Summit Hotel Properties, Inc. (NYSE:INN) Q2 2022 Earnings Conference Call August 3, 2022 9:00 AM ET
Company Participants
Adam Wudel – SVP of Finance, Capital Markets and Treasurer
Jon Stanner – President & CEO
Trey Conkling – EVP & CFO
Conference Call Participants
Neil Malkin – Capital One
Chris Woronka – Deutsche Bank
Austin Wurschmidt – KeyBanc Capital Markets.
Michael Bellisario – Baird
Bill Crow – Raymond James
Operator
Thank you for standing by, and welcome to Summit Hotel Properties Second Quarter Fiscal Year 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]
I would now like to hand the call over to Mr. Adam Wudel, Senior Vice President, Finance, Capital Markets and Treasurer. Please go ahead.
Adam Wudel
Thank you, Latif, and good morning. I am joined today by Summit Hotel Properties President and Chief Executive Officer, Jon Stanner; and Executive Vice President and Chief Financial Officer, Trey Conkling. Please note that many of our comments today are considered forward-looking statements as defined by federal securities laws. Statements are subject to risks and uncertainties, both known and unknown, as described in our SEC filings.
Forward-looking statements that we make today are effective only as of today, August 3, 2022, and we undertake no duty to update them later. 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 www.shpreit.com.
Please welcome Summit Hotel Properties President and Chief Executive Officer, Jon Stanner.
Jon Stanner
Thanks, Adam, and thank you all for joining us today for our second quarter 2022 earnings conference call. Our second quarter results marked new pandemic era highs in nearly every relevant operating metrics driven by continued strength in leisure travel and supplemented with accelerating recoveries in business transient and group demand as growth in our portfolio increasingly shift mid-week into our high-quality urban assets.
Second quarter pro forma RevPAR increased approximately 54% from the second quarter of last year, driven by a 12.5% increase in occupancy and a 37% increase in ADR. In our portfolio of 92 hotels with comparable 2019 results, RevPAR recapture reached 93% of 2019 levels, a significant improvement from the 79% recapture we achieved in the first quarter and highlighted by June’s 96% recapture rate, the highest of any month since the onset of the pandemic.
Hotel EBITDA recapture in this portfolio was 89% of 2019 second quarter results as the benefits of a lean staffing model has helped offset wage pressures being driven by a tight labor market. We continue to benefit from meaningful pricing power throughout the portfolio as average rates increased in every segment of our business over the first quarter and now exceed 2019 levels in all but our negotiated segment. For the quarter, comparable portfolio ADR was 2% higher than the second quarter of 2019.
While resort in small town locations continue to achieve rates well in excess of 2019 levels, up 16% and 11%, respectively, rates in our urban portfolio exceeded 2019 by over 3%, reflecting rapidly improving mid-week corporate and group demand. Weekday pro forma RevPAR increased 26% from the first quarter and 67% from the same period last year.
Weekday occupancy was more than 71% for the quarter, with June posting a pandemic era high of nearly 74%. Our weekend RevPAR recapture rates continue to meaningfully exceed 2019 levels. And encouragingly, Monday through Wednesday nights are seeing the greatest improvements and now all exceed 80% recapture compared to below 70% in the first quarter. Weekday rates increased in every major segment during the quarter. And in June, weekday rates were within 4% of weekend rates.
The group segment’s recovery was particularly notable in the second quarter as group room night contribution reached 15% of our total portfolio mix, essentially flat to pre-pandemic levels. And rates were modestly above 2019. As expected, June was our strongest month since the onset of the pandemic, achieving new highs in absolute RevPAR, RevPAR recapture and average rates, which were nearly 5% higher than June of 2019.
Pro forma gross operating profit margins also reached a new peak of just under 48%, which represented 125 basis points of margin expansion over June of last year. Preliminary July nominal RevPAR is expected to decline modestly from June, consistent with historical seasonal patterns, but result in a comparable 2019 RevPAR recapture rate in line with what was achieved in the second quarter.
