Chatham Lodging Trust

Greetings and welcome to Chatham Lodging Trust's fourth 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 a 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, owner of Daly Gray, Inc. Thank you. You may begin.

Thank you, Doug. Good afternoon, everyone, and welcome to the Chatham Lodging Trust Fourth 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 February 24, 2021, 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 and 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 fourth 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 Wagner, Senior Vice President and Chief Financial Officer. Let me turn the session over to Jeff Fisher. Jeff?

Thanks, Chris. Good afternoon, everyone. First and foremost, I want to thank you for your interest in Chatham, and we really sincerely appreciate your participation and interest during these unusual times. As I look back, this last year has required intense asset management and operating focus. I'm thankful for our platform and relationship with Island Hospitality as we were able to pivot very quickly. From a corporate perspective, we were laser focused on how best to preserve long-term shareholder value and knew that we needed to maximize operating performance, reduce capital expenditures and G&A expenses, and preserve our strong balance sheet and enhance liquidity. We've certainly produced noteworthy operating performance during the pandemic. We've had the highest absolute rev par of all lodging REITs over the final three quarters of 2020, including companies who have reported their fourth quarter results. Pending others who have not yet reported, we continue to have the highest operating margins of all lodging REITs. Since our IPO, we've accumulated a portfolio that delivers on a relative basis strong top line and bottom line results no matter the cycle. We generated the second highest EBITDA per room of all lodging REITs in 2020. Lastly, and this is pretty incredible, through this unprecedented period, we were able to produce positive adjusted EBITDA for the full year. Our sales and revenue management teams have delivered outstanding results since the outset of the pandemic, as proven by our significant REVPAR index or market share gains. Since the beginning of April, our REVPAR index has jumped 15% to an average monthly index of 136, compared to our 2019 already strong REVPAR index of 118. The impressive gains are being driven by Island's outstanding direct sales efforts from its national, regional, and local sales teams, as well as concentrated revenue management efforts ensuring that we're quickly adjusting to the diverse demand sources in today's lodging environment. Additionally, and very importantly, we have the largest concentration of extended stay rooms of all lodging REITs at 58%. And another impressive statistic, during 2020, 80% of our hotel EBITDA was generated by our Residence Inn and Homewood Suite hotels, a significant increase over the percentage of rooms. Our upscale extended stay hotels provide us the flexibility during periods of growth or weakness to diversify our customer base to maximize revenue, a thesis we've believed and espoused for almost four decades, and certainly these results are a testament to our portfolio. Without sacrificing the upside, we can limit the downside. From an operating expense standpoint, we're hyper-focused on every expense. On the island side, we have a team of analysts that are in day-to-day touch with every hotel GM and investing 100% of their time to help each hotel micromanage its expenses. Every regional manager is looking at current expenses daily. Labor is by far our biggest expense. Even though occupancy and revenue has increased substantially off the April lows, our hotel employment has not increased materially. On March 1, we had almost 1,800 hotel-level employees. At June 30, our hotel employee count was 776, and as of September 30, that count was 855 employees. At year end, factoring in the sale of the Mission Valley Hotel, employment essentially remains unchanged. Again, a fantastic job by our team to hold employment steady despite improving trends and adding back certain guest amenities. As trends improve in 2021, this focus will need to be maintained to generate strong flow through to the bottom line. In addition, In addition to hotel-level expense management, at the corporate level, we've been very aggressive. We instituted corporate pay cuts across the board to all employees and unfortunately had to reduce our headcount by 35%. In total, we have reduced salary costs by over 50%. Our corporate G&A expense was down approximately 20% year over year. Also, we significantly cut CapEx costs. during 2020. Our 2020 budgeted CapEx was 23 million, and we were able to cut that expense to 14 million, a reduction of approximately 40%. Of the $14 million spent, 11.2 million of the spending was on two renovations that were ongoing when the pandemic hit. Additionally, we will be pushing up the drive, that expense line lower. We got some wins in 2020 and property tax expense was down 1.2 million or over 6% at our 39 comparable hotels. Another strategic goal was to solidify our balance sheet as much as possible and enhance liquidity. With plenty of capacity and debt markets wide open, we were using our credit facility to fund our Warner Center development. Given the potential liquidity crisis, it was important for us to obtain more permanent financing. We paused the development in the second quarter. Having already invested about $30 million into the project, we were able to fully fund the remaining costs with the construction loan. Additionally, we were able to amend our credit facility to gain full availability of the $250 million facility that allows us to make acquisitions if we see an opportunity. So on the liquidity front, although we are burning less cash than most of our peers, and even though our liquidity runway was longer than most of our peers, we felt that if the opportunity presented itself, we would be open to selling an asset if the pricing was strong so that we could further enhance our liquidity with the ultimate outcome being to adding flexibility down the road, again, to be opportunistic on the growth side. Doing this ultimately adds shareholder value long-term. This exact opportunity arose when we started talking with the San Diego Housing Commission, and in the fourth quarter, we sold our 192-room residence in Mission Valley to the San Diego Housing Commission for $57 million, or almost $350,000 per key, a very attractive 6.5 cap rate on 2019 results. As we look back on lodging transactions in 2020, this sale stacks up as one of the best of all premium branded sales in 2020. Last year was a difficult year across all fronts, but despite all that, I'm proud of our efforts and very appreciative of the sacrifices made by our employees across the country. Our teams at Chatham & Island have the experience to persevere through these situations and our achievements in a pretty dire year are noteworthy. We certainly believe we've made some important strides to protect shareholder value now and provide flexibility to add value down the road. I think we can all say we're looking forward to better days in 2021. From a lodging perspective, booking visibility remains days and maybe a couple of weeks ahead, not a month or months in advance. Leisure travel remains the best segment in the industry, and weekends are the strongest days of the week. Through the first eight weeks of the year, Friday-Saturday occupancy is 51%, about 15% higher than the other five days of the week. Our ADRs are slightly higher on the weekend. President's Day weekend was particularly strong with occupancy of 60%. March trends seem to be picking up steam Again, led by leisure travel, and I will say we are seeing a small bit of business demand pick up in various markets. With the continued vaccine rollout and the continued decrease in hospitalizations and death rate, we do expect leisure travel will lead us out of the pandemic and expect that business travel will gradually come back as we make our way through the calendar year. Although we haven't been able to reach cash flow break-even, we still estimate we need to achieve REVPAR of approximately $75 there. I firmly believe that given our portfolio attributes, our industry-leading platform with Island, our ability to appeal to the diverse customer base that our room type and hotel type allows, we believe we'll be able to grow occupancy and rates faster than most of our lodging repeaters and return to 2019 levels much sooner. Our liquidity is strong, our balance sheet is strong, and we have no looming debt maturities. Our teams have an incredible amount of operating and corporate experience through good times and down times, and we are enthusiastic about what lies ahead for Chatham and our investors. With that, I'd like to turn it over to Dennis.