Chatham Lodging Trust - Earnings Call - Q2 2020

Transcript

Operator (participant)

Greetings and welcome to the Chatham Lodging Trust Second Quarter 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. Should anyone require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Daly, President of Daly Gray Inc. Please go ahead.

Chris Daly (President)

Thanks, Sachi. Good morning, everyone, and welcome to the Chatham Lodging Trust Second Quarter 2020 Results Conference Call. Please note that many of our comments today are considered forward-looking statements as defined by federal securities laws. These statements are subject to risks and uncertainties, both known and unknown, as described in our most recent Form 10-K and other SEC filings. All information in this call is as of August 5, 2020, unless otherwise noted, and the company undertakes no obligation to update any forward-looking statement to conform the statement to actual results or changes in the company's expectations. You can find copies of our SEC filings and earnings release, which contain reconciliations to non-GAAP financial measures referenced on this call, on our website at chathamlodgingtrust.com.

Now, to provide you with some insights into Chatham's 2020 second quarter results, allow me to introduce Jeff Fisher, Chairman, President, and Chief Executive Officer, Dennis Craven, Executive Vice President and Chief Operating Officer, and Jeremy Wegner, Senior Vice President. Jeff?

Jeff Fisher (Chairman, President, and CEO)

Thanks, Chris. Good morning, everyone. First and foremost, thank you for your interest in Chatham, and we sincerely appreciate your participation during these unusual times. The COVID-19 pandemic has been one of the most destructive events to the global and national economy in history, and its impact on the lodging industry is unprecedented, forcing hotel owners and operators to manage our businesses under the most dire circumstances. This unprecedented period has required intense asset management and operating focus, and I am very proud of the efforts of our teams, both at Chatham and Island Hospitality, allowing us to generate some of the best operating results of all public lodging REITs. We have lauded our best-in-class operating platform since our IPO, and during these turbulent times, the benefits of that platform stand out as the ideal operating model, allowing us to work closely together to deliver leading results.

For the quarter, our RevPAR declined 77% to $33. Although a dismal absolute RevPAR, the decline of 77% for our entire portfolio, not just some small subset of open hotels, is much better than most companies who have already reported RevPAR declines over 90%. I certainly believe that our outperformance is attributable to the fact that 70% of our 2019 EBITDA and 60% of our rooms are made up of extended-stay hotels. An important differentiator is that Chatham has the highest percentage of extended-stay rooms of all lodging REITs, basically double the next highest REIT, and this is often overlooked. Additionally, more than 96% of Chatham's rooms are characterized as limited service rooms, the highest percentage among public lodging REITs.

Our upscale extended-stay hotels, as well as our select and limited service hotels, provide us the flexibility during periods of growth or weakness to diversify our customer base to maximize revenue, and that's exactly what our operating team has been doing. Within the quarter and in July, we've seen gradual revenue improvements since hitting bottom in late March. We laid out in our press release our monthly RevPAR stats and RevPAR performance by brands for the quarter, and there are some interesting points. First, occupancy improved 1,000 basis points in each of May and June. Companies who have already reported earnings have stated that July has been similar to June, but for us, our occupancy further increased over 400 basis points to 48% for our entire portfolio.

Having suites with full kitchens and large rooms has been beneficial in winning business from today's travelers, primarily first responders and government or military in the first couple of months after the collapse. These wins allowed us to keep all 40 of our hotels open. Additionally, in Silicon Valley, where we have four Gen one Residence Inns, those hotels are laid out to provide extra space and rooms well-distanced for longer-term corporate guests when they return, and this should aid our direct sales efforts. In addition, those Gen one Residence Inn hotels have, of course, separate entrances without the need to even enter a lobby of the hotel, and folks can have a contactless experience 100% of the way, which we think, as you move through 2021, will certainly prove to be another big plus for us. Second, average daily rate has rebounded.

