Chatham Lodging Trust

Greetings and welcome to the Chatham Lodging Third Quarter 2024 Financial Results Conference Call. At this time, all participants are in listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Chris Daly. Thank you. Chris, you may begin.

Thank you, Julian. Good morning, everyone, and welcome to the Chatham-Rodding Chess Third Quarter 2024 Results Conference Call. Please note that many of our comments today are considered forward-looking statements to define 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 7, 2024, 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 contains 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 2024 third 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 Redner, Senior Vice President and Chief Financial Officer. Let me turn the session over to Jeff Fisher.

Jeff? All right, thanks, Chris, and I certainly appreciate everyone joining us this morning for our call. We've got some good news here throughout. Before I get into our quarterly results, I'd like to provide an update on some key corporate initiatives that we've been undertaking. First, we've entered into separate contracts to sell five hotels and are hopeful that those transactions close in this fourth quarter. when closed, will generate proceeds of approximately $80 million. The five hotels slated for closing are on average 23 years old. Among the six lowest-reg PAR hotels in our portfolio, they have forecasted 24 reg PAR of $101, and importantly, are in need of renovations within the next 24 months. We will use these proceeds to initially pay down debt, but ultimately make additional investments to accretively grow EBITDA and FFO. This recycling initiative will enable us to continue to add hotels in new markets or expand our presence in existing markets. We will continue to look at opportunities to sell assets and reinvest in hotels that enhance our portfolio quality and growth profile. Secondly, our liquidity is strong. We are at the lowest leverage levels in over a decade. We paid off another maturing mortgage in the quarter and have a mere $30 million of debt maturing over the next year. Additionally, we've added exposure to floating rate debt, and with rates expected to decline, we will be able to grow FFO. In fact, based on current borrowings outstanding, Our FFO increase is $2.6 million, or approximately 5 cents per share for every 100 basis points declined in SOFR. I'd like to spend a few minutes on our third quarter results, and you'll hear more detail from Dennis. We're quite pleased to report the EBITDA and FFO near the top of our guidance range. Importantly, our REVPAR growth continues to exceed industry and most peer performance. Our REVPAR growth of 2.1% when you take out the impact of renovations handily beat industry growth of 0.9%. We were able to deliver EBITDA and FFO at the upper end of our guidance range because our operating expenses were at the lower end of our expectations. We were able to limit our same-store GOP margin decline to only 40 basis points. And as we've said the last few quarters, employment and wage pressures are moderating with year-over-year wages up. only 3%, well below what has been experienced over the last five years, and our absolute GOP margins of 45% are strong. I think if you step back, what you really see here is the complete cycle change from the post-COVID environment, and I believe as you look forward, you will see those margins pop back up to some pretty strong levels. Third quarter REVPAR of $150 exceeded 2019 levels, marking the second consecutive quarter beating 2019 levels. And based on our current guidance, full year 2024 REVPAR should exceed 2019 levels for the first time since the pandemic. As most understand, the sluggish recovery in our five tech-driven hotels in Silicon Valley and Bellevue have caused us to lag 2019 levels up till now, but we are moving ahead. If you pull out the five tech-driven hotels... Earth power of $148 is up 7% compared to 2019, with ADR up a strong 14%, and occupancy off 6%, of course, mostly attributable to Silicon Valley. Let's talk about our five tech-driven hotels in Silicon Valley and Bellevue, which achieved third quarter rent power growth of 8% in the quarter and a whopping 14% in October. In the quarter, ADR rose 5% to almost $200, and occupancy rose 3% to almost 79%. We're really encouraged by the demand dynamics we're seeing in the markets, and as we've spoken quite a bit over the last few quarters, a lot of good things are happening in the market related to AI, computer chip initiatives, and re-office efforts by most of the big tech companies announcing the return to office that we've been waiting for. To give you some additional color on what's happening, just a week ago in Sunnyvale, our largest individual market with just about 500 rooms there, it was announced that Sunnyvale was selected as the site for the new CHIPS for America design and collaboration facility. The facility will be one of the flagship R&D facilities for the CHIPS for America initiative. Last month, Applied Materials acquired another site less than half a mile from our Sunnyvale to Residence Inn for about $100 million. Plans for that site have not been announced, but certainly will be beneficial to our hotel, and Applied Materials forever has been one of our top five accounts. Applied Materials previously announced $4 billion, 180,000 square foot R&D facility is expected to break ground shortly, and I know we're already doing business with folks involved in that facility's construction, whether they're consultants, architects, or otherwise. As a reminder, this facility sits about a mile from our two hotels. Within the last quarter, General Motors opened in Mountain View, a technical center to be a focal point for software development and innovation. It's located right in Silicon Valley, and of course we do have a residence in right in Mountain View. And it's certainly going to be beneficial overall to our hotel and the market. As previously mentioned, Intuitive Surgical, another one of our largest corporate clients in Sunnyvale, is also expanding its footprint, building another 1 million square feet of office and R&D. Industrial construction obviously has resumed, and we are pleased with what we see going forward. Looking across the remainder of the portfolio, business travel continues its steady growth across the country, and that certainly was proven not again this quarter. For us, with seven of our largest nine markets delivering their part growth in the quarter, our occupancy for the key weekday business travel days was 79% on Monday, 84% on Tuesday and Wednesday, and 79% on Thursday, all but Thursday up over last year. Weekday, ADI was up 2% in the quarter to $186. And weekend, ADI was down 1%. Just to finish up here in conclusion, we remain encouraged by the fact that our red-par growth continues to outperform the industry and most peers, and we still have the most internal growth upside as we look forward of other lodging REITs, given the recovery still available in those five tech hotels. Additionally, expense pressures, as I've said, have certainly lessened. Labor and benefit wages costs seem to be under control, and by that I mean reverting back to more historical, normal increases that we've experienced over the last five years, and we're hopeful that enables us to drive more. Finally, on the balance sheet side, we are an excellent financial condition, and we're positioned to meaningfully benefit from declining interest rates, and we've got the capacity and flexibility to continue to recycle capital, acquire hotels where they can really be a creditor to FFO, our earnings, and NAV. With that, I'd like to turn it over to Dennis. Thanks, Jeff. Good morning, everyone.

