Hersha Hospitality Trust Class A Common Shares of Beneficial Interest

Good morning, everyone, and welcome to the HRSA Hospitality Trust third quarter 2021 earnings conference call and webcast. All participants will be in a listen-only mode. Should you need assistance, please say no to 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 and then one. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Greg Costa, Investor Relations. Sir, please go ahead.

Thank you, Jamie, and good morning to everyone joining us today. Welcome to the Hersha Hospitality Trust third quarter 2021 conference call. Today's call will be based on the third 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. Neal H. Shah, Hersha Hospitality Trust President and Chief Operating Officer. Neal, you may begin.

Thank you, Greg, and good morning to everyone. As always, I'm here with J.H. Shah, our Chief Executive Officer, and Ashish Parikh, our Chief Financial Officer. Thank you to everyone for being with us this morning to kick off third quarter earnings. When we last spoke in late July, demand for travel and hotels was the highest since March 2020, and projections were shaping up for a very strong second half of the year. The Delta variant made for a choppy seasonal shift in demand in late August and early September, but we were able to meet our internal forecasts each month through a combination of aggressive revenue management and strict cost controls, allowing us to drive strong GOP margins even compared to the same period in 2019. Despite a slow start on the top line shortly after Labor Day, we are encouraged by the positive momentum we are seeing over the last few weeks, coinciding with the decline in COVID cases and notable green shoots, indicating that travel is ramping up meaningfully. TSA data shows that beginning in mid-September, we have seen consecutive weeks of more than 12 million travelers. And if you zoom in on our markets, New York City, Boston, Philadelphia, San Jose, and Washington, D.C., have all seen a rebound over the last few weeks of at least 7.5% in air travel. Additionally, Uber recently reported a 15% increase in airport rides during the last two weeks of September, and U.S. car traffic in major cities like New York and Los Angeles was significantly higher in September versus August. In New York, weekday ridership of trains and subways have each increased about 30% since the end of August, while Times Square foot traffic reached a record high since the start of the pandemic, with 270,000 people visiting last Saturday, 80% higher than the same day in 2020. Robust leisure demand post-Labor Day is encouraging for the upcoming holiday season as well, and our booking pace for weekends in New York City and the holiday weeks in South Florida and California is noteworthy. And beginning next week, our borders will open to fully vaccinated international travelers. One week after the announcement, airlines such as JetBlue and American reported positive trends. JetBlue said it had seen a five times increase in bookings to the U.S. from the U.K., while American noted it expects international revenues to surpass 2019 levels in December and throughout 2022. On the hotel booking front, many OTAs have noticed an uptick of almost 20% international bookings in the week since the announcement in major feeder markets like New York City, with an expectation for 2022 bookings to materially increase across the next several weeks. The international demand is diverse, but Canada, Mexico, the United Kingdom, Brazil, and even several Asian countries are booking again. Ash and I will discuss in more detail our top line and bottom line results. But first, a quick recap of third quarter performance for our portfolio. We began the third quarter on strong footing as our portfolio rev par ended July near $150, approximately 15% higher than June as peak summer travel translated into robust results across the portfolio. The first half of August was equally strong. But due to the Delta variant and typical seasonality with the resumption of the new school year, demand began to moderate during the second half of August, which stretched through the middle of September after the Jewish holidays. Despite the occupancy decline, our revenue managers continued their strategy of holding rates, resulting in our comparable portfolio ADR for the quarter coming in only 1% below third quarter 2019. Rate integrity remains key to the lodging recovery, and based on year-to-day performance from our resorts and our urban clusters, we believe strong EDRs will prove sustainable on a portfolio-wide basis for years to come. Our resorts portfolio was strong again this quarter, as the group generated weighted average occupancy of 68% and ADR growth of 30%, leading to weighted average rev part growth of 20% compared to the third quarter 2019. Performance this quarter continued to stem from robust demand in South Florida, despite what is typically the slowest period for travel to this region. The Parakeet Hotel and Villas was our best-performing asset during the third quarter from a RevPar growth perspective, as 71% occupancy and a $409 average daily rate resulted in a $290 RevPar, which surpassed third quarter 2019 RevPar by 73%. The Keys continue to garner unprecedented demand, and we expect the Parakeet to continue its robust performance into year end. Performance on Miami Beach was also encouraging, as