August tends to be a slightly weaker seasonal month in our portfolio, which is reflected in our current pace that is down compared to our pace for July a month ago. So once again, we expect 2019 recapture rates to hold fairly steady month-over-month. However, we are very encouraged by the pace trends in our portfolio in September and October, particularly within the recently acquired NewcrestImage portfolio and our urban properties, which are seeing significant month-over-month pace increases for both weekdays and weekends.
September RevPAR is pacing 14% ahead of August in our pro forma portfolio, which positions us to achieve recapture rates to 2019 that are in line or potentially above the highest we experienced in June. Combined with our healthy recovery in July and expectations for August, we expect third quarter recapture in our comparable portfolio to be generally in line with the second quarter. But with still very early in our booking window, our optimism for the fall is further supported by our October pace, which is 12% ahead of September and has historically been one of the strongest months in our portfolio.
Our strong operating results and the continued progress we’ve made enhancing our balance sheet have positioned us to reinstate a quarterly common dividend. Yesterday, our Board of Directors declared a $0.04 per share quarterly common dividend, which equates to $0.16 per share on an annualized basis and roughly a 2% annualized dividend yield. We’ve been prudent to size the dividend so that it can be meaningfully increased over time if the current fundamental recovery in our business continues on uninterrupt, but also to be sustainable if we experience a reduction in demand from our baseline expectations.
Prior to the pandemic, we had a strong track record of paying common dividends, which grew over 60% from the time of the IPO, according to a 5% dividend CAGR over that 10-year period. We’ve remained active on the transaction front. And during the second quarter, we closed on two previously announced transactions. In May, we closed on the sale of the 169-guestroom Hilton Garden Inn San Francisco Airport North Hotel, previously owned in our joint venture with GIC, for $75 million, and we realized a net gain of $20.5 million in less than three full years of ownership.
The sale price reflects a trailing 12-month NOI cap rate of approximately 1% as of March 31. As a reminder, the sale also allowed us to forgo a $7 million renovation that was scheduled to begin later this year. In June, we successfully closed on the equity purchase option to acquire a 90% interest in the newly constructed 264-guestroom AC Element dual-branded hotel in Downtown Miami’s Brickell neighborhood at a valuation of $89 million or $337,000 per key.
The hotel features Rosa Sky recently named as one of Miami’s best rooftop bars, which has generated on average, nearly $500,000 of revenue in each month since its opening. The hotels have ramped incredibly quickly since our December 2021 opening, generating year-to-date RevPAR of approximately $170 despite being in the slower summer season in Miami.
For the full year 2022, we anticipate that hotels will generate a combined hotel EBITDA yield on our option price between 8% and 9%, effectively in their first 12 months of operations. Our 31 recently acquired hotels continue to perform very well as forecasted EBITDA is trending to finish nearly 10% above 2022 underwriting despite the delayed opening of the Canopy New Orleans Downtown.
We remain particularly bullish on the longer-term outlook for the NewcrestImage portfolio as we expect to begin to realize the benefits of recently implemented asset and revenue management strategies as early as the second half of this year and continue to believe the concentration of assets in high-growth sun belt markets are poised to outperform over the next several years.
Our other recent acquisitions continue to vastly exceed expectations as the residents in Steamboat, the Embassy Suites Tucson, and the dual-brand AC Element Brickell Miami are collectively pacing more than 40% above our underwritten 2022 hotel EBITDA levels. Combined, for the 31 hotels acquired since June 30 of last year, we expect our blended 2022 EBITDA yield to be approximately 7%. As a reminder, nearly half of the hotels we acquired have opened within the past four years, implying there is still considerable upside in many of these assets.
With that, I will turn the call over to our CFO, Trey Conkling.
Trey Conkling
Thanks, Jon, and good morning, everyone. On a pro forma basis, we experienced continued RevPAR growth across our portfolio in the second quarter, generating our highest nominal RevPAR of the pandemic era and continuing a trend of sequential quarter-over-quarter improvement.
From a segment perspective, Summit’s 42-hotel urban portfolio produced a second quarter RevPAR of $125, by far, the highest quarterly RevPAR for our urban portfolio since the onset of the pandemic. This surpassed first quarter 2022 urban RevPAR by approximately $34 or 38%. Sequential quarter-over-quarter urban RevPAR growth was driven by strength in both occupancy and ADR, which increased 22% and 13%, respectively.