RevFar and our seven predominantly leisure hotels, which comprises approximately 20% of our third quarter room revenue, saw RevFar rise 0.7%, and that does exclude the impact of the Savannah Hotel that was under renovation for August and September. And within our leisure hotels, our best performer was the Hampton Inn Portland, Maine, with RevFar growth of 8% in the quarter. Our top five revpar hotels in the quarter were dominated by our three northeastern assets, led by our Hampton Inn in Portland, Maine, with revpar of $347. Our Hilton Garden Inn in Portsmouth of $273. That revpar was down 1% year over year. Followed by our residence in San Diego Gaslamp at $216. Then our Hilton Garden Inn and Marina Del Rey with REF PAR of $215. And lastly, our Hampton Inn and Suites Exeter, New Hampshire with REF PAR of 201. Post-quarter end, October REF PAR grew 6% with occupancy up 5% to 83% and ADR up 1% to 191. Interestingly, 30 of our 38 Copper Bear hotels produced positive REF PAR in the month of October. So again, just really broad overall strong trends in the portfolio in October. We're up for the first week of November. Not surprisingly, it's down about 4% due to the impact, obviously, of the midweek election. Breaking down our Silicon Valley hotels, within Silicon Valley, we have part of our two Sunnyvale hotels gained 13% in the quarter, driven by a 5% gain in occupancy to 80% in the 7% gain in ADR, $295. As Jeff discussed, a lot of good things happening in the Sunnyvale market with our key corporate clients, like Applied Materials and Intuit, Apple, TikTok. Versus 2019, these two hotels are covered slower than the other two, but the good news, obviously, is that they are growing faster than the rest of the portfolio. At our Mountain View Residence Inn, REF follows up 3% in the quarter to $174. That's driven by a 7% increase in ADR to $230 and a decline in occupancy of 4%. to 76%. We made the decision earlier this quarter and this summer to not take certain intern business at that hotel because they were looking at lower-rated business in the market, lower-rated hotel business in the market to stay at. In San Mateo, RevPAR rose 2% to $149, with gains evenly attributable to ADR and occupancy. For the second consecutive quarter, rev par exceeded 2019 levels. At our other cap-driven hotel, the residence in Bellevue, it produced strong rev par growth of 8% in the quarter to $184, again with an even split in ADR and occupancy. Occupancy at that hotel is 85%. Versus 2019, third quarter rev par is approximately 2% shy of 2019 levels. At our 38 comparable hotels, hotel EBITDA margins were only down 40 basis points, a pretty good result given low single-digit rev par growth. Moderating labor costs for the primary driver, wages for occupied room were only up 0.9% within our rooms department. and those are actually down 1.8% in the quarter. That decline is partly driven by increased productivity, given the fact that occupancy rose, while labor headcount declined by 1%. Benefit costs were up 18% in the quarter, and that's been a message obviously all year long, and that adversely impacted margins by approximately 60 basis points. As I mentioned in our release, at least based on preliminary estimates, for the first time in what seems like a really long time, we are hopeful that our benefit costs are going to be essentially flat year over year in 2025. Other key items that impacted our third quarter, 24 margins. Complementary breakfast costs were up 14%, and that impacted margins by approximately 20 basis points. Insurance has been up, again, kind of a consistent theme, obviously, with renewals on a calendar year basis, 20% year over year, and that also impacted margins by 20 basis points. And the good news, again, kind of on the renewal front, is based on preliminary expectations, is that that increase is going to be kind of in the mid-single-digit range across both forms of our insurance policies for our properties. Utility costs were up from that adversely impacted 20 basis points, and offsetting some of those increases were lower guest acquisition costs, primarily related to lower the program reimbursements that improved margins by approximately 80 steps in the quarter. During the third quarter, our other operating department's profits were flat year over year. Our top five producers of GOP in the quarter were led by our gas plant residents in with $2.9 million. The 11th straight quarter, it's led our portfolio, followed by our incredible Hampton Inn Portland with GOP of $2.5 million, which was up approximately 10% year over year, and followed by another great quarter at our residents in Bellevue with GOP increasing 15%. to $2.4 million. And then rounding out the top five are Sunnyvale, two residents in, and our seasonally strong Hilton Garden Inn Portsmouth with approximately $1.6 million of GOP each. At our five tech-driven hotels, we generated really strong hotel GOP margins of 50% in the quarter, with GOP up approximately 6% over last year. With respect to capital expenditures, we spent $6 million in the quarter, $25 million year-to-date. Our budget for 2024 is $37 million. We do expect... We're going to come in under that at about $34 million for the year. A renovation of the courtyard Dallas-Addison commenced in July and was completed in the third quarter. A renovation of the Spring Hill Suite Savannah commenced in August and will be completed in the fourth quarter. A renovation of the residence in Bellevue, Washington, will commence in the fourth quarter and be completed in the 2025 first quarter. And additionally, the renovation in Hilton Garden in Portsmouth, New Hampshire, scheduled for early 2025. We are commencing that this month to get into some slow periods, and that will commence here shortly soon. With that, I'll turn it over to Jeremy.

