Chatham Lodging Trust

Greetings, and welcome to Chatham Lodging Trust's second quarter 2022 financial results conference call. At this time, all participants are in 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 the conference over to your host, Patrick Daly, Executive Vice President of DG Public Relations, LLC.

Thank you, Joe. Good morning, everyone, and welcome to the Chatham Lodging Trust second quarter 2022 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 August 3rd, 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 insights into Chatham's 2022 second 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 Fisher. Jeff?

Thanks, Patrick. I appreciate everyone joining us this morning for our call. I hope all of you have had a chance to take a look at our earnings release. It certainly was a great quarter for us on many fronts. First, REVPAR has really jumped in recent months. Second quarter REVPAR was up 50% over last year and June REVPAR of $158 exceeded June 2019 RevPAR of $156, the first month since the start of the pandemic where RevPAR exceeded 2019 levels. June RevPAR was up a strong 19% over May's, driven by a combination of incremental leisure travel and a more meaningful return of the business traveler, especially in our five hotels in the tech-reliant markets of Silicon Valley and Bellevue, Washington. Next, second quarter operating margins of 50.1%, I think a great overall result. We're up 60 basis points over the 2019 second quarter, which is especially impressive when you consider that rev par of $138 was still $8 below the 2019 second quarter. Historically, we produced the highest operating margins of all lodging REITs and we are well on our way to producing those again. The second quarter operating margins would be our third highest second quarter margin since our IPO 12 years ago. We know there is even more margin upside in the portfolio, particularly as ADR continues to increase, and it's encouraging that we are within earshot of an all-time high set seven years ago, given all the incremental costs we've absorbed over the years from a labor and benefits perspective. As a result of the structure, we were able to generate free cash flow of over $20 million in the quarter, almost double our free cash flow from the entirety of 2021, and more than five times higher than our 2021 second quarter, and up over seven times over our first quarter results. Lastly, we closed on the extremely successful sale of our four hotels for $80 million at a 2019 cap rate of approximately 6% and a 2021 cap rate of 2%. The sale of these four hotels certainly positions our balance sheet to be aggressive on the acquisition front when the time is right. Structurally, I'm very pleased with where we stand today. We are exiting our credit facility covenant waiver period and our financial position is healthier than it has been in a decade. We have a mere $15 million outstanding on our $250 million credit facility and project that'll be reduced to zero by the end of the year. Additionally, we'll have 24 unencumbered assets available to provide liquidity to acquire hotels and address at the right time a very manageable $114 million of fixed-rate debt maturities next year. Before turning it over to Dennis, I want to talk about some developing trends. Momentum has been building all year within our portfolio, and I think this is an important point. Since the start of the year, weekday and weekend occupancy as well as weekday and weekend ADR have grown sequentially each month of 2022. As most experienced, the first week or so of July was a little soft given the timing of the July 4th holiday. Certainly not indicative of our trend because for the last 21 days of July, occupancy was 85%, ADR was $194, and REVPAR was $165. All would be COVID area highs. Interesting. Not only would this rev par be 4% higher than last month, as well as July 2019, this rev par of $165 would be an all-time July high for Chatham, $5 higher than our previous record of $159 set in 2018. These trends further support our belief that the business traveler is returning and adding to a very strong leisure base. We're seeing increased demand in many of our primary business travel driven markets, such as Washington, D.C., the Northeastern U.S., Dallas, and especially in Austin, all posting sizable gains again this quarter. But for us, as we've said many times, it's the resurgence in Silicon Valley and Bellevue, Washington, that really helps pop our performance and increases our confidence for a promising outlook going forward. Since the intern business returned this year, starting in late May, and the business traveler is picking up steam overall, our performance in these markets is nearing pre-pandemic levels. At the five hotels, June REVPAR was $192 on occupancy of 86% and ADR of $223. which is down 10% from June 2019 REVPAR of $213 on occupancy of 88% and ADR of 241. July REVPAR finished a strong $207, which was up 12% over June's REVPAR and only off 2% to July 2019. So we're really coming along there. Looking past the summer, we're encouraged by what we're hearing from our teams in these five hotels. Our key accounts continue to reach out for blocks of rooms in the fall, and that list includes common names known by everybody and our long-term customers, Samsung, Google, Apple, Applied Materials, Amazon, and the rest. From a retail perspective, although our booking window is relatively short-term, we are seeing retail bookings ahead of 2019 levels. And although it isn't huge in terms of dollars, it is the first time we've been up in quite some time. International travel is slowly gaining traction. And again, even though total revenue dollars are not significant, the list of countries from which we're seeing guests has grown from 15 to 25 countries in July. Lastly, we're starting to see the bell curve with Monday to Wednesday, Thursday and Thursday beating the rest of the week. Air travel into San Francisco and San Jose is starting to rebound and has a lot of upside to come. Domestic deployments are down about 25% from 2019 levels still and international deployments are off about 40%. In Seattle, both domestic and international deployments are off 15 and 20% respectively, but with the lessening of restrictions for international travel and the return to office just starting to pick up steam in these lagging tech-driven markets, we certainly expect business travel to continue to gain momentum. That just translates into more upside for Chatham. In Austin, where we acquired two hotels last year, demand continues to strengthen and is benefiting from tech company expansions and relocations to the area. Our two hotels at the domain ran occupancy of 89% in the quarter, and Revpar at the residence and in the town place suites were $154 and $131, respectively. On the operating side, these two hotels generated operating margins of 58%. pretty strong. Washington DC, which was previously a pretty dormant market where we managed to put heads in beds, came back to life in the second quarter with our two residents ends and Tyson's corner and foggy bottom seeing occupancy of 87% and the embassy suites in Springfield, Virginia, just outside of DC boosting occupancy above 75%. Importantly, the big driver of the growth was ADR. with average ADR gains of 55% at the three hotels. Needless to say, with these kind of numbers, we believe the future is bright. People still like to travel. People like to do business in person. And we've got some new kinds of travelers to the space, the digital nomad traveler that we've talked about, people who live away from the office and are asked to come back to their office regularly and with return to office allowing more flexibility, employees can get away for long work weekends and mix business with leisure, as we've seen. These new travelers will be staying for more than one or two nights. They've got the flexibility to do that, and our extended stay hotels, which of course is the predominance of our portfolio, the majority of our hotels are extended stay, and we believe we will be the primary beneficiary of this new added demand. So we remain confident in the ultimate recovery and trajectory of the portfolio, and this was the first quarter since the pandemic began where our most significant markets started to show strong gains in either ADR occupancy or both. Adding to great top line performance, of course, is our ability to generate very strong operating margins very high flow through of that top line, higher than 2019, and we believe we will take same store margins even higher, which means our free cash flow will meaningfully grow. Our balance sheet, as I said, is in great shape. I think we're poised to outperform. With that, I'd like to turn it over to Dennis for a little more color.