For our urban hotels with comparable 2019 data, second quarter ADR surpassed 2019 levels by approximately 3%. Strengthening corporate and group travel were instrumental to improving urban fundamentals in markets such as New Orleans, Austin, Tampa, Nashville, Charlotte, Boston and Downtown Chicago. Most notably, urban weekday RevPAR increased sequentially throughout the quarter as each month generated a new pandemic era high. This culminated with June posting a weekday RevPAR of approximately $125, nearly double that of June 2021 and resulting in an 86% recapture to 2019’s urban portfolio weekday results.
Second quarter RevPAR for our non-urban hotels was $119, an increase of over 13% relative to first quarter 2022 and a 33% increase to the second quarter of 2021. Strength in our non-urban portfolio was driven heavily by our hotels in airport and suburban locations, while hotels and resort markets, such as Fort Lauderdale, Tucson and Phoenix, entered seasonally slower periods.
Despite this seasonality, rate strength among our resort properties with comparable 2019 results continued to accelerate in relation to 2019. With the ADR recapture of 116% in the second quarter versus 108% in the first quarter of this year. Furthermore, our airport suburban and small town hotels demonstrated exceptional strength, with Q2 RevPAR increasing by 33% over the first quarter to $117.
Booking windows in the quarter continued to expand. Most notably, same-day bookings declined from 19% to 15% of total bookings, a new pandemic era low and relatively in line with pre-pandemic norms. Furthermore, bookings in the week for the week declined by 17%, while bookings per stays more than 30 days out increased by nearly 40% during the quarter. In addition, bookings for stays 15 to 30 days out. Historically, the window in which corporate travelers typically book increased by approximately 10% during the second quarter.
From a channel mix perspective, we continue to see strong bookings coming from the less expensive channels as approximately 70% of our stays in the second quarter came from direct bookings and central reservation systems. OTA contribution declined 90 basis points from the first quarter to comprise approximately 16% of our total bookings as corporate group and business transient demand continued to accelerate.
On a same-store basis, operating costs per occupied room in the second quarter declined compared to the first quarter of 2022, resulting in second quarter gross operating profit margin of over 49%, which is approximately 100 basis points below the second quarter of 2019 despite current labor market dynamics. Same-store hotel EBITDA flow-through remained strong at 54% compared to the second quarter of last year.
Pro forma hotel EBITDA for the second quarter was $70.7 million, a 94% increase from the second quarter of 2021, which resulted in a 38% margin, the highest quarterly hotel EBITDA margin during the pandemic era and more than 600 basis points higher than the second quarter of 2021. Adjusted EBITDA increased to $54.6 million in the second quarter, which was more than double from a year ago.
Adjusted FFO in the second quarter was $32.6 million or $0.27 a share, an increase of $24.2 million from the second quarter of 2021 and $12.5 million from the first quarter of 2022 amid an improving fundamental backdrop. Included in our adjusted FFO was a higher than normal income tax expense for the second quarter driven by the $20.5 million gain from the sale of the Hilton Garden Inn San Francisco. When adjusting for the tax related to the gain on sale, adjusted FFO was $36.1 million or $0.30 per share for the second quarter. For the full year, we estimate income tax expense of approximately $3.5 million.
During the second quarter, on a consolidated basis, we invested approximately $15 million in our portfolio, bringing our year-to-date total to approximately $25 million. Second quarter spend was primarily driven by transformative renovations at our Hilton Garden Inn Houston Energy Corridor, Hyatt Place Orlando Universal Studios and SpringHill Suites Nashville MetroCenter in addition to typical maintenance capital and purchasing for near-term renovation projects. Including the year-to-date spend, we expect to spend $60 million to $80 million on a consolidated basis or $50 million to $70 million on a pro rata basis and total capital expenditures for 2022.
Finally, turning to the balance sheet. Our overall liquidity position remains robust at more than $480 million. We continue to maintain ample liquidity to repay all maturing debt through 2024 when considering available extension options. From an interest rate risk management perspective, our balance sheet is well positioned, including an average pro rata interest rate of 3.8% and nearly 70% of our current outstanding pro rata debt fixed after consideration of interest rate swaps.