the Cadillac and the Winter Haven on South Beach each exceeded their third quarter 2019 occupancy, ADR, and REVPAR levels. Even in the more business-oriented submarket of Coconut Grove, we were able to drive 36% ADR growth during the quarter as we captured local business from a variety of industries, law, universities, financial services, consulting, technology, healthcare, and advertising, which is leading to stronger weekday demand post-Labor Day. Our South Florida hotels continue to generate robust rates into the fourth quarter, with significant growth on the horizon, as peak travel is set to return after Thanksgiving, highlighted by the resumption of noteworthy citywide events such as Art Basel in early December. Out in California, the Sanctuary Beach Resort continues to lead our resorts from a rate perspective, as its $669 ADR and 78% occupancy resulted in 30% RevPar growth versus the third quarter of 2019. Our hotel Milo in Santa Barbara reported 22% RevFar growth this quarter, recording 75% occupancy at a $446 average daily rate. Both of these hotels set record ADR levels under our ownership last quarter during the peak travel season on the California coast, further proving that the Leisure Traveler is not price sensitive for high-quality, well-located, differentiated hotels. Back east, our Annapolis Waterfront Hotel occupies an irreplaceable position on the Chesapeake Bay and was our strongest performing hotel from an occupancy perspective during the third quarter. We recorded an 86% occupancy and an average daily rate of $332 last quarter, which led to a 24% rev par growth over the period. Annapolis in the summer was primarily leisure transient, but the hotel has seen significant demand continue post-Labor Day, highlighted by weddings, smaller conferences, and corporate groups, collegiate sports and alumni reunions at the Naval Academy, and the historic boat show that took place just a few weekends ago. Our regional resort destinations have provided robust results for the portfolio year to date and continue to show strong pace heading into year end. But our core urban portfolio, 75% of our rooms, has also seen a steady demand increase over the last several months. Weekday ADRs in our urban portfolio exceeded $195 in July, surpassed $200 in August, and ended September at approximately $225, 15% higher than July. From June to September, our urban portfolio saw a 7.5% CAGR in weekday RevPAR, supported by notable increases in both rate and occupancy. And weekday demand has continued to accelerate in the fourth quarter, as month-to-date ADRs in October are higher than the same time in September, with occupancy up approximately 650 basis points to 54%. This performance has led to substantial weekday RevPar growth over the last 30 days, as RevPar for our urban portfolio is up 15%, with increased demand across each of our major northeastern cities. Despite the third quarter being predominantly leisure-driven and the business transient recovery clearly slowed by the Delta variant, we have seen a steady return of corporate business across our markets. Airlines have reported that the larger corporate accounts are beginning to fly again and domestic business demand has rebounded to pre-Delta levels or better. And we are seeing the shift in our hotels. After months of healthcare workers, sports teams, design and construction, and other small and medium-sized companies, we are now seeing the return of our more traditional corporate accounts midweek. Accenture, Deloitte, JP Morgan, Goldman Sachs, Bank of America, McKinsey, Boston Consulting Group, and General Dynamics remain active across our portfolio. Our urban luxury hotels have enjoyed meaningful rate growth across the last several months, as the Rittenhouse Hotel in Philadelphia and the Ritz-Carlton in Georgetown outperformed their third quarter 2019 ADRs by 17% and 7% respectively. Demand at these assets was broad-based and supported by leisure and social groups such as weddings and entertainment over the last few months, the reopening of universities and parents' weekends, and the blending of leisure and business travel in luxury. But in September and October, we've seen an increase in corporate guests for stays and catering events. Healthcare, consulting, financial services, media, software have all been gathering and traveling at our hotels. Weekday trends have been clearly accelerating, but the return to more stable business travel is closely correlated with employees going back to the office and resuming traditional travel to conferences and group meetings. Although many of the world's largest corporations have postponed their return to office plans, third-party data providers indicate that major cities like Boston and New York saw a 30% month-over-month increase in workers returning to the office in September. And conversations with our corporate accounts indicate that we should continue to see a resumption in companies opening their doors and encouraging travel through the end of the year. but anticipate the first quarter as the next inflection point in demand growth from the business traveler. Gateway urban markets have been more impacted by this pandemic than any other segment and offers the longest runway for growth as we look forward to the next several years of this cycle. Last month, we saw the return of traditional major events in Manhattan, the U.S. Open, which benefited