Chatham Lodging Trust

Greetings, ladies and gentlemen, and welcome to the Chatham Lodging Trust third quarter 2021 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. Should anyone require operator assistance, please press star zero on your telephone keypad. It is now my pleasure to introduce your host, Mr. Chris Daly. Thank you, sir. You may begin.

Thank you, Jen. Good morning, everyone, and welcome to the Chatham Lodging Trust third quarter 2021 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 subjects to risks and uncertainties, both known and unknown, as described in our most recent Form 10-K and other SEC filing. All information in this call is as of November 4th, 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 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 2021 third quarter results, allow me to introduce Jeff Fisher, Chairman, President, and Chief Executive Officer of 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?

Thank you. Morning, everybody. Thanks, Chris. And we appreciate everyone who's joining us this morning for our call. After having a very good second quarter when we became the second hotelry to be cash flow positive, We produced a great third quarter that brought our highest REVPAR since the start of the pandemic and a significant increase in free cash flow after all debt service preferred dividends and before CapEx. Our third quarter free cash flow of $10 million was two and a half times greater than our second quarter cash flow of $4 million, and that is only on a $20 or 22% increase in REVPAR over the second quarter. We are now positive cash flow for the year and expect to remain so for 2021. Our cumulative cash burn since the start of the pandemic is a mere $25 million, or about 50 cents per share. As we move to the end of this year and into next year, many of our peers are still gonna be burning cash, but that is not gonna be the case for us. We'll come out of the pandemic healthier than most of our peers, When EBITDA recovers, many probably don't realize that our debt-to-EBITDA ratio is going to be lower than it was heading into the pandemic, to the tune of one and a half to two full turns lower, excluding the preferred, and a half to a full turn lower when you include the preferred. I'm real proud of that, and I think that bodes well for us and our growth going forward in 2022. Coming off a very successful $120 million preferred equity raise at the end of the second quarter, we're in very good shape from a capital and leverage perspective. Our leverage ratio was approximately 31% at the end of the third quarter, down meaningfully from 38%, as I indicated just a year ago. Additionally, our liquidity now stands at approximately $200 million. almost double our liquidity from the end of the 2020 third quarter. Furthermore, we just completed an amendment to our credit facility that keeps key terms unchanged and simply extends our maturity by an additional year to 2024. And as such, we have no debt maturities in 21, 2022, and only $115 million maturing in 2023. We've made fantastic strides solidifying our balance sheet and have the confidence to go on offense and grow our portfolio. In early August, we invested $71 million to acquire two incredible premium-branded extended stay hotels adjacent to the domain in Austin, Texas, a market that we all know is absolutely thriving and will generate meaningful REVPAR growth and EBITDA growth for us going forward. It also furthered our exposure to premium branded extended stay hotels that we believe will continue to be brands of choice as we emerge from the pandemic. We still have an appetite and the financial flexibility to acquire more hotels. Cap rates for acquisitions remain close to 2019 valuations, And it's a difficult environment to find the kind of assets that fit, I think, our very strict criteria, particularly since we're trying to, again, increase our exposure even further to extended stay hotels. But we are looking at a fair amount of deals, and I would expect to be successful in that endeavor over the next 6 to 12 months. By the way, the two Austin acquisitions, the Residence Inn and the newly opened Town Place Suites, are doing extremely well and outperforming our underwriting results. Our operations team at Island has done a fantastic job delivering those results. The two hotels had occupancy of over 80% in September and 90% in October. The town place suites, which just opened in June, saw October occupancy of 89%, ADR of $125, and rev par of $111, a premium to our portfolio performance. They say that new hotels have to ramp up over 12 to 18 months, but we've certainly accelerated that time frame, I'd say, more than a little bit. So we're real proud of those acquisitions and their performance already. Speaking of a quick ramp up, our ramp up expectations that are soon to open Home 2 Suites out in Woodland Hills is not 12 to 18 months. The hotel is expected to open this quarter. We just came back from there. It's a beautiful hotel and It's going to have the best rooms in the market by far, the best public space, I think the best amenities, and even outdoor experience. We think that there's going to be very strong demand for this extended stay hotel once we open the doors. We look forward to talking very specifically about those results on our next conference call. As we spoke on our last earnings call, we expected REVPAR would modestly decline after July before rebounding in October, reflecting the seasonality that we normally see in our portfolio. Between kids returning to school, some offices reopening across the country, and the Delta variant spiking up corona cases across the country, it was certainly not going to be up, up, and away after July. July RIVPAR was our peak RIVPAR since the start of the pandemic at $113. And as we anticipated, RIVPAR slipped a