In addition, to address the pending maturity of $200 million in notional swaps, we recently entered into two $100 million interest rate swap agreements that will fix one month SOFR and carry fixed rates of 2.6% and 2.56%. These new swaps will mature in January 2027 and January 2029. This extends the average duration of our swap portfolio from less than two years to over four years. The swaps will be effective in January of 2023 after the $200 million of existing interest rate swaps expire. The new swap transactions will result in the company maintaining approximately 70% fixed rate debt.
In the second quarter of 2022, we exited the waivers on certain financial covenants related to our primary corporate credit facility and amended the credit agreements for our $400 million senior revolver — revolving credit facility and two senior term loans totaling $425 million to extend the available loan term and enhance overall flexibility. The amendments on the $600 million senior credit facility include additional extension options. They allow us to extend the maturity date to March 2025 for the $400 million revolving credit facility and to April 2025 for the $200 million term loan facility.
Pricing remains unchanged for both loans. Additionally, the company has retained complete capital allocation flexibility regarding future potential acquisitions, dispositions, capital expenditures and dividends. Included in our press release last evening, we provided 2022 guidance on certain non-operational items, including cash corporate G&A, interest expense, preferred dividends and capital expenditures, both on a consolidated and pro rata basis. We expect the midpoint of consolidated cash corporate G&A to be $21.5 million; interest expense, excluding the amortization of deferred financing costs, to be $59 million; Series E and Series F preferred dividends to be $15.9 million; Series Z preferred distributions to be $2.3 million; and pro rata capital expenditures to be $60 million.
With that, we will open the call to your questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Neil Malkin with Capital One.
Neil Malkin
Good morning, guys.
Jon Stanner
Good morning, Neil.
Neil Malkin
Congrats on the dividend and getting out of waivers and everything. So that’s — weight after shoulders. First one is on just the ADRs of business traveler. You mentioned that pickup in midweek, urban hotels being indicative of accelerating corporate environments and travel cadence. So just so we can understand how the dynamics would work in terms of ADR overall, can you talk about what a typical premium in ADR that business or corporate business would get or would achieve versus a typical leisure guest?
I think it’s important that a lot of the luxury peers, as business comes back, those people are paying below what the leisure ADRs are. But I think for your portfolio, it’s actually flipped. So can you just help quantify that and talk about how that would help the portfolio in terms of ADR lift as we go through the rest of the year and into ‘23?
Jon Stanner
Yeah. Sure. Thanks, Neil. Good morning. I think you’ve highlighted it correctly. I think if you look back historically at our portfolio, particularly pre-pandemic, we’ve certainly run higher rates than our negotiated channel than we have in some of our leisure channel. That has flipped today. And we’re certainly running a much higher percentage of our room night mix through the retail segment than we would on a normalized basis.
I still think as you start to see — and again, you saw a lot of that, as you alluded to, in the quarter, particularly in the month of June as we started to see some of this BT business come back. It’s still at rates lower than it was in 2019 negotiated still our only channel where rates are lower than they were pre-pandemic. But I — we do think that there is an enormous amount of upside as that business starts to come back. We do think that the remixing of our business overall is going to be positive from a rate perspective as we start to see, one, BT come back; and two, just better demand broadly in urban markets.
Neil Malkin
Okay. Thanks. And then the other one for me is bigger picture on the stock, kind of been an underperformer, kind of lagging the group and having a sort of disparate multiple. So I was just wondering if you could or hoping you could maybe give a couple points or catalysts that would — that you think would help bridge that discount and kind of get the stock moving in the right direction so you can really turn on the external growth engine. So yes, there’s just a couple of things that you could talk about, that’d be great.
Jon Stanner
Sure. Look, Neil, I think the way the stock is traded has been frustrating. It’s been disappointing. I’m sure it has been for most of our peers as well. I don’t think the stock today reflects the quality of the portfolio, the quality of the platform, the nature of the transactions that we’ve been able to complete through the balance of the year and, really, since the onset of the pandemic. Some of it, I think, is attributable to the operating performance, just the nature of the portfolio. This is a — we’re a select service portfolio that’s recovered sooner, but we have less suburban exposure. We have less small town exposure, which was — which recovered faster. And we just have a higher concentration in urban markets.