Not surprising, ADR took a hit as the rate profile of early pandemic travelers was lower. ADR bottomed out for us in May but gained 12% in June and another 6% in July. Third, RevPAR Index. Let's talk about our market share. RevPAR Index measures the share of business you are getting versus your competitors within a market, and it's skyrocketed throughout the pandemic. Even as hotels have reopened in the markets, we've been able to maintain a significant premium of around 144 for the past four months, which is 22% higher than our 2019 average of 118. This fantastic performance is a direct result of the outstanding efforts by Island's direct sales and revenue management efforts, again winning more than our share of existing demand.

Fourth, average length of stay has markedly changed for our portfolio, driven by the type of traveler during the pandemic who prefer our extended-stay hotels. Second quarter 2020 average length of stay was up to five nights for the Homewood hotels and 5.9 nights for Residence Inn, which compares to second quarter 2019 average length of stay of 2.6 nights for Homewood Suites hotels and the same 2.6 nights for Residence Inns. Fifth, daily demand trends have completely flipped. Of course, you've all read about that for the industry. In our portfolio, as demand is strongest on the weekends, for the past couple of months, Friday-Saturday occupancy was 50% at an ADR of $108, while for the remainder of the week, occupancy is 45% and ADR is $105. As most are aware, the leisure traveler is the driver of this trend.

People want to travel and get out of their house. Lastly, revenue per day has increased every month since April, and July revenue per day is higher than June. With the exception of the week after July 4th, room revenue has sequentially increased each week for the last nine weeks. The current trends remain somewhat encouraging, although the rate of growth from month to month has slowed, but if we've learned anything, it's these times are incomparable, and there's really no way of accurately projecting the future. Looking past the summer, we have seen some corporate demand percolating, but only time will tell if, in fact, that comes to fruition, and I can say that the corresponding rate is well down from the prior year but slightly improved from the second quarter.

I firmly believe that, given our portfolio attributes, we believe that we'll be able to return to 2019 revenue levels sooner than most of our lodging REIT peers, but the full return of the corporate transient traveler will be predicated on the availability of a vaccine. As I stated earlier, I am thankful to have our best-in-class operating platform with Island Hospitality, and this has been further proven when you look at our ability to operate much leaner at lower operating levels, which allowed us to reach operating profitability much sooner and at lower RevPAR levels than indicated. Dennis and Jeremy will talk a little bit more about that, but I will tell you that it required extensive adjustments to our cost structure. Compared to pre-pandemic levels, we laid off or furloughed approximately 70% of our employees and reduced that number to 60% today as occupancy has come back.

We've reduced service levels, reduced staffing at our hotels to minimal but functional levels, reduced compensation, and are carefully analyzing every expense. When you look at the monthly detail of hotel profitability in our release, you can see that we were able to achieve positive GOP, Gross Operating Profit, at RevPAR of less than $30 and positive EBITDA at RevPAR of about $40. Those are remarkable achievements accomplished by staying hyper-focused on managing expenses across all departments, using our experienced operating teams and providing them the right tools to actively manage expenses on a daily basis. As a result of much better operating performance, our second quarter cash burn before CapEx of $8.4 million was a meaningful 40% lower than our original estimate of $21.3 million. Our June cash burn before CapEx of $2.8 million was approximately 60% better than our prior forecast of $7.1 million.

If you wanted to assume that June was where we were going to perform for the foreseeable future, our liquidity runway is 41 months, enough to get us through the end of 2023. Most industry experts and pundits seem to think that it will take until 2022 or 2023 before RevPAR returns to 2019 levels. Not knowing how long this downturn is going to last, operating so efficiently produces operating profit, which lessens our cash burn, and ultimately, this has a meaningful impact on long-term equity value for our shareholders. Our teams at Chatham and Island have the experience to persevere through these situations, and we know how to lead a public lodging company through these challenging times. With that, I'd like to turn it over to Dennis.

Dennis Craven (EVP and COO)

Thanks, Jeff. I'd further add on the outlook that the impact of new supply is going to lessen significantly in the future. Hotels under construction, for the most part, are going to be slowing down but will be completed, and if you aren't under construction currently, it's going to be difficult to underwrite the appropriate returns that justify construction. Additionally, even though we were able to close on the construction loan for our hotel in L.A., it's a pretty difficult process. Underwriting's very challenging at this time, and given our good credit, our good relationships, we were able to get that loan closed, but don't think that that's a pervasive thing that people are going to be able to do moving forward.

