Chatham Lodging Trust

Good day and welcome to the Chatham Lodging Trust third 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 touchtone phone. 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, Sarah. Good morning, everyone, and welcome to the Chatham Lodging Trust Third 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 November 2nd, 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 insight into Chatham in 2023, Third quarter results allow me to introduce Jeff Fisher, Chairman and 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?

Yeah, thanks, Chris, and good morning, everyone. I appreciate everyone being on the call this morning with us. We know it's a busy morning out there in earnings land. It was a successful quarter, given our earnings beat, but also an interesting quarter because Given the unusual and difficult comps created by the substantial cancellation of the 2023 tech intern programs, as we've talked about numerous times in Silicon Valley, Bellevue, Washington, and Austin, Texas. In the third quarter alone, the loss of intern business meant we were missing approximately $8 million of room revenue and $5 million of operating profit. As we all know, starting about this time last year, tech companies started announcing massive layoffs, hiring freezes, and cost-cutting initiatives. Less than six months later, those same companies were announcing significant investments in artificial intelligence, chip manufacturing, and reshoring of technology manufacturing back to the U.S. As previously noted, 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. Today, general business travel demand trends remain encouraging in Silicon Valley and Bellevue. Passenger traffic into San Jose has leveled off versus last year, while domestic and international travel continues to improve at SFO and SeaTac in Seattle. At SFO, domestic deployments are down 17% still to 2019 versus down 26% last year with international travel much improved. only down 6 percent to 2019 versus down 26 percent last Q3. At SeaTac, domestic passengers are down only 1 percent to 2019 versus down 10 percent last year. And international passengers are up 2 percent to 2019 versus down 16 percent last year. When you look at international occupancy at our two Sunnyvale hotels, those are the two big hotels, was 25 percent in the third quarter versus 20 percent in 2019. So, good improvement there. After getting through the year-over-year intern-tough comps, demand has been encouraging. At the five primarily tech-driven hotels, RevPAR was up approximately 11 percent in October, mostly due to demand or occupancy, and we are forecasting RevPAR to grow about that same amount for the entirety of the fourth quarter. Market demand growth is pivotal, of course, for lodging owners and operators to be able to drive rate higher as we move into next year. We've owned these hotels, as you know, for many years, and we know that the year-in-turn programs will come back and that these companies are continually evolving, investing, and developing the world's greatest technologies, That certainly isn't going to change. At some point, we'll get back to 2019 levels and ultimately exceed those levels. And of course, that just means our internal growth prospects continue to be very strong. For 2023, we are projecting just over 19 million of hotel EBITDA from these five hotels. And as a reminder, that's 16 million short of 2019 levels still. That $16 million of incremental hotel EBITDA equates to $0.32 of FFO per share, a massive increase over our current FFO per share run rate. So that shows you where the upside is. Switching gears back to our third quarter performance relative to 2019, REGPAR was down less than 2%, though ADR was up 5% to 2019, and occupancy was impacted, of course, down by the tech hotels. Excluding those five hotels, RevPower would have been up 7% versus the 2019 third quarter. Encouragingly, this 7% increase accelerated from last quarter's growth of 5% versus 2019. Portfolio occupancy was a strong 80% in the quarter, down from 81% last year and 85% in 2019. and within the week, weekday occupancy was 78% in the quarter, and June weekday occupancy of 81.3% was the highest level since the pandemic. ADR was off $3 over last year, but up $9 or 5% over 2019. Given our reliance on the business traveler here, I want to compare performance versus 2019 When we had a lower concentration of intern business, weekday occupancy was 78% in the quarter, and weekend occupancy was 82. Both measures down to 2019. Weekday ADR was $181, and weekend ADR was $192, which represented increases of 2% and 15% over 2019 levels. And weekday REVPAR was $142, and weekend REVPAR was $158 versus 2019. So weekday REVPAR was off about 5%, which is the lowest quarterly variance this year. And additionally, as we've noted, October performance has been quite strong with portfolio REVPAR growth of 2% and about 1% over last year and 2019. Operationally, we were able to generate margins of 45%, down 50% from last year. But the brunt of that loss, as we've discussed before, was due to our five tech-driven hotels, which again shows you the upside as those hotels recover. With the intern business specifically last year, and the requirement to clean rooms was once a week, if that, the margin differential should definitely abate as we move forward. We continue to generate significant cash flow, over $20 million in the quarter, and have been utilizing the excess cash flow after dividends and CapEx to repay a portion of our maturing debt. During 2023, we've repaid $155 million of maturing or amortizing debt Our balance sheet is strong, and with approximately $332 million of liquidity, we're well positioned to address all remaining debt maturities next year and 2025. We continue to pursue external growth opportunities, though, of course, we must be mindful of our cost of capital while assessing in-place cash flow yield and growth projections on potential acquisitions. With a significant rise in interest rates, brands becoming more focused on renovation requirements, and a bunch of maturing debt occurring throughout the industry as we look forward, we believe there'll be some opportunities to acquire hotels that fit into our portfolio. We'll continue to seek investments that allow us to add some external growth to supplement the massive internal growth that will come from the continued recovery of our hotels in Silicon Valley and Bellevue. As you know, we don't provide forward-looking guidance, but I do want to address our dividends. We currently pay seven cents a quarter and stated upon reinstatement of the dividend last year that we would make a fourth-quarter true-up dividend payment based on our operating results for 2023 and our expected usage of our NOLs. Based on our internal projections, we expect our fourth quarter dividend will remain at $0.07, and we'll continue to evaluate our dividend, of course, on a quarterly basis. With that, I'd like to turn it over to Dennis.