Chatham Lodging Trust

Good morning and welcome to the Chatham Lodging Trust second quarter 2023 financial results conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Chris Daly, President of DG Public Relations. Please go ahead.

Thank you, Gary. Good morning, everyone, and welcome to Chatham Lodging Trust's second quarter 2023 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 filings. All information in this call is as of August 2, 2023, 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 2023 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 Wagner, Senior Vice President and Chief Financial Officer. I'm going to turn the session over to Jeff Fisher. Jeff?

Hey, thanks, Chris, and good morning, everyone. I certainly appreciate everyone being on the call this morning with us. For the fifth consecutive quarter, we've outperformed the industry RevPAR growth with RevPAR growth over 5% for the quarter, driven by pretty equal increases in both occupancy and ADR. Relative to 2019, RevPAR was down slightly, just a little more than 1% for the quarter. In fact, versus 2019, RevPAR has sequentially improved each month of 2023 through June. Relative to 19, RevPar improved each month of the quarter, with RevPar down 3%, 2%, and 1%, a key indicator that business travel continues its recovery across the country. This is particularly impressive given the loss of most of the intern business in Silicon Valley, Bellevue, Washington, and also in Austin, Texas. The loss of intern business impacted performance for about one-third of the second quarter, and will impact two-thirds of this quarter and will make third quarter comparisons to last year in 2019 tougher. Having said that, interns will return in much larger numbers next year for tech companies, which should provide outsized growth next year and beyond for us. Portfolio occupancy rose to 79% in the quarter despite the intern loss, which is up from 77% last year and not far off the 2019 occupancy of 83%. Within the week, weekday occupancy reached 78% in the quarter and June weekday occupancy of 81.3% was the highest level since the pandemic. ADR was up $3 over last year and up $6 over 2019. Again, looking at the weekday business traveler, weekday ADR was up $6 over last year, and the June weekday ADR was $186. That's the third highest since the pandemic and only slightly behind June and July 2022 ADR of $187. ADRs continue to be pushed by our operators all days of the week. Interesting point, that is that last weekend's ADR for the company was over $200. Outside of our tech-driven markets, we really are seeing nice growth year over year with each of our top markets, other than, of course, the three tech markets, led by Washington, D.C., our coastal northeastern hotels, and Los Angeles, producing rev-par growth of 11 percent, 10 percent, and 7 percent, respectively. Those three markets account for over 25 percent of our EBITDA leisure travel remains strong with our leisure markets producing strong rev par growth in the quarter. We can look at Destin, Florida, up 8%, Portsmouth, New Hampshire, up 24%, and Anaheim, up 2%. Fort Lauderdale, up 14%, and Savannah, up 4%, with Portland flat, but opportunities are strong going forward. Driven by our 5% rev par growth, we were able to generate year-over-year EBITDA FFO and FFO per share growth. We delivered 5% FFO per share growth over last year, producing FFO per share of 43 cents compared to 41 cents last year. Our FFO per share of 43 cents exceeded consensus estimates of 40 cents per share. Operationally, we were able to generate operating margins of 49% flat to last year, and the 2019 second quarter and hotel EBITDA margins of 41 percent, just below the prior year and 2019 levels of 42 percent. The key driver on the expense side was holding hourly wages flat year over year. Interestingly, when you exclude the five tech hotels, margins were up 40 basis points to 2019 levels, again, shows you the inherent upside once those hotels start performing. With good flow-through, we were able to generate corporate-level cash flow before CapEx and common dividends of $22 million and a quarter, up approximately 10% over last year. With the excess cash flow, we were able to repay a $20 million maturing mortgage. With only $70 million of maturing mortgages left, Between now and June 2024, we're in an excellent position to address all remaining maturities this year and next year. We continue to pursue external growth opportunities, though we must, of course, be mindful of our cost of capital while assessing in-place cash flow yield and growth projections on potential acquisitions. With the significant rise in interest rates, brands becoming more focused on renovation requirements, and a bunch of maturing debt occurring throughout the industry, we believe there'll be some opportunities to acquire hotels that fit into our high-quality portfolio in the back half of this year and certainly into next year. With 39 hotels, we can acquire one or two hotels, and it significantly moves the needle with respect to EBITDA and FFO growth. The good news is we have substantial internal growth upside, as I said, inherent in our existing portfolio with the ultimate recovery of Silicon Valley and Seattle, as well as the return of the intern business in Austin. If those hotels reach 2019 RevPAR in 2024, that would generate incremental portfolio RevPAR growth of approximately 7%, an incremental FFO per share growth of 32 cents. If you include the Austin intern business, that will add another 50 basis points to RevPAR and FFO per share of another two cents. So, including all those hotels, those seven, if you use current consensus estimates for 2023, adjusted FFO per share would increase almost 34 cents per share which alone would represent an almost 30% increase. That certainly is substantial upside as you look at our company and look forward. Before turning it over to Dennis, I want to spend a few minutes updating everyone on what we're seeing currently in Silicon Valley and Seattle. Obviously, the loss of the intern business hurts our current year results, especially this quarter. But coming off the massive layoffs last year and early this year, big tech is now posting big profit numbers. All of the big tech is talking about investing significant dollars into CapEx and product development. International travel continues to improve with deployments in San Francisco, San Jose, and Seattle at their highest level since the pandemic. Seattle deployments are actually up over 2019 levels. Again, encouraging news and a good data point to show underlying trends are getting better and better. International occupancy at our two Sunnyvale hotels was approximately 22% in the second quarter, with most of the demand coming from Korea, China, and India. General business travel demand trends are encouraging in the Valley, We're experiencing an uptick in demand from TikTok. Electric vehicle-related lodging demand continues to grow, of course. And we've recently seen group requests with an increase on size now hitting into the hundreds for late Q3 and early in the fourth quarter. Though the absolute attendee numbers for Apple's fall programs are down to 2019, They are occurring and we should hopefully see some demand out of that. Of course, part of this development relates to AI, which will remain a significant growth opportunity across all the industries. Every tech company is assessing and developing generative AI tools into their operations. NVIDIA, ServiceNow, and Accenture just announced a partnership to accelerate AI development further. And additionally, reshoring chip manufacturing and semiconductor tech investment is going to be a huge tailwind for tech. And in support of this movement, just two months ago, Applied Materials, which has forever been one of our top five accounts in Sunnyvale, announced plans to build a $4 billion, 180,000 square foot R&D facility in Sunnyvale, just blocks from our two Sunnyvale residence inns. The facility will be a state-of-the-art facility for collaborative innovation with chip makers, universities, and ecosystem partners. Some of those partners include AMD, NVIDIA, and Western Digital, all customers of ours. We've owned these hotels for many years, and we know that these companies are continually evolving, investing, and developing the world's greatest technologies. As these technologies evolve and these companies continue to grow, our hotels, as they always have in the up cycle, will recover and our earnings will accelerate rapidly. With that, I'd like to turn it over to Dennis. Thanks, Jeff.