Chatham Lodging Trust

Greetings and welcome to the Chatham Lodging Trust Third Quarter 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Chris Daly, President of DG Public Relations. Thank you. You may begin.

Thank you, Laura. Good morning, everyone, and welcome to the Chatham Lodging Trust Third 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 October 29, 2020, unless otherwise noted. and the company undertakes no obligation to update any forward-looking statements 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 insight into Chatham's 2020 third 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 and Chief Financial Officer. Let me turn the session over to Jeff Fischer. Jeff?

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. But all things considered, I'm very pleased with our current results and the extraordinary work our team has done during this difficult time. For the quarter, our RevPAR declined 61% to $58, well above our second quarter RevPAR of $33. Since the beginning of the summer, we saw RevPAR gradually improve in the summer from $45 in June to 52 in July, and to approximately $60 in August, September, and October. The improving trend can be attributable to the leisure traveler who came out in force during the summer. We did see some return of corporate travel, but it remains quite limited, and it rates more in line with our overall portfolio ADRs. Since the beginning of August, our occupancy has hovered around 55%. and our ADR has remained around $110. Although others saw performance decline in September and October, we've been able to maintain our operating performance. As I said, this unprecedented period has required intense asset management and operating focus, and I'm very proud of the efforts of our teams at both Chatham and Island Hospitality. We had the highest absolute rev par of all lodging REITs in the second quarter, and I'm confident that our third quarter rev par will be near the top. Additionally, we delivered GOP margins of 36% in the quarter, despite a rev par decline of almost $90 versus the comparable period last year, which I have to say is pretty remarkable, and certainly when doing research projections at the beginning of the pandemic, we never thought we could deliver that kind of margin. I certainly believe that our relative outperformance, both versus our peers in the overall industry, which saw third quarter occupancy of approximately 48% and ADR of $100, is attributable to a combination of our great sales efforts as well as the composition of our portfolio. Our sales and revenue management teams have delivered outstanding results since the onset of the pandemic as proven by our significant REVPAR index or market share gains. Our 2019 REVPAR index was 118. Since the first week of April, our REVPAR index has been significantly higher. Our second quarter index, as we said prior, was 148 and our third quarter index was 137, 16% higher than our 2018 average and still a very impressive statistic given that most hotels have now reopened. The impressive gains are being driven by Island's outstanding direct sales efforts from its national, regional, and local sales teams at the hotels, as well as concentrated revenue management efforts ensuring that we're quickly adjusting to demand and modifying our rates. One of the benefits of our platform is that as owners, we're able to participate in meetings, if necessary, on a daily basis with island sales leaders and discuss opportunities and hear of recent sales developments. We've won significant business from large nursing groups, student housing, senior housing, and we've increased our government military revenue during this period of time. With respect to our favorable portfolio characteristics, approximately two-thirds of our EBITDA is attributable to our Residence Inn and Homewood Suites hotels, which have been in higher demand during the pandemic. We've talked about the benefits many times of being focused in the upscale extended stay arena, and having suites that are larger and with full kitchens has been really beneficial in winning business from today's travelers. Chatham has the highest percentage of extended stay rooms of all lodging REITs at almost 60%, basically double the next highest lodging REIT. 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, and that's reflected in our results. Some interesting trends in our portfolio continue from the second quarter into the third quarter. First, average length of stay remains higher than what we are accustomed to experiencing. In prior years, average length of stay has hovered around 2.5 nights for our two largest brands, Residence Inn and Homewood Suites. Second quarter 2020 average length of stay was up to five nights for our Homewoods and 5.9 for our Residence Inns. In the third quarter, average length of stay was 3.9 nights for our Homewoods versus 2.7 last year and almost five nights for our residence ends versus 2.8 nights last year. Second, daily demand trends continue to favor weekends and the contributions of the leisure traveler throughout the pandemic. Friday, Saturday occupancy during the third quarter was 59% with an ADR of $114, while for the remainder of the week, occupancy is 50% and an ADR of $108. Truly amazing that for a portfolio such as ours, which historically has been reliant on the corporate traveler to have these kind of results, but that's what generally the industry is seeing as well. Looking into the fourth quarter, as you saw in our release, October REVPAR is generally in line with performance the last three months. In November and December, our portfolio will naturally experience, of course, some seasonality, and we do expect RevPAR to tick down a few dollars. Looking further into 2021, we expect that business travel will meaningfully come back once a vaccine is introduced and available. I firmly believe that our portfolio attributes and our ability to appeal to the diverse customer base that I've talked about will really be able to allow us to grow occupancy and rates faster than most of our lodging peers and return to 2019 levels much sooner. This will translate into higher revenue and cash flow for our company and for our shareholders. Before I turn it over to Dennis, I want to talk about a significant and recent development, and that's the pending sale of our 192-room residence in in Mission Valley in San Diego to the San Diego Housing Commission for $67 million, or almost $350,000 per room. Not only does this transaction make sense from a financial perspective, after all, the price equates to a very attractive 6.5% cap rate on 2019 results. which certainly is far from a distressed price. The transaction adds meaningful liquidity and allows us to pay off a CMBS loan that was set to mature in a couple of years. So this liquidity significantly strengthens our balance sheet during these uncertain times and provides added flexibility to potentially reinvest these proceeds into distressed acquisitions down the road. It's a home-run deal for us and for the city of San Diego. Lastly, our third quarter operating margins of 36% were very impressive, and we remain hyper-focused on managing expenses across all departments, especially labor. We were able to deliver positive adjusted EBITDA in the third quarter. I'm very pleased with our efforts and want to thank our employees again across the country for their efforts. Although we haven't been able to reach cash flow break even, we're real close and we've significantly reduced our monthly cash burn to approximately $1.6 million per month. To be cash flow break even, we still estimate we need to achieve REVPAR of approximately $75, but we're not too far away. Our liquidity runway, especially if you factor in the pending sale of our Mission Valley Hotel, is approximately 90 months if you use our third quarter cash burn as a basis. Our efficient operating model, along with a strengthened balance sheet, has a meaningful impact, I think, on our long-term equity value for our shareholders. Our teams at Chatham & 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.