Hersha Hospitality Trust Class A Common Shares of Beneficial Interest

Good day and welcome to the Hersha Hospitality Trust first quarter 2021 earnings call and webcast. Today, all participants will be in a listen-only mode. Should you need assistance during today's call, please signal for a conference specialist by pressing the star key followed by zero. After today's event, there will be an opportunity to ask questions. Please note that today's event is being recorded. At this time, I would like to turn the conference over to Mr. Greg Costa with Investor Relations. Please go ahead, sir.

Thank you, Chris, and good morning to everyone joining us today. Welcome to the Hersha Hospitality Trust first quarter 2021 conference call. Today's call will be based on the first quarter 2021 earnings release, which was distributed yesterday afternoon. Before proceeding, I'd like to remind everyone that today's conference call may contain forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties and other factors that may cause the company's actual results, performance, or financial positions to be considerably different from any future results, performance, or financial positions. These factors are detailed within the company's press release as well as within the company's filings with the SEC. With that, it is now my pleasure to turn the call over to Mr. Neil H. Shah, Hershaw Hospitality Trust President and Chief Operating Officer. Neely may begin.

Thank you, Greg, and good morning, everyone. Joining me here today are Jay Shah, our Chief Executive Officer, and Ashish Parikh, our Chief Financial Officer. Again, thank you all for joining our call today. What a difference one year makes. Last year at this time, we were burning cash in a completely uncertain environment. Today, there is positive momentum across the economic spectrum, and we can report a clear acceleration in year-to-date results and positive cash flow. We are grateful for the courage, hard work, and commitment of our people, both our frontline staff and our regional teams. They did right by all of our stakeholders, our guests, our investors, fellow team members, and our hard-hit communities throughout this pandemic. Our first quarter results also underscore the quality of our portfolio, the effectiveness of our cluster operating strategy, and the resilience of our locations, all of which provided the flexibility we needed to get through this pandemic. These competitive advantages will continue to differentiate our portfolio's earnings growth profile as the economy recovers and ascends its next peak. Let's start with the quarter. We'll then go market by market before Ash takes a deeper look at our cost controls and margin story. The first quarter is typically the softest quarter of the year, but results from January to March surpassed results from the fourth quarter 2020, as occupancy for our comparable portfolio was higher by 1,300 basis points and ADR grew by 8%. leading to quarter-over-quarter REVPAR growth of 50%. Despite growing case counts and lockdowns, January was more resilient than we anticipated for our portfolio, returning to greater than $60 REVPAR, with strength in South Florida and Washington, D.C., offsetting lockdowns on the West Coast and the Northeast. Absolute portfolio REVPAR sequentially improved throughout the quarter, increasing to $75 in February and surpassing $90 in March. And recent results indicate that we are approaching $100 for April. Occupancy for the first quarter eclipsed our internal forecast at the beginning of the year by more than 1,200 basis points. And our ability to hold rates during this demand influx led to a 34% higher absolute REVPAR than we initially expected in early January. Results month-to-date in April are similar to March. Our portfolio occupancy is approximately 55%, and we continue to drive ADR in South Florida and on the West Coast, with ADRs 10% and 7% higher, respectively, than we forecast at the beginning of April. The shift in sentiment is remarkable, and forward bookings are providing more visibility than any time in the last year. The stimulus, holiday schedules, and pent-up demand have clearly driven a robust spring travel season, and we are seeing positive momentum into the second quarter. Leisure remains the primary source of portfolio demand, particularly in South Florida and along the California coast. Drive-to resorts have been our strongest performers since the inception of the pandemic. In this portfolio of hotels, about 25% of our pre-pandemic EBITDA had a weighted average occupancy of 56%, with similar daily rates for the first quarter 2021 compared to the first quarter 2019. Leisure demand is not proving to be price sensitive. Urban markets will take several more quarters to recover. but we are encouraged by accelerating demand in the hardest hit urban markets like Boston, New York, and Seattle. Demand remains leisure driven, but in both transient and now the small group segments. The return of smaller social groups is beginning to accelerate, with collegiate and youth sports events taking place across our urban clusters, benefiting our select service assets in these markets. In our luxury and lifestyle hotels, weddings and other special occasions have begun in earnest and deposits continue to be made for the rest of the year. The number of wedding blocks currently on the books for 2021 is more than 20% higher than wedding blocks we had on the books during the same period in 2019. Demand across the portfolio continues to be heavily weighted on weekends versus weekday stays. But with each passing month, the number of weekday stays continues to increase. Year-to-date results for our portfolio show average weekday REVPAR growth of 56% and weekend REVPAR growth of 85%. Weekday occupancy has grown from 38% in January