Chatham Lodging Trust

Greetings. Welcome to the Chatham Lodging Trust First Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow a formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. And please note that this conference is being recorded. I will now turn the conference over to Chris Daley, President of DG Public Relations. Thank you. You may begin.

Thank you, John. Good morning, everyone, and welcome to the Chatham Lodging Trust first quarter 2022 results conference call. Please note that many of our comments today are considered forward-looking statements as defined by federal security 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 filings. All information in this call is as of May 4, 2022, 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 2022 first 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. I appreciate everyone joining us this morning for our call. As I look at these results, I'm very proud of our teams at Chatham & Island, who did a fantastic job during the pandemic, maximizing revenue and operating profits while minimizing cash burn and executing key corporate transactions. that have enhanced our financial position. In fact, for the eight quarters just ended, we produced positive corporate cash flow before principal amortization and CapEx. As we sit here today, the business traveler is coming back across the country and our five primarily tech-driven hotels in Silicon Valley and Bellevue, which historically comprise 25 to 30% of our EBITDA, are seeing demand accelerate rapidly. As a reminder, these five hotels generated EBITDA of $35 million in 2019, but only a mere $7 million in 2021. This recovery is going to be a major driver behind our outperformance over the foreseeable future. Strategically, we're excited to announce that we're expected to close within the next week on the sale of four hotels, comprising 537 rooms for approximately $80 million and two separate transactions. These older hotels are on average 27 years old and have produced RIPPAR below our portfolio average. In 2019 and 2021, they produced RIPPAR of $96.59, below our 2019 and 2021 portfolio RIPPAR by 28%. and 32% respectively. Additionally, two of the four hotels were set for renovation in the next 12 months, and we believe we could put that money to better use buying assets. Two of the four hotels are going to be converted for multifamily use and would represent our second and third hotels sold over the past two years at a very low cap rate for the purposes of converting to apartment use. The proceeds will be used to pay down most of the borrowings on our $250 million credit facility, which will have only $30 million outstanding when they close. When we exit the waiver period on our credit facility after the second quarter, we will have the full capacity available and we'll have a substantial number of unencumbered assets available to provide flexibility to acquire hotels and address, at the right time, a very manageable hundred and fourteen million dollars of fixed rate debt securities excuse me debt maturities next year we sit here today with substantial dry powder a refined portfolio given the sale of the four hotels and a platform that can grow quickly over the past two years we did a great job putting heads and beds pivoting away from the higher rated business traveler and During the pandemic, since mid-February, we are seeing now a substantial acceleration in business travel. And just like we did on the downside, on the upside, pivoting again and pivoting our sales and revenue management efforts to capture the higher-rated traveler. Our message to our operating team is to push rates. We are in a heightened inflationary environment and have the opportunity to push higher rates. Our opportunity is much better than it was in the years leading into the pandemic when supply growth was significant and there was resistance to any kind of rate growth. Previously, we stated our belief that the business traveler was going to return with a vengeance and never bought into the belief that business travel is permanently impaired. I've lived through a lot of cycles here and heard for many years that how online meetings were going to be the downfall of the business traveler and many other external events that were supposedly going to really cut down business travel. People still like to travel. That's clearly evident in everybody's numbers. They like to meet in person. They like to do business in person. And now we've got two new kinds of travelers to the space. the bleezer or digital nomad traveler, and the people who live away from the office and are being asked to come back to their office regularly. And for those new travelers, I think they're going to be staying for more than one or two nights. That's already evident. And extended stay hotels, the majority of the hotels we own, should be the primary beneficiary of this new added demand. We're becoming more and more confident with respect to this outlook as we see weekday demand really start to accelerate. Weekday occupancy is the best indicator of business travel and it rose significantly through the first four months of the year. Weekday occupancy was 48% in January before jumping to 60% in February, 68% in March, and 72% in April. April weekday and full month occupancy of 73% are both the second highest levels since the start of the pandemic. April 2019 weekday weekend occupancies were both 82%. So given where we are in the recovery of the business traveler, we are already in a very good position. With the sharp uptick in occupancy, ADRs are also advancing quickly. A sign of great things to come, our 2021 April ADR of $161, excuse me, that's 22, is only $4 shy of our 2019 ADR of $165. We've been encouraged by the return of some tech-related group business in Silicon Valley and Bellevue, Washington. Offices have reopened, which will be the impetus to travel both in and out of these markets. In Silicon Valley, Q1-22 witnessed office vacancy decline for the first time in two years, falling to 10.6%. And that decline in vacancy is notable given that 9.5 million square feet of new office product was delivered to the market over the same period. Office developers and owners remain bullish, anticipating the great return for the region's highly profitable and growing economy. tech companies. Revpar at those five hotels has basically been $70 to $75 for the better part of the last year, but April Revpar is up 45% over the first quarter figures. So that business is coming in fast. More great news out of the Valley and Bellevue. We can confirm that later this month, tech companies such as Meta, Apple, eBay, and T-Mobile are going to be hosting in-person internships this summer. In 2019, as we've said before, this business accounted for over $7 million in revenue. This year, we allocated more rooms for this business, knowing that the return of the international business traveler and long-term consulting business in these markets would be gradual over the course of the year. At this point, We have approximately $15 million in intern revenue on the books for the summer. ADRs are approximately $200 compared to approximately $220 in 2019, so pretty close there. An added benefit is that our operating margin on this business is very high as there's limited room servicing as part of the arrangement. We expect the second half of the year to be especially strong in these markets. and will be an impetus to drive our portfolio growth higher relative to our peers. We're seeing increased demand in many of our other primary business travel-driven markets, such as Washington, D.C., the Northeastern U.S., Dallas, and especially Austin, all posting sizable gains here lately. In Austin, where we acquired two hotels last year, red power was about $115 in the first quarter, And in April, that's jumped to $140. Our two hotels at the domain should be top performers as that market is benefiting from tech company expansions and relocations to the area. I want to quickly point out how things are going at our recently opened Home 2 Suites in Woodland Hills Warner Center. After opening in late January, it's ramping up nicely and latest trends are very encouraging there. April occupancy was over 63%, and ADR was approximately $185. We've seen occupancy exceed 90%, and ADR is in excess of $200 on certain nights already. This area is in the midst of a massive growth spurt. More great news in the market. It was announced about a month ago that the Super Bowl champion Los Angeles Rams, closed on the acquisition of a 38-acre site just a few blocks from our hotel that's going to be turned into a mixed-use development, which will include the team's headquarters, host off-season training activities, as well as other football events during the year and welcome fans all year round. Our hotel, that Home 2 Suites brand, is perfectly positioned for the kind of business and demand that this development should generate. We're real excited about that. As I mentioned on our last call, we're confident in the ultimate recovery and trajectory of that recovery in our portfolio and want to see continued improvement, as we expect we will, in the business traveler, especially in our tech-driven markets before reinstating the dividend. Silicon Valley and Bellevue and other primary business travel markets are rebounding and increases our confidence in generating consistent and distributable cash flow. We've historically targeted paying out 100% of taxable income, and when we look at any potential distribution, of course, we'll carefully analyze our taxable income for the upcoming years while also considering use of taxable deductible NOL carry forwards that came as a result of the pandemic. With that, I'd like to turn it over to Dennis for a little more color.