Given the slow expected recovery for the industry, it's hard to imagine new supply being an issue for at least the same amount of time, given the fact that it took essentially almost eight years for new supply to approach 2% after the financial crisis. Among our key markets, San Diego was the top performer with RevPAR of $52, as it benefited from military and government-related business. Silicon Valley RevPAR of $38 was better than our portfolio average with a bit of corporate travel business in late May and June. Our three coastal hotels in Maine and New Hampshire were hampered during the quarter due to severe hotel restrictions that were loosened in July, so those hotels will be and have been better in the third quarter. Like the industry, our leisure market hotels have certainly seen the best rebound.

At our Residence Inn in Anaheim, second quarter occupancy was 45% even though the hotel was under renovation. In June, occupancy was actually 71%, and July occupancy was 93%. At our Residence Inn in Lugano and Fort Lauderdale, second quarter occupancy was 44%, with June occupancy of 60% and July occupancy of 97%. In Savannah, at our SpringHill Suites, second quarter occupancy was 26%, with June occupancy of 44% and July occupancy of 50%. The three coastal New England hotels had second quarter occupancy in the low 20s, but July occupancy for those three hotels was approximately 65% after some of those restrictions were loosened. Eleven hotels had second quarter occupancy over 50% out of our 40 hotels, and three hotels had occupancy under 15%, but of those three hotels, two of them are complex with an adjacent hotel where we are consolidating most guests into one hotel.

That's at our Courtyard in Houston West University and then at one of our Residence Inns in Sunnyvale, Silicon Valley. On a relative basis, government revenue has been our best-performing segment during the quarter, but it still makes up the lowest of the three major segments for our business. Corporate revenue comprised approximately 26% of our second quarter revenue in 2020 versus 29% last year, with RevPAR off 79% and ADR off 40-50%. Importantly, within this segment, is that about 40% of this business was related to traveling nurses and doctors fighting the pandemic. On the retail side, retail revenue comprised approximately 53% of our second quarter revenue this year versus 56% last year, with RevPAR off 78% and ADR, again, off about 35-40%.

Government revenue production doubled this year to approximately 16% of our second quarter revenue, and revenue is off 55% with ADR off about 25-30% to $125. We've certainly had a lot of government-related production related to ships and military being housed in one of the hotels outside of two hotels, actually, both hotels outside of Charleston. Operationally, as a major Hilton and Marriott franchisee, we do believe that the operating model is going to look a bit different going forward. The pandemic has triggered us as an industry to reevaluate how guests are served, whether that's with respect to housekeeping, food and beverage, or other complementary services. As most of you have heard from us for a while, we've been pushing the brands for change.

These changes certainly aren't going to happen overnight, but of course, the brands are now very much in concert with us relative to making the necessary changes to generate better returns. We are adhering to all cleanliness and life safety standards and have only limited exposure to unions with only one of our hotels unionized, that being the Residence Inn in White Plains. All lodging companies are having to analyze liquidity needs, which is something unheard of in the lodging industry, especially for well-capitalized companies such as Chatham. At the corporate level, we've been very aggressive as a means of adjusting our cost structure during these difficult times and minimizing cash outflow. Our G&A was already among the lowest of all lodging REITs, but we still wanted to be as aggressive as possible. We've had to reduce our headcount, unfortunately, by about 25%.

Jeff and I took 50% pay cuts, and every corporate employee also took a 25% pay cut. In total, we've reduced salary costs by approximately 50% in the quarter. Our board of trustees also reduced their 2020 compensation by 25%, and all in, our cash G&A is down approximately 35% or over $3 million for the year. We did file a business interruption claim related to COVID-19 losses and will continue to pursue them, but any potential recovery is going to take a long time, and certainly, the amount is not estimable. As Jeff discussed, we're very pleased to see that our cash burn was much less than originally modeled. Our GOP break-even RevPAR ended up being approximately $26 versus our original estimate of $32-$35, a 20% improvement. Our hotel EBITDA break-even RevPAR was about $40, again, about 20% below our original estimate of $50.