to 48% month-to-date in April, while weekend occupancy has increased from 46% in January to 66% month-to-date in April. Over that same period, weekday and weekend ADRs have increased 25% and 30% respectively. When the high-rated business traveler returns... and replaces government contract business, we would expect a meaningful leg up in weekday ADR. Corporate travel recovery has been slow but steady. The airline sector reports that corporate volumes are accelerating and could reach prior peak by next year. American Express expects travel and entertainment spending to recover to 70% of pre-pandemic levels by the end of this year, At our hotels, we continue to find small and medium enterprises producing the most roomed nights to date. But we are beginning to see the larger enterprises mobilizing. While we expect continued improvements to business travel throughout the summer, we anticipate the next big leg up in the recovery to be after Labor Day when schools reopen in person and employers return to the office. Once the recovery of business transient and corporate group is underway, we expect to see a powerful cash and profitability driver for our business into the fourth quarter and accelerating into 2022. For our markets, let's start in Miami and Key West. Our first ray of sunshine in 2021 for the first quarter. Our largest asset, the Cadillac Hotel and Beach Club on Miami Beach, saw continued demand from leisure travelers in the first quarter. generating over $3 million in EBITDA at a 73% occupancy. Demand to South Florida built sequentially over the quarter, with the strongest period from President's Day until Easter, when the Cadillac and our Parakeet Resort in Key West generated weighted average occupancy of 83%, essentially flat versus the same period in 2019, with weighted average rate growth exceeding 5%. Despite only reopening in mid-January as an independent hotel, even the Blue Moon Hotel on Miami Beach generated positive cash flow for the quarter. Demand at the Ritz-Carlton Coconut Grove is primarily driven by member reward stays and Amex packages today, but we are beginning to see some pickup in L&R business from financial services and aviation-related companies. We have hosted several weddings and social events, and are expecting more corporate group business in the fall. Although performance year to date in South Florida is not indicative of the remainder of the year, there are a number of events, festivals, and conventions returning to Miami in the coming quarters. The South Beach Food and Wine Festival, Art Basel this fall, and then the recently awarded Formula One Grand Prix next year. Beyond tourism, Miami has also announced several new corporate demand generators and new tenants to the market, including Blackstone, Baliosny, Icon Enterprises, Tom Bravo, and of late, venture and tech firms like the PayPal Founders Fund and SoftBank. The short, medium, and long-term demand fundamentals in Miami are quite impressive. Key West is similarly encouraging. Performance at the Parrot Key Hotel and Villas, was strong for the second consecutive quarter, generating 76% occupancy and 24% ADR growth, which led to 10% higher REVPAR growth than the first quarter of 2019. Performance in March highlighted the substantial demand witnessed in the Florida Keys, as the Parakeet Hotel and Villas ended the month with 91% occupancy and a $489 absolute ADR, which equated to 27% growth in ADR and RevPAR versus March of 2019. Key West began the pandemic as the prototypical drive-to resort market. Today, it continues to attract Floridians and Southeastern residents, but TSA data shows that airlift is now significantly higher than before the pandemic. The barriers to entry in Key West are nearly absolute, or at the very least, zero sum. We reinvested approximately $27 million in a major upgrade of the resort in 2018. And like the Cadillac, we expect to achieve results well beyond prior peak performance on this hotel. California and Seattle. Our coastal resorts in California all benefited from significant renovations in 2018. and we are enjoying strong early returns despite significant restrictions still in place during the quarter in California. The Sanctuary Beach Resort generated an absolute ADR of $410 during the first quarter, which represents 51% growth versus the first quarter of 2019. Our Hotel Milo in Santa Barbara also saw significant rate growth last quarter. With increased demand in March around spring break, ending the quarter with 28% ADR growth versus the first quarter of 2019. The Santa Monica Ambrose weekends performed well in the quarter, but weekdays remained weak, with the area technology companies still not back in the office. Next quarter, we expect elective medical procedures to resume and have begun to build some small business at the Ambrose. Our more business-oriented hotels in Seattle Silicon Valley, and Los Angeles continue to improve steadily from an admittedly low base. These are the homes of the largest technology companies in the world, also absorbing new office space during this pandemic. In Seattle, in South Lake Union, Apple recently announced a new office location close to our hotel with plans to double over the next several years. Amazon reaffirmed its commitment to Seattle and signaled a return to the office in September, while life science and office space are renting and selling for higher than pre-pandemic levels. Multifamily absorption has also spiked in Seattle and the South Lake Union sub-market. Until corporate travel returns, the Pan Pacific has had some success booking entertainment, film-related groups, residential and corporate relocation, and leisure business. TSA data for Seattle has shown a notable acceleration since the start of the year and throughout the last several months in particular. In Silicon