We have fewer pure-play leisure-oriented assets, which has been the outperformers year-to-date. What we do have is a really, really high-quality urban-focused portfolio, which I think positions us very well where we see kind of the next leg of growth. And again, we’ve talked a lot about that in our prepared remarks where we’re seeing better growth midweek and better growth in urban markets. We do think we’re really, really well positioned, again, as we continue to see growth in that mix, in particular, and specifically as we start to focus more on this business on year-over-year and less on an index relative to ‘19.
I’m really proud of the transaction activity that we’ve completed since the onset of the pandemic. And I don’t think that value that has been created and will be created is reflected in the stock price. If you look at the acquisitions, and we — again, we mentioned this in our prepared remarks, we’re 10% ahead of our underwriting year one and everything that we’ve acquired about $1 billion worth of assets that we’ve acquired since the beginning of the pandemic. The Brickell trade has been a home run. We’re probably $25 million to $30 million in the money on that trade from our option price, day 1 and it’s yielding 8% or 9%.
The San Francisco trade, I think, was a home run. We’re already ahead of our underwriting in the NCI portfolio. And I think most of that upside is yet to be realized. A lot of the heavy lifting that has been done, have been done over the last six months, whether it’s getting sales clusters organized, the right resources in place. And we think a lot of — particularly as we get into the stronger seasons in some of these sun belt markets, we think a lot of the upside in that portfolio will be realized in the back half of this year and into the next coming years given the growth profile of those assets.
We reinstated our dividend, which we think reflects our conviction of, one, the cash — strong cash flow profile of the business; and two, the confidence that we have in our business going forward. I’m proud of the work that we’ve done on the balance sheet. So I think the business is really well positioned on a go-forward basis. And I think if we continue to do thoughtful transactions and continue to execute on our operating plan, ultimately, that’s going to show up in earnings and will be realized in the share price over time.
Neil Malkin
Yeah. That was great. Thank you, Jon. Thanks everyone.
Jon Stanner
Thanks, Neil.
Operator
Thank you. And our next question comes from the line of Chris Woronka with Deutsche Bank.
Chris Woronka
Hey. Good morning, guys. Appreciate all the color on the segments in the markets. Question is, as you’re seeing this nice urban rebound, do you think resort markets and suburban markets are still kind of winning, too or do you think this is just a more of a transfer from strength in resort and small town markets to urban? In other words, same traveler just going to a different place for — perhaps for business instead of pleasure.
Jon Stanner
I think there’s a little bit of that, Chris. But I think — look, I think leisure’s still really strong. Our resort markets — again, we don’t have a ton of pure resorts. We do have a number of leisure-oriented markets. They’re still leading the pack. They’re still the furthest ahead of 2019. We have a couple of markets that were actually down slightly year-over-year in June but still way up to 2019. And I think some of that is reflective of what you’ve seen. Travelers have other preferences.
I think over the summer, you saw some leisure travel get reallocated to urban markets. And we saw the greatest strength in urban markets in markets that have great leisure attraction, markets like Austin, New Orleans, Miami, even Tampa. But even if you go and look at the performance through June, more and more of this performance is driven by what I would call more BT-oriented markets, at least in our portfolio, markets like Charlotte. We were up almost 6% over ‘19 in a market like Charlotte, up 13% in June.
That’s really BT-driven. Pittsburgh is another market that was up 8% or 9% both for the quarter and for the month of June. We were up in the loop in Chicago over 3% for the quarter in June over 2019 levels. So some of this is just being driven by more BT. There’s no question that I think we’ve seen some urban shift out of pure-play leisure resort destination to more urban markets, though.
Chris Woronka
Okay. Thanks,Jon. And then it was interesting, yesterday, I think we heard from Marriott that they’re starting to see more conversions on the select serve side into their brands, which was a little surprising to hear. Are you guys seeing any of that in your markets or is there any concern that as new units become a little bit maybe tougher to get done on a timely schedule, that you get any pressure from some of these Marriott — new Marriott select serve conversion product?