Importantly, we estimated on our last call we would need RevPAR of approximately $90-$100 to be cash flow positive after debt service, and as we sit here today, we think that RevPAR break-even level is probably now about $75, again, 20%-25% better than previously expected. On the CapEx front, we spent approximately $8 million in the second quarter, including $4 million on the Warner Center development, $1.2 million on the renovations of the Anaheim Residence Inn and the Residence Inn in New Rochelle, New York, and another $1 million wrapping up renovations in Silicon Valley. We have suspended all renovations that had not started and all non-emergency CapEx, preserving $10 million in 2020. We slowed down CapEx spending on our Warner Center development until we closed on a dedicated loan for that project.

We do expect to spend approximately $4 million on all CapEx other than Warner Center through the balance of the year. We're pleased to have just recently closed on the construction loan that further solidifies our capital structure by not using liquidity on our credit facility and allows us to move full speed ahead with an expected completion in early 2022. We expect this hotel to ramp up quickly and provide meaningful hotel EBITDA in 2022 and beyond. As you saw in our release, the Inland portfolio has been appointed to a receiver by the special servicer of the loan, so ownership is ultimately in transition, and we are fully cooperating with the receiver. Although this investment didn't quite pan out as expected, since our IPO, joint venture investments have generated attractive returns.

Our total JV investments since our IPO were approximately $87 million, and those investments have generated cash returns of approximately $150 million. All in all, pretty good deals. I think with that, I'm going to turn it over to Jeremy.

Jeremy Wegner (SVP and CFO)

Thanks, Dennis. Good morning, everyone. Chatham's Q2 2020 RevPAR was down 77%, but we saw positive trends throughout the quarter and after. RevPAR increased from approximately $24 in April to $31 in May to $45 in June to $52 in July. Through our significant efforts to contain costs, we were able to limit our adjusted EBITDA loss for the quarter to $3.3 million. As with RevPAR, we saw positive EBITDA trends throughout the quarter, with hotel EBITDA losses of $2.3 million in April and $0.8 million in May before generating positive hotel EBITDA of $0.8 million in June. At the end of Q1, we wrote off our entire investment in the Inland JV, and in Q2, we stopped recognizing any income or EBITDA from it.

The Inland JV has not been able to negotiate a debt forbearance agreement, and the servicer started the process of appointing a receiver to oversee control of these hotels. Excluding the Inland JV, Chatham's pro forma 2019 net debt to EBITDA ratio would be 5.4 times versus 5.7 times if it was included. The Innkeeper's JV is continuing to pursue a debt forbearance agreement. Both JV loans are non-recourse to Chatham except for certain bad boy acts, and defaults under the JV debt do not trigger cross-defaults under any Chatham debt. Chatham has a strong balance sheet that positions us well to weather the disruption being caused by the COVID-19 pandemic. We ended Q2 with $36.9 million of unrestricted cash and $8.9 million of restricted cash escrowed with loan servicers that can be used for capital expenditures, property taxes, and insurance.

In early May, we completed an amendment to our credit facility that provides us covenant relief until Q2 2021 and the ability to utilize the entire $250 million capacity of the facility. When covenants begin to be tested again starting in June 2021, EBITDA and NOI figures used for covenants will be calculated on an annualized basis through the end of the year. At June 30, we had $114 million of liquidity between our unrestricted cash balance and revolving credit facility availability. Even at our June 2020 RevPAR of $45, our monthly cash burn, including corporate G&A, interest expense, and principal amortization, was approximately $2.8 million before CapEx, so our current liquidity position covers our current monthly cash burn for approximately 41 months. This provides a significant amount of time for operating performance to recover.

