Hersha Hospitality Trust Class A Common Shares of Beneficial Interest

Good day and welcome to the Hersher Hospitality Trust second quarter 2021 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone 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 Greg Costa, Investor Relations. Please go ahead.

Thank you, Betsy, and good morning to everyone joining us today. Welcome to the Hersha Hospitality Trust Second Quarter 2021 Conference Call. Today's call will be based on the Second 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. Neil, you may begin.

Thank you, Greg, and good morning to everyone. Joining me this morning are Jay Shah, our Chief Executive Officer, and Ashish Parikh, our Chief Financial Officer. We are pleased to kick off earnings season this quarter and glad that you could all join us. During last quarter's call in late April, all indicators were setting up for a summer of strong leisure travel, and it appears that expectations were appropriately set. We significantly outperformed our internal forecast for the second quarter on both top line and profitability metrics. We saw increased demand portfolio-wide this quarter and are expecting this trend to incrementally build through the second half of the year. Property-level cash flow sequentially improved from $3.8 million in April to $7.7 million in June. In June, our 33 hotels generated 59% occupancy, at an average daily rate of $220. And comparable GOP margins for the month came in at above 45 percent. We are encouraged to see both ADR and GOP profitability metrics begin to approach 2019 levels well before a recovery in business transient and group gets underway in our gateway markets. Gateway market occupancy will push RevPAR higher from here. Achieving solid profitability and generating free cash flow a little over a year from the start of the worst crisis in this industry's history is testament to the quality of our hotels, the effectiveness of our cluster operating strategy, and our mix of urban and resort markets. These three advantages are our core pillars of growth for the early stages of this cycle. Our operating leverage positions us for outsized growth in a stabilizing environment. We began the second quarter on strong footing as our portfolio rev par in April exceeded $100 and was 10% higher than March, which had been elevated due to spring break travel and stimulus spending. Absolute rev par ticked sequentially higher during the balance of the second quarter, growing to $116 in May and exceeding $130 in June. resulting in second quarter REVPAR of $116, more than 50% higher than the first quarter 2021. Rate integrity was a common concern this time last year, but compared to prior demand shocks, such as the great financial crisis, revenue managers have not sacrificed rate to put heads in beds during this recovery. In this environment, we've been able to strategically drive rates across our portfolios. Last quarter, our comparable portfolio ADR grew from $193 in April to $220 in June. That's just 13 percent below June 2019 without the core business traveler in the marketplace. In July, month to date, we are actualizing 2019 ADR levels. Based on pricing power at our resorts, and the return of the price elastic business traveler in the fall to boost demand at our urban clusters midweek, we believe elevated ADR will prove sustainable on a portfolio-wide basis through the recovery. Let's start to dig in with the two largest EBITDA-producing assets in our portfolio, the Cadillac Hotel and Beach Club on Miami Beach and Parrot Key Hotel and Villas in Key West. They led the portfolio again this quarter on sustained demand to South Florida, despite what is typically the start of reduced travel to the region. Back in 2018, we reinvested approximately $74 million in major upgrades of these resorts, and they are now firmly on target to achieve our expected post-renovation ROIs. At prior peak in 2015, the Cadillac and Parrot Key generated $9.5 million and $7.8 million in EBITDA, respectively. This past quarter, the Parrot Key and Cadillac generated $3.8 million and $3.2 million in EBITDA, respectively, for the quarter. And based on current projections, both hotels are expected to surpass prior peak and combine to exceed $20 million in EBITDA generation for the full year 2021. As the lodging recovery continues to take shape across the next few years, we anticipate meaningful EBITDA contribution from these assets as they ramp towards stabilization. The Parakeet was our best-performing asset during the second quarter, generating 92% occupancy on a $454 average daily rate, resulting in a $416 REVPAR, which surpassed second quarter 2019's REVPAR by more than 80%. The Keys have seen unprecedented demand year-to-date, and the Parakeets' performance has proven is one of the most sought-after hotels in the marketplace. Despite inclement weather