our assets in the JFK sub-market, Fashion Week, which led to the compression at our Hilton Garden Inn Tribeca, and the UN General Assembly, which saw increased demand at our Hilton Garden Inn Midtown East from foreign delegates and Secret Service personnel. Despite attendances below pre-pandemic levels, it was great to have these events back in person, as they helped drive hotel demand in Manhattan to its highest levels since the beginning of the pandemic. And New York has more city-wides occurring in Q4. Comic-Con took place a few weekends ago. The NYU Lodging Conference and the New York City Marathon is resuming next month, and several trade shows and medical conferences remain on schedule. Pockets of corporate strength remain across our assets in Manhattan from the traditional accounts I noted earlier, but we believe they will continue to expand as more corporations reopen their offices. With the first mover advantage of remaining open throughout the pandemic, our clustered sales effort in the marketplace should yield additional revenue opportunities. New York City has historically been the market leader in occupancy, and we remain confident that it will revert back to prior levels over the next few years, with our operating and data advantage driving meaningful outperformance throughout the recovery. During the last cycle, we had record demand for hotel rooms in New York, but year-over-year, mid-single-digit supply growth resulted in a very challenging operating environment for owners. Although we have seen new hotels open again this year, with more on pace to open over the next 12 months, it is important to note that many hotels have permanently closed. And although few have recently reopened following the passage of the severance law in the city, the midterm supply picture looks very encouraging. Based on our internal projections as well as some recent third-party studies, it is estimated that 10,000 keys may be removed from the inventory for the foreseeable future, if not permanently, by way of demolition, resizing, or alternate use conversions. When we factor in this in the analysis and the aforementioned new supply, net supply over the next few years will actually be negative 1% to 2%. And with the cost of construction financing remaining exorbitantly high and the recent approval by the New York City Planning Commission of the special permit for all new hotel construction, supply should remain in the low single-digit range for years to come. Two quick notes on our capital allocation strategy and sustainability before I turn it over to Ash to discuss our margins and balance sheet. Earlier this year, we completed the sale of six non-core hotels that had substantial capital improvements on the horizon. And we also took necessary steps to infuse the portfolio with non-dilutive equity through our notes placement with Goldman Sachs Merchant Bank. We believe that our unique collection of hotels and our advantaged operating strategy allow us to manage cash burn in the worst of times and drive out performance early in the recovery. We have and continue to actively monitor the capital markets for the best opportunity to increase our operating capital without diluting shareholders' valuations. the capital markets for almost every level of financing remains extremely accommodative. And with improving fundamentals in each of our markets, we will remain opportunistic with both asset sales and financing opportunities across the next several quarters. At current prices, we see no better value in the marketplace than our existing collection of hotels. Second quick topic, sustainability, which has been at the core of our strategic operations since we launched our EarthView program in 2010. Since inception, we've saved over $20 million from energy efficiency initiatives that generate recurrent savings year over year and help to alleviate expense growth and improve margins, vital over the past 18 months as we navigated the COVID crisis. We've also had a very positive environmental impact. We've reduced energy use per square foot by 15% and greenhouse gas emissions by 44% since 2010. And we announced our 2030 targets in our robust annual report on our website, disclosures that contributed to HRSA ranking number one among our US hotel peer set in the global real estate sustainability benchmark public disclosure for the second year in a row. We continue to be proud of the work of our teams in the field and in our headquarters to ensure our hotels continue to operate not only efficiently, but are positioned for sustainable long-term growth. As I mentioned earlier, the resumption of business travel is closely correlated with the return to office, and this will present a major inflection point for our hotels, with 75% of our rooms situated in major gateway cities. Performance at our resorts has led to significant growth this year and allowed us to generate property-level cash flow quicker than most of our peers. But our growth runway remains long, with a pending rebound of business travel demand to our urban gateway markets. 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. And with the Delta variant peaking, our borders reopening, and businesses ramping up travel, we expect 2022 will be an inflection point for the lodging recovery. With that, let me turn it over to Ash to discuss in more detail our financial performance and outlook. Great. Thanks, Neil.