Valley, our top clients are Facebook, Google, and Apple. Most have reopened offices but have extended remote work directives through the third quarter. Facebook appears to be a first mover in the Valley and is expecting travel to return to prior levels. All three companies have been hiring new talent and expect to remobilize training and other traditional activities in the fall. Until then, our team has been scrappy by booking construction and nursing crews to generate some revenue, and the team remains poised to capture early business from our key accounts. Our Los Angeles courtyard is in Culver City, a booming sub-market with newly developed and leased studio, tech, and life science buildings. Very little business travel yet, but we are capitalizing on our convenient location for collegiate sports while the hotel's meeting space is being used as a COVID vaccination site. Whether it be on the West Coast or the East Coast, we assembled our urban portfolio one by one, targeting locations and innovation markets that have proved to be the most resilient. We would include our Hyatt Union Square Hotel, well located in Silicon Alley, New York's tech sub-market. and the Boston Seaport, which continues to draw pharmaceutical technology and research and development centers near our Envoy Hotel. It is noteworthy to highlight that in March, there were approximately 76,000 tech job openings across the country, the highest monthly total over the past three years. During the month, 11 markets had higher tech job postings than their 2019 levels, with four of the top five being in Seattle, Washington, D.C., Los Angeles, and New York City. And then zooming out by state, California has grown employment the most since the pandemic. New York. In New York, traditional sources of demand remain weak, but our teams have been entrepreneurial in their approach, and it has allowed us to serve the community. Our teams continue to contract with first responders and other government groups to build revenue, leading our portfolio to end the first quarter with 53% occupancy in New York, resulting in absolute rev par for the portfolio more than 20% higher than our forecast at the beginning of this year. Continued stays by first responders, traveling nurses, and the New York Fire Department resulted in portfolio occupancy approximately 15%. 1,500 basis points higher than our initial expectations for the quarter. New York City, which was the hardest hit city for travel during the pandemic, is beginning to see leisure travelers return to the market. As daily visitors to Times Square eclipsed 110,000 per day in March, up 23% month over month. While the MoMA is getting close to 7,000 visitors per day, up from 4,000 per day when it reopened towards the end of last summer. Returning visitors to New York are welcomed to new gateway improvements, like Moynihan Station for Amtrak and transit, or the new terminals at LaGuardia Airport. In several of our locations in the final weeks of March on Saturdays, we reached 70% to 80% occupancy, and this boost comes ahead of the city's announcement of committing $30 million to its tourism campaign beginning in June. There were also some great announcements this morning, if you may have caught them. In addition to leisure returning to the city, we are seeing more data on the return of workers to the market. Major financial firms such as Goldman Sachs, JP Morgan, and Barclays have already begun to mobilize staff to return to the office this summer, and each firm intends to get close to full capacity before the end of the year. Additionally, Mayor de Blasio has disclosed intentions to bring an estimated 80,000 municipal workers back to the office by early May, which will help increase transit ridership and availability. And sizable leases by notable tech firms in Manhattan have continued in droves. Facebook taking down 730,000 square feet in Manhattan, TikTok 232,000 square feet in Times Square, and Apple's 336,000 square foot Manhattan sublease. just to highlight a few. These are all signs that show that the resiliency of New York City and travelers desire to return for both business and pleasure. Our Manhattan Select Service portfolio is particularly well located and built to the taste and preferences of today's travelers. High quality corner locations in the most important sub markets. Markets that are seeing successful new technology tenants absorbing new office near our hotels. our Hilton Garden Inn Tribeca near Disney's new location in Hudson Square, our Hilton Garden Inn Midtown East near the iconic new Tower 1 Vanderbilt, or J.P. Morgan's new building, or our Express at 29th and 8th Avenue, a gateway to Penn District and Manhattan West. When the higher-rated weekday business returns to occupy these new buildings later this year, we will be able to drive margins and cash flow meaningfully. Outside of the city, the Hyatt House, White Plains, produced over 500,000 of EBITDA as it continues to benefit from social and sports groups, wedding blocks, and some early corporate L&R production, not to mention its recent renovation and additional key count. Finally, Boston, Washington, and Philadelphia. Most of these cities, like most around the U.S., were essentially shut down from March to September 2020. But as demand generators began to reopen and restrictions eased, we have seen increasing leisure demand in all of our cities. Here in Philadelphia, our offices literally overlook Independence Hall and the Liberty Bell, where lines have grown longer and longer by the day, growing more than 225 percent from February to March. In Washington, D.C., we saw travelers flock to the region for the annual cherry blossoms, despite the heavy restrictions, and less than welcoming messages from the city. In both Washington and Philadelphia, weekend RevPAR