Thanks, Dennis. Good morning, everyone. Chatham's Q3 2024 hotel EBITDA was $32.2 million. Adjusted EBITDA adjusted FFO was $0.35 per share. We were able to generate a GOP margin of 44.5% and hotel EBITDA margin of 37.1% in Q3. GOP margins for the quarter were only down 40 basis points from Q3 2023. This improvement in margin trends relative to prior quarters reflects continuing stabilization of key expenses such as labor and the fact that expense comparisons to Q3 last year were clean unlike Q2 where expense comps were impacted by some one-time benefits in Q2 of 2023. and the strong top-line performance has continued into the start of Q4 with October rev part up 6%. Over the past couple years, we have taken significant steps to reduce leverage and address debt maturities. We now have only $30 million of debt maturing over the next 12 months and have $135 million of availability under our revolving credit facility. $265 million, or 60% of significantly as rates come down. As Jeff mentioned, we are pursuing several potential asset sales, and if any of these are completed, the proceeds would likely be used to repay credit facility borrowings in the near term and reinvested into hotel investments in the medium to longer term. As of September 30th, Chatham's net debt to LPM EBITDA was 4.2 times, which is significantly below our pre-pandemic leverage, which is generally in the 5.5 to 6 times area. recovery of our Silicon Valley hotels. Turning to our Q4 guidance, we expect rev par growth of 1% to 3%, adjusted EBITDA of $19 million to $21 million, and adjusted FFO per share of $0.15 to $0.18. This guidance reflects the renovations of three hotels during the quarter, so you should note that we also renovated three hotels in on year-over-year wealth or growth. Our guidance also reflects the repayment of a $14 million mortgage loan maturing in December with available cash and credit facility borrowings and does not reflect any acquisitions, dispositions, or other capital markets activity. This concludes my portion of the call. Operator, please open the line for questions.