Jon Stanner
You know not particularly, Chris. I mean I think that the other brands are clearly going to need to focus on conversion activity. Look, I think the math depends a lot of new development remains incredibly challenging. And I think one of the silver linings of the pandemic and some of the uncertainty that exists today and the broader macroeconomic environment is just — it’s really hard to pencil new development. So we think we’re going to be in for an extended period of time where there’s very low — below historical norm supply growth. So I certainly understand that, that’s going to be a push on their side. But generally, I think the supply dynamic is very favorable for us going forward.
Chris Woronka
Okay. Very good. Appreciate it. Thanks, Jon
Jon Stanner
Thanks, Chris.
Operator
Thank you. And our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets.
Austin Wurschmid
Hey, good morning, everybody. Jon, you mentioned the pace gains for September and October. And I’m just curious if you have any breakdown or detail between sort of occupancy versus ADR. And then also, if you specifically have any of the pace trends for sort of that urban midweek piece of business that you’re able to share.
Jon Stanner
Yeah. We can follow up with specifics. What I would say is that the pace gains are both in rate and occupancy. So we’re seeing good traction there. I would say we’re seeing much more significant growth in the urban portfolio, and the pace gains are largely attributable to the urban portfolio, particularly the Newcrest portfolio, as we get into in the sun belt markets, Dallas, in particular, you’re getting out of the peak summer slow season here where it’s been pretty hot for most of the summer in Texas. We get into the fall. We get into much better convention and citywide activities in some of these markets. So I would say that our pace is definitely skewed higher in some of these markets, and again, particularly in the Newcrest portfolio.
Austin Wurschmidt
That’s helpful. And then you discussed recent investments are trending ahead of underwriting. And I’m curious if you roll up all the new investment activities you’ve completed over the last few years, kind of taking the stabilized yield on those and then marry that with the legacy assets. Where do you think stabilized hotel EBITDA could shake out? Certainly won’t hold you to a time frame, but just curious if you have sort of a range in mind.
Jon Stanner
Yeah. What we said publicly about the acquisition portfolio has been roughly a 7% EBITDA yield in 2022. We are ahead of our underwriting. We’re about 10% ahead. Our expectation was that these would all stabilize north of 8%. I think, frankly, we’re probably ahead of expectations. I think the point that we’ve continued to reinforce is a lot of the upside, particularly in the Newcrest portfolio, is still to be realized. I think that the 2023 and 2024 where we really feel like it’s going to take for those to stabilize. A number of those properties are brand new. A lot of them have never been through a traditional RFP season.
Again, many of them were just now implementing a lot of the asset and revenue management tactics that we think are going to drive a lot of value on a go-forward basis. So the non-Newcrest portfolio acquisitions are way, way ahead when you look at Steamboat and you look at Tucson and Silverstar, and you look at some of those acquisitions, they’re far ahead of our initial underwriting. But I do think a lot of upside of the portfolio, particularly in some of these urban markets, are to come in the next — beginning in the back half of this year, but particularly as we get into next year.
Austin Wurschmidt
Thanks for the thoughts.
Jon Stanner
Thanks, Austin.
Operator
Thank you. And our next question comes from the line of Michael Bellisario with Baird.
Michael Bellisario
Thanks. Good morning, everyone.
Jon Stanner
Good morning.
Michael Bellisario
Jon, just a follow-up on Newcrest there. Can you maybe dig in a little deeper just on all the heavy lifting that you guys have done kind of behind the scenes in the portfolio during the first six months of your ownership? And then kind of — I know you mentioned 2022 and 2023, but like when might we start to see the top line and bottom line start to pick up? And when will all that heavy lifting start to show up in the numbers?
Jon Stanner
Yeah. I think you’ve highlighted something we spent a lot of time working through internally. It’s a heavy lift to get a deal closed. The real work started when we closed the deal. And so our team, and I’m incredibly proud of the work that the team has done, has been very, very focused, particularly on getting some sales clusters organized in markets like Dallas and San Francisco and Oklahoma City. We’re in slow season in a lot of those markets today. And we’re — again, as I alluded to in the — on the last question, we’re just now getting the right resources in place.