from Tropical Storm Elsa deflecting demand a few weeks ago, performance in July remains in line with our forecasts at the beginning of the month. Performance on Miami Beach was similarly encouraging, as the Cadillac surpassed 80% occupancy for the quarter, on a $235 ADR, which drove 39% REVPAR growth versus the second quarter of 2019. Demand trends for the third quarter remain robust at our three beach hotels, as well as our more business-oriented Ritz-Carlton Coconut Grove, which is beginning to capture corporate business this summer across a variety of industries, financial services, defense, technology, healthcare, and advertising. and broke through 2019 levels with 8.7% year-over-year REVPAR growth for the quarter. Despite August and September being traditionally slower in South Florida, our portfolio is forecasted to meaningfully outperform those periods in 2019 on the heels of continued price elastic leisure demand and growth from both business transient and grouped. There are a number of events, festivals, and conventions returning to Miami in the near future. Miami Beach Pride in September, the South Beach Food and Wine Festival, and Art Basel later in the fall, and Formula One Grand Prix next year. Beyond tourism, there remain significant corporate relocations and transportation-related infrastructure growth in the region, leading to robust near-term and long-term demand fundamentals for Miami that will be captured through this recovery. Our drive-to resorts also continued their recent outperformance during the second quarter, as the group generated weighted average occupancy of 72% and ADR growth of 23%, leading to weighted average rev park growth of 17% compared to the second quarter of 2019, further proving that the leisure traveler is not price sensitive for high quality, well-located, differentiated hotels. The Sanctuary Beach Resort continues to lead our resorts from a rate perspective, as its $506 ADR and 82% occupancy resulted in 21% REVPAR growth versus the second quarter of 2019. Our Hotel Milo down in Santa Barbara reports 77% occupancy at a $333 ADR and a very similar 21% REVPAR growth versus prior year. We anticipate these resorts, in addition to our Ambrose and Santa Monica, will continue to garner robust occupancies and rates in the third quarter as travelers flock to the California coast. Back east, our Annapolis Waterfront Hotel occupies an irreplaceable position on the Chesapeake Bay, and after a significant renovation of the hotel, we are driving rates and occupancy. We recorded a 77% occupancy and an average daily rate of $294 last quarter, which led to 7% Rev Park growth over the period. Annapolis in the summer is primarily leisure transient, but social and sports groups provided a strong base of business to kick off the season. Looking further out towards the end of the third quarter, the hotel has several rebooked corporate and retreats that are helping to drive 15% ADR growth for Q3 versus 2019. Our Marriott in Mystic, Connecticut is also on pace to achieve peak summer leisure demand from weddings, leisure travelers, and rebooked corporate and government groups during the third and fourth quarter at a better pace than was anticipated. Across the quarter, we saw cities and states reopen their local economies and remove restrictions for gatherings and experiences. enabling the surge that we are seeing in domestic leisure travel today. This fall, we expect to see the next inflection in demand growth as large employers return to the office and encourage travel, and our cities begin to host conventions and major citywide events. Gateway urban markets have been more impacted by the pandemic than any other segment and offer the longest runway for growth as we look forward to the next several years of the cycle. With summer travel underway, demand across the portfolio continues to be heavily weighted on weekends versus weekday stays. But weekday stays have shown a noticeable increase compared to just 90 days ago. Month-to-date results in July for our portfolio versus March show average weekday occupancy growth of more than 1,200 basis points, leading to REVPAR growth of approximately 55%. Removing our resort markets Our urban clusters saw weekday RevPars grow more than 100% over that same period, indicating our gateway cities remain attractive to all segments of the traveler. When the higher-rated business traveler returns and replaces primarily leisure business, we would expect a meaningful increase in weekday ADRs. During the second quarter, we began to see traditional business travelers return to our hotels, from one- and two-night stays to corporate groups. At the Philadelphia Westin, we saw transient business from many pharmaceutical companies, in addition to Accenture and Deloitte employees. Out West, tech-related businesses are beginning to return, with corporate groups