Just yesterday, we obtained a $40 million construction loan to fund the remaining costs of our Warner Center development. This will enable us to complete the project without using any of the liquidity provided by our current cash balance or revolving credit facility. The construction loan has a four-year maturity with two six-month extension options and is initially priced at LIBOR plus 750. Once the property achieves a debt yield of 9%, the spread on the loan decreases to 600 basis points. While we do not believe we will need additional liquidity beyond what we already have, we have six unencumbered hotels with a book value of $276 million that could serve as collateral to raise additional debt proceeds. Chatham's balance sheet also benefits from minimal debt maturities over the next several years.

The only debt we have maturing between now and the end of 2021 is a single $12.8 million non-recourse mortgage loan that matures in September 2021. After that, the next debt maturity that we have is for our credit facility in March 2022, but we have an option to extend that maturity through March 2023. We will have a significant amount of time for both hotel operating performance and the capital markets to recover before we need to refinance a material amount of debt beginning in 2023. With the current lack of visibility around operating performance, we withdrew our earnings guidance in March. Since visibility around the timing of a recovery in hotel operating performance remains limited, we are not going to provide guidance at this time. This concludes my portion of the call. Operator, please open the line for questions.

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For those using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. The first question is from Ari Klein of BMO Capital Markets. Please go ahead.

Ari Klein (Director, Equity Research)

Thank you, and good morning. Can you talk to the specifics of what has been done to reduce the break-even versus prior expectations? How much of the cost reductions do you think are permanent, or maybe how different would you expect staffing levels to look when we get back to normalized occupancy levels over the next few years?

Dennis Craven (EVP and COO)

Hey, Ari. This is Dennis. Yeah, listen, I think the outperformance on the operating side is, I hate to say it, but it's really across the board, but it's primarily focused. 1/3 of our costs are labor-related. It is primarily focused on being really efficient on the staffing side. You certainly have, with most F&B offerings, even in the select service complementary hotels where it's obviously free, the breakfast has been trimmed back significantly, both in terms of what has been provided as well as the staffing of that, and there are no evening social events. Our best contributor to the performance is purely labor-driven. The ability to hold off on some of that rehiring as occupancies improve from 20% now to almost 50%, and we've really only brought back about 10% of our employees, is pretty meaningful.

It is just really working those as much as possible. We have a team of analysts that are really in day-to-day touch with every hotel GM, every regional manager that is looking at current expenses for all types of every expense, basically, but is looking at that on a daily basis and projecting those for within a month for the month. It is just hyper-focused on every dollar that is going out the door. As far as the second part of your question, I think as we get to a stabilized basis, we do believe that the housekeeping model is going to change a bit, and we do believe that the evening social hours are probably going to go away for the most part, and breakfast is going to be modified as well. Those should be beneficial to our model on a stabilized basis.

Ari Klein (Director, Equity Research)

Got it. This is on the ADR to kind of balance out as recovery advances from here. You mentioned some of the corporate negotiations that you've been having. Are they worse than the ADR declines that you've seen to date?

Dennis Craven (EVP and COO)

No, no. No, they're not worse. I think as we, I think ADRs are going to slowly come back as the corporate traveler begins to come back into our hotels. The rate profile for most of the people, like I said, 40% of our "corporate business" in the quarter was traveling nurses and doctors, and they're just at a much lower ADR profile. As room blocks come back in the third quarter and fourth quarter, hopefully, from the corporate traveler, that rate is improved from where we are today.

Ari Klein (Director, Equity Research)

Okay. Just last question. Any seasonality we should be aware of post the summer and maybe leisure travel declining a little bit?

Jeff Fisher (Chairman, President, and CEO)

I think this is Jeff. Hi, Ari. Look, I think that that's a reasonable thing to at least be considering. We know the hotels, particularly with this weekend occupancy that we're talking about here, are leisure-driven. Kids go back to school around the country. There's a strong possibility that we do get some flattening or bleed-off on some of that leisure travel. I think we're going to take a wait-and-see attitude, but we would also expect for or certainly hope that for some of that potential bleed-off of leisure, there is, as Dennis was talking about, a little more corporate travel coming back into these markets and to these hotels. Hey, only time will tell. That's why we're not putting out any guidance nor anybody else. It's difficult to predict.