has been two times the weekday RevPAR levels, the widest margin in our portfolio. In Philadelphia, our sales teams are having success with university and professional sports teams and the entertainment segment at several of our hotels. The Hampton Inn has hosted several university and high school sports tournaments, and the Westin is once again working with Major League Baseball. The hotel continues to book some entertainment and small group weddings, with our first board meetings and corporate events slated for the fall. On still very low occupancy, the Rittenhouse has pushed ADR higher than 2019 to $441 for the quarter, evidence of less price-sensitive luxury companies luxury consumers, and a preference for our well-known suites within the inventory. On the Chesapeake Bay at the Annapolis Waterfront Hotel, another autograph collection hotel we recently upgraded substantially, we are enjoying better weekends than before the pandemic and have had some success with social, corporate, and state legislative groups. By next quarter, we should be close to second quarter 2019 performance. In the district in Washington, Our team was able to book National Guard and Capitol Police to provide base occupancy in the first quarter at our Hampton and Hilton Garden Inn properties, which offset weakness in the market more broadly. The St. Gregory is capturing some law firm demand, but most legal and diplomatic business is expected to return in the third quarter. In Washington, despite persistent local restrictions, we have seen a sharp increase in TSA volumes across the last several months that we expect to lead to more lodging demand. A new presidential administration, particularly one with as large of an agenda and spending plan as this one, leads to substantial legislative, lobbying, federal contracting, and foreign policy, all big drivers for lodging demand. The Ritz-Carlton Georgetown may be the biggest flow-through beneficiary next quarter as occupancy is already over 50% and our ADR at $380 is is within 15% of pre-pandemic levels. In Boston, spring comes late, but Governor Baker on Tuesday announced changes to restrictions in the city for events. Weddings, live sports, concerts, and other social events will now be permissible in May. Although graduations remain limited in scope again this year, we do suspect that many parents will travel to still be with their children, if only to help pack them up. For the Envoy, the start of federal courts and the first trials beginning in June will be a strong generator of midweek demand that should allow us to double RevPAR. Our locations in the Seaport, the Boxer Hotel in the West End, and the Courtyard in Coolidge Corner or Brookline are attractive to leisure, university-related demand, and ultimately weekday corporate when it does return. A few words on capital allocation before I turn it over. As we outlined on our previous earnings call, we entered into binding sales agreements on six hotels that represent total proceeds of $216 million. Five of those six hotel sales have closed, and we expect the Duane Street hotel sale to close this quarter. We were able to transact at attractive pricing, highlighting the high-valued real estate of our purpose-built portfolio. We sold the oldest, most stabilized hotels in each of our market clusters for a $54 million gain and a 7.5% cap rate on 2019 NOI. Several of the assets that were sold represented hotels with capital-intensive projects on the horizon, and the successful completion of these sales will lower our CapEx budget by approximately $20 million over the coming years. We are not anticipating any additional sales this year. We also closed on our strategic financing with affiliates of Goldman Sachs Merchant Bank, providing a $150 million unsecured term loan, which can be expanded to $200 million, and notably with flexible prepayment terms. This notes facility, in conjunction with the aforementioned asset sales, led to the successful amendment of our credit facility. extending our covenant waivers until June 22 and eliminating term loan maturities in 2021 without a change in our rate. Inclusive of the GS notes and our other bank mortgages, our total cost of borrowing on $1.1 billion of debt is 4.4%, with an over three years' life to maturity. We are pleased to have forged a strong relationship with Goldman Sachs Merchant Bank, provides us with a well-capitalized partner to seek out strategic opportunities and to have been provided the financial flexibility to clear the runway and focus on the ramp of our portfolio in the coming quarters this year has gotten off to a very strong start and a robust economic recovery appears underway of course there are still risks and uncertainties our portfolio gets beyond break even and cities and states ease restrictions Our operating and financial leverage can drive outsized returns. As we kickstart what we anticipate to be a multi-year recovery, we remain bullish on the cities where we operate, innovation-oriented, urban gateway markets, with regional resorts just a short drive away. Drive-to resorts and leisure destinations will continue to enjoy demand, but we believe the top U.S. cities we'll see a swift recovery beginning in the second half of this year and extending for the next several years. Our innovation districts provided strong results prior to the pandemic, and these markets have the most to recover as we make strides towards returning to a more normalized operating environment. And this summer, remind everyone that New York, Boston, Washington, and Los Angeles are among the greatest tourist destinations in the world. Extraordinary richness comprised of every culture on Earth world-class art, music, bars, restaurants, public parks, and sports. We hope to see all of you out. With that, let me turn it over to Ashish.