from both Google and Facebook booked at our Sunnyvale hotels during the third quarter. McKinsey, JP Morgan, Goldman Sachs, IBM, General Dynamics, and other traditional large accounts have become more active at several of our hotels in the portfolio. While we are seeing early stages of business travel returning in each of our urban centers and expect continued improvements throughout the summer, we anticipate the next big leg up in the recovery to be after Labor Day when schools reopen in person and employees return to the office. Despite our hotels being primarily transient, we have seen an increase in group activity over the last few months across our portfolio. The majority of the business has been through social groups and sports. But as cities have reopened, larger events are occurring and being scheduled in our markets, resulting in increased group activity at our hotels. Our luxury hotels have benefited from not only strong leisure business and social group, but also the first signs of corporate group, small meetings and retreats. The Ritz-Carlton Georgetown finished the quarter with nearly 72% occupancy at a $456 ADR. The Rittenhouse Hotel in Philadelphia also turned cash flow positive this quarter as ADR reached $478 with occupancy growing by more than 2,500 basis points versus the first quarter. Many of our hotels are located near major universities and health systems, and these significant demand generators have mobilized and are leading to increased production and group bookings at many of our Boston, New York, Philadelphia, and Washington D.C. hotels in the third quarter. Larger events are taking place in the third and fourth quarters across many of our markets, highlighted by healthcare-related conventions in Washington D.C., Boston, and Philadelphia. Otakon in August in Washington, D.C., and the Boston and New York City Marathons in the fourth quarter. The Javits Center in New York is slated to host a few larger city-wide in August, including the New York Auto Show, but the major events in New York will return in September, the U.S. Open for Tennis, Fashion Week, and the U.N. General Assembly. And for the first time, Salesforce's Dreamforce event will occur across multiple cities, including New York. Our New York City portfolio saw occupancies incrementally build throughout the balance of the quarter. Visitation remains primarily transient, and this leisure demand should continue as Broadway reopens this fall and more events occur. But as noted in other markets, first signs of corporate travel have emerged across the past few months, and we are encouraged by the return of our more traditional large corporate accounts in the markets. We are very well positioned with our locations in several high-growth submarkets. We supported teams during the mayoral election race early in the quarter at our Hilton Garden Inn Midtown East and have since transitioned to J.P. Morgan as our top account. Our high Union Square has seen a pickup in travelers from entertainment, media, and technology, AT&T, Discovery, and Apple. And downtown at the Hampton Seaport and the Hilton Garden Inn Tribeca, Business travel has increased from major financial services companies and GE Blackstone. Pockets of corporate strength have taken shape across the city, and we believe they will continue to expand after Labor Day when schools fully return and more workers across all industries return to the office on a consistent schedule. Conversations with our larger corporate accounts indicate that September is the month when the switch for business travel and in-person office work turns on. And with our first mover advantage of remaining open throughout the pandemic, our clustered sales effort in the marketplace should yield additional revenue opportunities. Momentum is clearly building in New York, and our operating and data advantage can drive meaningful outperformance as supply remained significantly below pre-pandemic levels. The lodging recovery is clearly underway. Near-term results have exceeded expectations, and there is a long runway of value creation ahead. During the first half of the year, we took swift action to right-size our balance sheet and evenly reduced our exposure to our core markets by divesting of a lower-growth hotel in each market. With few capital expenditures on the horizon over the next few years, we can focus on hotel operations to drive high absolute rev par on industry-leading margins, resulting in significant EBITDA and free cash flow growth in the coming years. Results this past quarter illustrate the merits of this strategy and the growth profile of our unique portfolio. We are looking forward to a continued recovery in earnings in what we anticipate to be the start of a long up cycle in lodging. With that, let me turn it over to Ash to discuss in more detail our financial performance and outlook.