Ari Klein (Director, Equity Research)

Sure. All right. Thanks for that. Thanks for the call.

Jeff Fisher (Chairman, President, and CEO)

Thank you.

Operator (participant)

The next question is from Anthony Powell of Barclays. Please go ahead.

Anthony Powell (Director, Equity Research)

Hi, hello. Good morning, guys. Another question on the seasonality issue. What about the seasonality of the current, I guess, corporate business and government business that's in the hotels now? Is that going to be pretty steady, or do you expect that to fall off or change in any way in the fall or winter?

Dennis Craven (EVP and COO)

Certainly the traveling nurses are going to fall off. We have seen a slow decline in that production month by month since April. There will be some seasonality just because of the pandemic and the people that are moving around and putting out the hotspots. We have seen a slow-off in that type of business, but it's been offset by whether it be leisure or corporate in certain markets.

Anthony Powell (Director, Equity Research)

Got it. Okay. Thanks. Just maybe moving on to the Warner Center with the destruction and the loan. Just curious, you've been pretty positive on that opportunity. What caused you to push on with that? Maybe more details on the loan, just the negotiation there, the terms, was that attractive? Was it not attractive? Just more details there would be great.

Jeff Fisher (Chairman, President, and CEO)

Okay. Anthony, this is Jeff. I think I'll take the first part of the question, which is when you look at where we were in the construction process with the first four floors of the structure being completed, but a hotel that has underground parking and underground mechanicals, it's a complex structure. It's not a stick-built suburban extended-stay hotel.

Therefore, we determined, and the contractor helped us, obviously, in detail with that analysis, that leaving that for some extended period of time where we already had some of the mechanical equipment, for example, in the basement of the building, etc., below grade, pumping water out of the surroundings of the building, dewatering expense, and other things like that, certainly predicated continuing the construction. Additionally, we've talked about the opportunity in Warner Center, in our view, being pretty unique because it is a competitive set full of very old, large group-based full-service hotels and one old Courtyard across the highway. We feel very strongly that our projections will come to fruition in terms of ADR and occupancy there by the time this thing really gets finished and opened and pre-opened and ramped up. Therefore, we went out to find a construction loan.

Let me tell you something. This is where Dennis or Jeremy will pick up. Finding a construction loan? We are the test case. We solicited through, I think, one of the best mortgage brokers for hotels in the country. I think what was it, Dennis? Over 100 folks they pinged. Dennis will get in just not a lot, but a little more detail about how difficult it is to secure this kind of loan. Therefore, some of our comments about lack of new supply generally for the industry, I think we've got a pretty good firsthand experience relative to the ability of finding that kind of loan.

Dennis Craven (EVP and COO)

Yeah. Jeremy, I don't know if you want to add some color to that.

Jeremy Wegner (SVP and CFO)

Yeah. I'll just point out we're very happy to get this loan done. It was challenging. Like Jeff mentioned, we reached out to 100 potential lenders here. There were a very limited number that had an interest in making a construction loan at this time. I think there's some unique factors about our project that help us get it done. Frankly, we have $30 million of equity invested already. The project's 40% done already, so a little bit of risk's off the table. Having a public REIT behind the loan and supporting the project is very different from most private developers. All those things put together help us get this done. Again, very happy to get it done, but I think hard to read into the saying that there's much availability of construction financing out there right now.

Jeff Fisher (Chairman, President, and CEO)

Of course, Anthony, what we did there, that Dennis mentioned, was very importantly not further encumber our line of credit or our other assets that support the line, therefore reducing our liquidity. Very important there as a standalone loan for that hotel.

Anthony Powell (Director, Equity Research)

Got it. Thanks for that color. Have you guys announced the brand for that hotel, or is that still pending?

Jeff Fisher (Chairman, President, and CEO)

See, I almost slipped it out there while I was talking, but we have not so far.

Anthony Powell (Director, Equity Research)

Got it. Okay.

Thanks a lot.

Jeff Fisher (Chairman, President, and CEO)

I did say.

I did say, notice I said extended stay.