We’ll go through our — the first RFP season for many of these assets. I think generally, when you look at the quality of these assets, these are the highest quality select service assets in their given markets. And they just haven’t had a chance to ramp up and stabilize. And so I think we’re very bullish on the dynamics in the market, particularly starting in the fall. So I think we’ll start to see some of the benefits in the fall. But we’ve always felt like stabilization in this portfolio was a 2023 or 2024 event. We’re ahead of where we thought we’d be at this time, but I do think it’s going to take some quarters for us to really get fully stabilized in that portfolio.
Michael Bellisario
Got it. That’s helpful. And then just switching gears just on the transaction front. Could you maybe talk about what you’ve seen over the last 90 days in terms of the changes in paying or buyer-seller expectations? And then if you have any interest in providing seller financing to prospective buyers to get deals across the finish line today.
Jon Stanner
We haven’t seen a lot of trades, Mike. I think that, that was kind of what we talked about on the last call that the environment that we are in, and particularly that we’ve been in over the last 60 or 90 days, hasn’t been conducive to transactions. Operating performance is better. The outlook — all of the hard data that you can point to from an outlook perspective, whether it’s pace trends, group trends, convention trends, they all still are very positive. That’s clearly offset by being in a higher interest rate environment. The credit markets are tighter than they were. And there’s some recession fears that are clearly looming and an overhang, particularly in the public markets.
And so I think, generally, asset prices have trended lower, not meaningfully lower, but probably marginally lower, probably 5% to 10% lower than we were at the beginning of the year. I still think there’s a pretty deep buyer pool for assets. And I think particularly for the type of assets that we own, any decline in value is probably at the lower end of that range, again, just given how much capital is still chasing these types of high-quality deals. From a seller financing perspective, we look at it. We’ve done it in the past. It’s not our preferred method of execution. But if it facilitates the trade and the economics make sense, it’s certainly something we would evaluate.
Michael Bellisario
Got it. Helpful Thank you.
Jon Stanner
Thanks, Mike.
Operator
Thank you. And our next question comes from the line of Bill Crow with Raymond James.
Bill Crow
Hey. Good morning, guys. Trey, appreciate your comments on the margins. I think we’re all trying to grapple with stabilized margins and kind of the lag between what we’re seeing in the occupancy and rate recovery and what we’re seeing in an FTE sort of recovery. So where are you if you look at a per occupied room or per available room basis for 2Q 2022 versus 2Q 2019 on an FTE basis?
Trey Conkling
Hey, Bill. How are you? Good morning. I would say if you look on a cost per occupied room, in Q2 relative to 2022 relative to Q2 2019, we’re probably up about 3.8% from that perspective. A lot of that is driven by the mix of labor. Our FTEs today stand at about 24 FTEs. If you remember, pre-pandemic, that was probably 35. We don’t think that we’re going to get back to 35 as we move forward here, but it certainly needs to be something higher than 24.
And part of what’s impacting that kind of delta in terms of an increase in cost per occupied room is the contract labor, which, frankly, is a little bit less productive than what we would like it to be. And so there continues to be an evolution as we kind of navigate this labor market of bringing back additional FTEs and offsetting that contract labor, which I think is what will close the remainder of the gap from a margin perspective.
Bill Crow
So do you think margin…
Jon Stanner
Sorry. I will just jump in and say — add one thing in that. I still think we’ve talked a lot about stabilized margins being 100 basis points to 200 basis points higher than they were on the same revenue mix pre-pandemic. I still think we feel good about that number. I think where we’ve shifted the narrative slightly has been more of that’s just going to be driven by your mix is skewed higher from a rate perspective than it is occupancy.
And as Trey alluded, we’re still running about 70% of our pre-pandemic FTE count. The reliance on contract labor has made up for some of that, which is more expensive and less productive. But I still — I think we’re still confident in that 100 basis points to 200 basis points of margin expansion longer term.
Bill Crow
So we should expect margins to continue to rise next [indiscernible], but can we see margins grow next year even if RevPAR growth slows and as labor staffing levels kind of normalize?
Jon Stanner
Yes. I think so long as your RevPAR mix has continued to skew towards rate growth.