We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up a handset before pressing the star keys. One moment while we poll for questions.

And it looks like our first question is from Jonathan Jenkins, Oppenheimer & Company.

Good morning. Thank you for taking my questions, and congrats on the quarter. First one for me, for Jeff. Redfar is sequentially improved in September and into October relative to earlier in the quarter, and I'm curious if you think that's kind of a shift in demand and inflection higher in corporate demand post-Labor Day, or is it more a continuation of the steady improvement that you've seen over the course of the year?

Yeah, I think what you've got is just more or less the end of the leisure summer component that's out there. And I think what you've seen over time post-COVID is business travel seems to be a lot more slack in and around holidays, in and around the summertime anyway, generally. So what I like to say in the office is we're Europe, or almost Europe in their own I think I'm a little bit of a right winger. But anyway, that's what happens when you live in Palm Beach. So I think that's really what you've got going on with September and October really being time to get back to work and business. And so therefore, I think what we've seen is just some corporate demand pickup.

Okay, that's great. I appreciate the color there. And then maybe switching gears, can you remind us what your target leverage is? Is that historical level kind of a good expectation going forward? And maybe can you provide some additional color on how you're thinking about the asset sales in light of the seemingly good and improving demand environment above industry trends and then your solid balance sheet position? I mean, is there anything in particular you would need to see to maybe step on the gas on acquisitions in the near term a little quicker? Sure.

Addressing the first part of your question with respect to leverage targets, I'd say we don't necessarily want to be all the way to where we were historically, but we're probably a little below where we feel comfortable being now. So if we're at four and a quarter times or so now, probably four and three quarters to five and a quarter would be a reasonable range for us.

And I think with regard to recycling capital, I will tell you that it is, around here anyway, very much of a renewed focus, you can tell, because if you look at our history, we've sold assets on a onesie, twosie basis, on a limited basis, for us to aggressively market and be successful in listing and signing PSAs on five different hotels, I think certainly shows our desire to move some things along here a little bit, and I do believe that opportunities are out there. We're looking at a few now. I think that in 2025, we'll be more, just because the overall environment and capital markets, I think, will be more favorable in that regard, which might also cause some I'm not going to talk about distress because that never seems to come to fruition, but I think our relationships are solid enough with folks that we bought from before. I just had a call from one that we bought from actually about three or four years ago with an opportunity just two days ago. that we can enhance our internal growth by newer assets, lessen our ongoing capital requirements and capex spend. That's the plan. Create more free cash flow to distribute to shareholders and lower the average age of the portfolio. Those are really, I think, doable objectives.

Okay, that's great. And maybe a follow-on to that commentary, given you guys have been out in the market lately, can you maybe talk about what you're seeing in real time in terms of volume and pricing? Has there been any closing of the gap between buyer and seller expectations or any other moves as of late, given the interest rates movement since September?

Well, there really hasn't been much dramatic. This stuff seems to have a lag time historically to it anyway. But, yes, there's been, I know, you know, certainly from some broker friends, et cetera, they're just doing a lot more, you know, BOVs and activity in their shop for things that folks, you know, are looking to perhaps test the market with.

Okay, great. Very helpful. Thank you for all the color. That's all for me. Thanks, John.

Thank you. Once again, if you'd like to ask a question, please press star 1 on your telephone keypad, star 2 to remove yourself from the queue.

Okay, looks like there's no further questions at this time.

I would like to turn the floor back to Jeff Fisher for closing remarks.

Well, thank you all for being here once again. I think we've clearly enunciated where we intend to go, and we're looking forward to posting some more good results going forward. Thank you.

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.