Anthony Powell (Director, Equity Research)

Yeah. Yeah, no. Got it.

Jeff Fisher (Chairman, President, and CEO)

We'll get the process of elimination going there and figure it out.

Anthony Powell (Director, Equity Research)

Yeah. Yeah. It's one of maybe two or three possibilities. I think I have a good idea which one it is. Thanks a lot, guys.

Jeff Fisher (Chairman, President, and CEO)

Thank you.

Dennis Craven (EVP and COO)

Thank you, Anthony.

Operator (participant)

The next question is from Kyle Menges of B. Riley FBR. Please go ahead.

Kyle Menges (Equity Research Associate)

Hi. This is Kyle. I'm for Brian. Just had a couple of questions. First off, as occupancy levels improve, do you anticipate any government-mandated occupancy limits in the near future?

Jeff Fisher (Chairman, President, and CEO)

No. No.

I guess if we—this is Jeff. I guess we probably would have had them already more at the front end of the pandemic, but.

Dennis Craven (EVP and COO)

Yeah. I mean, listen, there were, especially in New Hampshire and in Maine, were probably two of the more risk-averse in terms of travel restrictions for people traveling into the state or through the state or whatever it might be. And hotels did have some occupancy restrictions in May and June in Maine and in New Hampshire, and those have been loosened in July. That was a bit of a restriction, but thankfully, we're past it.

Kyle Menges (Equity Research Associate)

Makes sense. Thanks. Lastly, just thinking about ramping up staffing, has it been fairly easy to bring back furloughed employees? Also, is that pretty much at the same wage levels as pre-COVID?

Dennis Craven (EVP and COO)

No, it hasn't been easy. I think a common theme, whether it's retail, restaurant, hospitality, bringing employees back when they were getting the extra $600 unemployment supplement has been pretty challenging in some markets where occupancy has rebounded significantly and has required us to actually go and find some outside sources of labor in certain instances. Having said that, I do believe that moving forward, the average wage per hour is probably going to be on a stabilized basis, lower than what it was before the pandemic. We should get some benefit out of that.

Kyle Menges (Equity Research Associate)

Great. Do you expect to run around 60% staff reduction in this quarter? Is that what you're running?

Dennis Craven (EVP and COO)

We're about at 60. We're about at a 60% reduction at the moment. I think as we've moved into—as we've moved into July and August, that'll probably come down. I don't know if we'll get to 50%. Listen, it's a very flexible and pretty, from an operating model perspective. I think for us, we're being as aggressive as we can on limiting the comeback on the hotel employee side.

Kyle Menges (Equity Research Associate)

Great. That's all for me. Thank you.

Dennis Craven (EVP and COO)

Thank you.

Operator (participant)

The next question is from Tyler Batory of Janney Capital Markets. Please go ahead.

Tyler Batory (Director, Equity Research)

Thank you. Good morning. A lot of good news in this report and all the call this morning, which I think is worth acknowledging. I wanted to first tie the loop on July trends if I could. Curious a little bit more in some of the markets that have seen COVID-19 cases spike, specifically California. Is there much difference in what you've seen week over week in those markets compared to some of your locations that maybe haven't seen quite as much of a surge with respect to the virus?

Dennis Craven (EVP and COO)

No, not exactly, Tyler. I mean, I think whether you're talking about California, you're talking about the Carolinas, Florida, even Texas. I mean, at least compared to June, July has been improved. I do not believe we would say that it's automatically whacking our travel.

Tyler Batory (Director, Equity Research)

Okay. Also, just when I look at the rate of growth, and I'm nitpicking a little bit, but certainly there's been a little bit of moderation in July versus June compared to the sequential improvement. I mean, is that just you're kind of hitting a wall maybe, if you will, on how far leisure travel can take you? Is there anything else going on that's worth calling out there?