Bill Crow
Yeah. Okay. Just any time you have this dislocation that brings opportunities and your balance sheet…
Jon Stanner
Yeah. I think so long as that your RevPAR mix has continued to skew towards rate growth.
Bill Crow
Yeah. Okay. Just any time you have this dislocation, it brings opportunities. And your balance sheet may not be in a position to exploit any of these right now, but I’m wondering what your thoughts are on three kind of growth areas: number one, whether you received any inquiries from leveraged owners who might be in trouble or whether you’re seeing any sort of opportunities on the acquisition side. Second of all, in the mezz lending side, which obviously got you a pretty good asset down in Brickell and whether there’s any thoughts to resuming that process.
And then you’ve talked, I think, before about broken development deals, which just haven’t seemed to — and maybe the recovery is too good for them to come up, but it seems like there’s got to be some debt-laden developers that are looking for an exit. And I’m just wondering what you’re seeing out there broadly on those areas.
Jon Stanner
Yeah. We haven’t seen a lot yet, Bill. In terms of, what I’ll say, your first and your third bucket, broken development deals are kind of levered owners. I would say we’re still fairly early in higher interest rate environment, in an environment where the credit markets are open but certainly dislocated and tighter than they were 60 or 90 days ago. So I think if you’re going to see opportunities there, we probably aren’t — haven’t seen them yet, but they potentially will come.
And again, I think we’d always love to be opportunistic around finding a deal that’s broken or distressed in a way that we can get a really compelling basis. We would like to do more in the mezz lending program. You highlighted something that we’re incredibly proud of in the deal that we did in Brickell. I think it highlights the value of the program where you can earn. We earn 9% on our money all through COVID and then stepped into 8% to 9% yield and an asset that we’re well, well in the money on.
So we’d obviously love to do more of those. It is a difficult time to get development to pencil right now. And this isn’t — we’ve always looked at the mezz program as something that we wanted to do for assets that we want to own longer term. And this — as we were never — we never designed this just merely to be kind of a lender. And so the type of assets that we own, again, I think you’re going to see just less supply for a period of time. So I do think there’ll be some opportunities. We’ll continue to be very selective in what we do. But for the time being, I think we’re just in a lower supply growth environment generally.
Bill Crow
Thanks for the timing this morning.
Jon Stanner
Thanks, Bill.
Operator
Thank you. And our next question comes from the line of Neil Malkin with Capital One.
Neil Malkin
Hey. Thanks, guy. Just a quick follow-up. In terms of leisure demand, are you seeing, just from the confluence of factors, stock market sentiment, inflation everywhere, not just with gas prices, but with food, everything, travel? So I know like typically or empirically people reference that high gas prices don’t affect demand at properties that you guys have seen, but I think it’s a little bit different environment now with 40-plus year highs in inflation.
So just wondering, given the maybe, I don’t know, call it, lower budget orientation of the leisure traveler compared to some of the, like, sort of high-end resorts, are you seeing any impact, any change in the arm or any issues in terms of slowing drive to demand or a pushback on rate or potentially booking trends not coming to fruition because of some of those things?
Jon Stanner
We really haven’t, Neil. I know there’s a lot of concern out there broadly about the trajectory of consumer health. I think where we sit today, the consumer is still really healthy, whether you look at how much savings have since the start of the pandemic, if you look at the labor market, people have jobs, wages are growing. Inflation admittedly is growing faster.
But for the vast majority of people, they still have disposable income, and it hasn’t shown up in any signs of any track of leisure travel. So we’re monitoring it very closely. Again, I think that we think that if there is any softness there, it’s going to be more than offset by strength in BT, which we’re seeing come back more rapidly. But the simple answer is we certainly haven’t seen anything yet. There are no real signs at least in the data that points to it happening in the near term.
Neil Malkin
Okay. Thank you.
Operator
Thank you. I am showing no further questions. So with that, I’ll hand the call back over to President and CEO, Jon Stanner, for any closing remarks.
Jon Stanner
Well, thank you all for joining today. We look forward to catching up with you of leisure travel. So have a nice day.
Operator
Ladies and gentlemen, this concludes today’s conference call. Thank you for participating and you may now disconnect.
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