meetings at our Westin here in Philadelphia. We - some of our hotels are blessed with really large ballrooms, now they're only being filled with 100 people instead of 350 people. But they're paying for the privilege and we are starting to generate some income from it. So it's still all very anecdotal.

Our portfolio is highly transient. So I'm the group part of our business is probably less than 15% of our business. But even that part of the business is starting to show signs of life.

Jonathan Jenkins: Okay, great. I appreciate all that detail.

And then a multipart question from me, strategic on your cluster strategy, you sold a couple of assets in your clusters? Are you still a believer in that strategy? And as you look out at potential opportunities in the future, would it be your preference, I guess, to stay in those current markets? Or would you think about diversifying to new markets?

Neil Shah: First, just off the clusters, we absolutely continue to believe in the clusters and believing in the clusters for us just means that we believe that we get advantage from knowledge, from sales, from revenue management, and from efficiencies and kind of economies of scale. And so we can run hotels that have better margin and get higher market share and yield management results, because we have 5 to 10 hotels in each market, we can play in different sub-markets use different brand channel strategies. So we absolutely believe in that and our sales here was basically 1 hotel per cluster we sold. So keeping intact the strong clusters for the remainder of those portfolios, but selling our oldest hotel per cluster. As we look into the future, we are - I think, buying in our existing clusters has a little lower risk in our mind, we can just plug and play, we know that going into a market, we will have a cost advantage, because we have multiple hotels there, we will have a sales advantage, because we have established centers, but each of our clusters was started with 1 hotel.

And so we often will enter a market with a single asset and then build out the cluster. In 2011, we entered California with the Courtyard in Los Angeles, and then soon followed it with Courtyard San Diego and the Ambrose and the rest of our California portfolio. We entered Miami in 2011 with the Cadillac Miami Beach and then added 5, 6 hotels there across the time. Late in the past cycle, we entered Seattle, with an exceptional asset, the Pan Pacific. It was a larger asset.

So we felt like we could still get some efficiencies there. But our long-term intent was to kind of build out more of a presence in that market. So we'll see what the future holds, where there are good opportunities, where there is good pricing for assets, where there is good EBITDA growth. And we will look at some new markets across the coming years, but we do believe in the advantage of our existing cluster strategy as well.

Jonathan Jenkins: Okay.

Thank you for all the color. That's all for me.

Operator: Our next question will come from Chris Liu with Jefferies. Please go ahead. Chris

Tiger Liu: Hi, this is Chris, filling in for David.

Thanks for the time. I just wanted to ask a little bit about New York, just for one, how much of that recent quarter business was from first responders? And, I guess, a little longer term, how do you really think that reconciles with I believe you mentioned, reduction in supplies, that potential for special permits, and that innovation market coming on? And really any other points [of relevance] [ph] that we might be missing for that market? Thanks.

Ashish Parikh: Yeah, hey, Chris. We did receive some first responder business, primarily at new hotel in Brooklyn. We had the FDNY.

We've had smatterings of it in the fourth quarter and in January, but not nearly as similar to the levels we had last year in April, May, June. So that business is starting to really wane away, and we're starting to get just more transient business. As Neil described, even over Presidents' Day, we were surprised at sort of the bookings that came in on the leisure side. And we think as things open, and now the theaters are open, and restaurants are open and hopefully Broadway is opening in the next few months that should really pick up. So we're not anticipating too much more on the first responder business going forward.

I think overall, as we look at New York, the thing about these special permits, and a few years ago, New York instituted a special permit requirement for the M1 zones, which are the manufacturing zones. And it's interesting to note that since that ordinance was passed, there have been zero special permits filed, zero new hotels in those M1 markets, because of how difficult that is to obtain the permit, how costly the construction would be. So if that was to occur, for the entire 5 boroughs of New York, we think the future level of supply would go down precipitously. And we do believe that there are a lot of hotels coming into COVID in New York, big kind of encumbered by land lease, unions, old, that are looking at ways to open as something else or not open at all. And you've already seen it with the Hotel Roosevelt and number of - at least 10 to 12 other assets.

We do think that's going to stick. So we think the long-term supply picture gets markedly better in New York. We are big believers in the city. We saw what happened after 9/11 when people wrote it off. It's been a 20-year run for New York.

And we think that it comes back strong. And it comes back, probably as Neil mentioned, a little later in the year than other markets. But we do think that it comes back very strong. Chris

Tiger Liu: Right, thank you. And, I guess, quick follow-up, unrelated follow-up, on CapEx, I know you guided towards about 35% below 2020.

Just how are you thinking about 2022? Is there anything that really needs to be done going through those quarters?

Ashish Parikh: No, no, at this time, we're not planning anything considerably different than 2021 for 2022. I think the first time we would take on PIPs and other projects are pre-2023 or 2024. And we're fortunate in that we have the luxury with that, with the amount of money we've put into the portfolio pre-pandemic. Chris

Tiger Liu: Okay, thanks a lot. That's all for me.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Neil Shah: Thank you. Thank you, everyone. With no more questions, we'll just be available here for any follow-up questions later today or throughout this week.

Thank you for your time.

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