Jeff Fisher (Chairman, President, and CEO)

I do not see much there really other than purely math, which is what is the denominator and what the numerator is. As the early part of the acceleration, obviously, is going to show a higher % gain than what you are going to show as you move through this thing in the next 12 to 18 months. Again, we had, particularly with a couple of hotels in Florida, thought that things were really going to go the other way on us and did not. I mean, our Il Laguna Hotel in Fort Lauderdale is running 90-plus % occupancy and has not slowed down. Even though there is a lot of increased cases in that hotel in Broward County, which was pretty high on that list, I tell you what, people are still coming out.

Obviously, this fundamental midweek business of first responder-type business in that hotel, but great weekend leisure business as well. That was really a pleasant surprise on that front. I think the real question is, what do other kinds of corporate travel and travelers do in the fall? As I said earlier, only time will tell on that front.

Tyler Batory (Director, Equity Research)

Okay. I appreciate that. I also wanted to go back to your RevPAR Index. Obviously, quite strong. Can you elaborate a little bit more on the direct sales efforts and your revenue management strategy in terms of gaining a little bit more market share here?

Dennis Craven (EVP and COO)

Yeah. Listen, I think it's something that started early on in the pandemic with, on the Island Hospitality side, they have a direct sales team that's some based in our corporate office, some around the country that have been very aggressive early on going out to some of those sources of business. Listen, definitely government, nurses, doctors, and they reached out early on in the pandemic, expressed our availability with providing hotel rooms. Certainly, I think that has carried us essentially through April and May. I think that's been pretty pervasive throughout the portfolio for Chatham. I think the revenue management side is working in tandem with direct sales. Certainly, there is production through the brand.com sites, and rates are coming down as a result of the softened demand after the pandemic.

It is really opening those channels that were, quite honestly, we had closed off when times were really good because the rates are a little bit lower. It is a benefit, and it is an attribute of our portfolio and our asset types and our room types that whether it is in a growth mode or whether it is in a period like now, we have got the ability to diversify our customer base and for the direct sales teams to reach out to the providers of traveling nurses and doctors and government channels that, again, we turn the on button on for those as opposed to six months ago, that was off.

Tyler Batory (Director, Equity Research)

Okay. Last question for me, more just housekeeping. Can you remind us the restrictions in terms of the dividend right now and when those are lifted?

Dennis Craven (EVP and COO)

Yeah. Jeremy, you want to take that?

Jeremy Wegner (SVP and CFO)

Yeah. Right now, we have to keep our dividend below REIT taxable income. That is going to be in place through the end of this credit facility amendment, which is March of next year. To the extent this year that there was taxable income, we have to pay a portion in stock. I think there probably will not be taxable income this year. It would really be next year at the earliest that that would be possible to pay a dividend.

Tyler Batory (Director, Equity Research)

Okay. All right. That's all for me. Thank you.

Dennis Craven (EVP and COO)

Thanks, Tyler.

Operator (participant)

There are no further questions at this time. I would like to turn the floor back over to Jeff Fisher for closing comments.

Jeff Fisher (Chairman, President, and CEO)

We certainly appreciate everybody being on the call today. As somebody said, there is a fair bit of good news in here, certainly on a relative basis. I'm just pleased to be able to talk about things in a somewhat positive manner, looking at our hotels and looking at the kind of business that our teams have been able to secure. Really, it's that nationwide direct sales effort. It's the ability to talk to somebody that can put first responders or nurses or other folks, even National Guard folks that are setting up testing centers, whether that be on the West Coast of the United States or suburban Boston or South Florida. That's an advantage together with our daily vigilance on costs.

We all receive lots of sales updates on a weekly basis from our Island team and are very, very, very keyed in on what expense trends and particularly payroll trends are doing and what hotels may or may not be spending money on with a team of folks that are spending 100% of their time on the Island side monitoring and doing that. I think the results speak for themselves, and we look forward to working our way through this and getting back into what I would say is full-boat positive cash flow mode. As Dennis indicated, only another $3 million or $4 million to spend on CapEx for the rest of this year on some essential projects and not much to spend, nor, by the way, have the brands really even thought about ramping up any requirements to spend much money for 2021 on that front.

Our hotels were in great shape to begin with. We feel real good about how we can operate moving forward. Thank you. Appreciate your time.

Operator (participant)

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.