bit to $104 and $103 in August and September before climbing higher again to $107 in October. Looking to the remainder of the fourth quarter, just like the third quarter, we expect RIVPAR to seasonally moderate especially given the Delta spike certainly seems to be behind us. So we'll have a normal seasonal moderation for November and December and then get started again as we move through January and February. From 2015 to 2019, for example, REVPAR dipped 18%. from October to November, and another 19% from November to December, perfectly normal seasonal adjustments. Leisure travel continues to be the driver of performance, but we are seeing demand for healthcare, government, military, as well as the business traveler. ADRs have remained steady at approximately $150 from July through October, and we still believe that the business traveler will continue to expand their travel patterns, and those travelers will be looking for cost-conscious accommodations that in today's economy allows for a longer stay than one or two nights. Our extended stay hotels suit that perfectly and frankly suit the new traveler that's on the road that has more flexibility about where they can work and where they can work from. Again, we think we're perfectly positioned with our extended stay focus. Compared to 2019, our monthly red part during each month of the third quarter was down about 26%, so we didn't really see any meaningful drop-off, which affirms the seasonality that we typically see in our portfolio. Also, encouragingly, our portfolio outperformed the industry's sequential decline over the past few months by approximately 500 basis points, From July to August, industry rev par was down 13% for the industry versus 8% for us, and then industry rev par from August to September dipped 6% while we were down only 1%. In October, our rev par grew 4% from September, and we expect to continue to outperform the industry as we benefit from our appeal to a multitude of demand generators. As the recovery continues and the business traveler does come back, we'll continue to get more than our fair share of revenue because we've got the highest concentration of extended stay rooms, as I mentioned before, of all lodging REITs at almost 60%. And the business traveler is going to get the most value and flexibility in our kind of hotels. Our upscale extended stay hotels provide us the flexibility during periods of growth or weakness to diversify our customer base and adjust the mix accordingly to maximize revenue. That's a thesis that we've espoused for decades and followed. Among our top markets, our coastal northeastern hotels are absolutely killing it, led by our Hampton Inn in Portland, Maine, which Jenner hated Rev Parth, of $303, up 10% over 2019's, with ADRs of almost $330, up 15% over 2019. Its rent part was over $100 higher than the second highest hotel in our portfolio, the Hilton Garden Inn in Portsmouth, New Hampshire. Our suburban New York, San Diego, Los Angeles, and Charleston markets also produced solid results for the quarter, and Denver, Dallas, and Houston produced above average growth year over year during the quarter. So it's good to see those markets coming back to life. As I mentioned previously, our Austin hotels are off to a great start under our ownership. So when you look at our portfolio moving forward into 2022 and 2023, I'm really excited about the internal growth upside. because one thing that clearly stands out is that our strong performance today has been accomplished with little contribution from our technology-driven markets, particularly Silicon Valley, which is about 25% of our annual EBITDA, and Bellevue, Washington. Our 2019 hotel EBITDA at those five hotels was approximately $35 million, and those same hotels are estimated to produce between $5 and $6 million only of hotel EBITDA in 2021. That's something I really want you to take note of because we're producing results that are as good or better than the industry and all of our peers without the benefits of our most important market that constitutes 25% of our annual EBITDA. We all know that those tech companies that when COVID and when Delta spiked at the end of the summer and they pushed back all their office openings that we were expected to have in October and September to the beginning of 2022, we know that as that occurs, these markets are going to come back strong with a vengeance. And we certainly look forward to that lift for 2022. I'd also be remiss without mentioning the great job by our operating and management teams who've been focused as ever on delivering strong operating profits. Our third quarter margins grew 25% over the same quarter last year to 45%, only one point below our 2019 margins of 46 percent, despite REVPAR being approximately $30 lower. We are going to remain hyper-focused, like we always are, on driving margins higher and expect that same-store margins will be higher on similar levels of REVPAR. No REED is better than us at regularly delivering those kind of results. I'm going to close my comments by reminding everyone that our relative strong performance to date and expected performance moving forward again is going to be significantly enhanced next year by two key factors. We expect tremendous upside in our tech-driven markets, and we're going to be generating meaningful incremental cash from both of our Austin acquisitions and the pending opening of our brand new home two suites at Woodland Hills, which we think will ramp up very quickly also. That market and the star reports from that market are strong. So when we combine this great upside with our solid capital structure that I think we've done very well with during the pandemic and suffered very little dilution through that period of time, we're well positioned to deliver some outside growth and value to our shareholders.