Hersha Hospitality Trust Class A Common Shares of Beneficial Interest

Good morning, my name is Alex and I will be your conference operators today. At this time, I would like to welcome everyone to the Hersha Hospitality Trust fourth quarter 2021 earnings conference call and webcast. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a questions and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypads. If you'd like to withdraw your question, press the pound key. Thank you. Andrew Tamacho, Investor Relations for Herschel Hospitality Trust. You may begin your conference.

Thank you, Alex. And good morning to everyone joining us today. Welcome to Herschel Hospitality Trust fourth quarter 2021 conference call. Today's call will be based on the fourth quarter 2021 earnings release, which was distributed yesterday afternoon. Before proceeding, I'd like to remind everyone 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, Hershey Hospitality Trust's President and Chief Operating Officer. Neil, you may begin.

Good morning, and thank you for being with us as we kick off fourth quarter earnings. Joining me this morning are J.H. Shah, our Chief Executive Officer, and Ashish Parikh, our Chief Financial Officer. When we last spoke in late October, demand for leisure and business travel was accelerating rapidly, and we were optimistic as forward bookings were shaping up for a very strong fourth quarter. We are pleased to report that despite the headwinds we encountered from the Omicron variant in December, we achieved our highest cash flow producing quarter in 2021, meaningfully outperforming our internal forecasts and consensus estimates for the fourth quarter on both top line and profitability metrics. We saw a pickup in demand for our urban portfolio, as well as continued robust performance at our drive to leisure resort markets. Today, we're excited to see another resurgence of travel activity following this Omicron wave as case counts continue to fall and corresponding COVID restrictions are lifted. In the fourth quarter, our strategically located portfolio of 33 consolidated hotels generated 63% occupancy at an average daily rate of $238, resulting in a $150 rev park. likely one of the highest among all of our REIT peers during this time period. We began the fourth quarter on strong footing as the Delta wave receded. Our portfolio REVPAR ended October at $153, approximately 12% higher than September, as increased urban demand translated into robust results across the portfolio. Despite typical seasonal pullback, November demand remained strong in our resort market. and our urban markets experienced sequential growth, fueled by international travel and a small but noticeable uptick in business transient. Momentum carried into December, and despite a noticeable drop-off triggered by the rise of Omicron cases, December results improved sequentially from November for the portfolio. During the fourth quarter, our revenue managers continued to execute their strategy of driving rates, resulting in our comparable portfolio ADR for the quarter matching that of the fourth quarter 2019. Rate integrity remains key to this lodging recovery, and based on year-to-date performance from our resorts and our urban clusters, we believe strong ADRs will prove sustainable across our high-quality urban and resort-oriented portfolio. Our aggressive asset management strategies also drove comparable GOP margins for the quarter to 45%. 150 basis points higher than 2019 GOP margins. We are encouraged to see both ADR and GOP profitability metrics surpass 2019 levels well before a recovery in business transient and group gets underway in our gateway markets. With domestic leisure activity anticipated to have another record year in 2022 and the recovery of business and group travel on the horizon, Our portfolio's prospects for continued outperformance remain extremely favorable. Shifting to our market performance, our resort portfolio was strong again this quarter, with weighted average occupancy of 66% and ADR growth of 31%, driving weighted average REVPAR growth of 16% compared to the fourth quarter 2019. Our strong performance this quarter benefited from continued robust demand in South Florida, despite what is typically a slower period for travel to the region. The Parakeet was our best performing asset during the fourth quarter from a RevPar growth perspective, as 73% occupancy and a $491 average daily rate resulted in a $359 RevPar, which surpassed fourth quarter 2019's RevPar by 48%. You may remember that we executed a comprehensive $26.5 million repositioning of the Parakeet Hotel and Villas in 2019. The Keys continue to garner unprecedented demand, and we expect the Parakeet Hotel and Villas to continue its ramp well into 2023. Once again, the Miami Beach market turned in great performance in the fourth quarter. demonstrating promise for the peak season ahead as the Cadillac and the Winter Haven on South Beach each exceeded fourth quarter 2019 ADR and RevPar levels. Even in the more business-oriented sub-market of Coconut Grove, we were able to drive 16% RevPar growth compared to the fourth quarter of 2019. Our South Florida hotels continue to generate robust rates into the first quarter with significant growth on the horizon as peak travel is set to return during the winter months. And we also expect to see very strong momentum from spring break travel and the Formula One Miami Grand Prix, which should rival some of the larger citywide events that are traditionally hosted in Miami, like Art Basel or the Super Bowl. And the Cadillac is another hotel that underwent a major $47.3 million transformative repositioning in 2018-2019. and we expect to easily surpass prior peak performance in the coming years. Back east, our Annapolis Waterfront Hotel occupies a one-of-a-kind position on the Chesapeake Bay. We recorded 70% occupancy and an average daily rate of $330 last quarter, which led to a 20% rev par growth over 2019. Annapolis typically thrives in the summer and early autumn, but the hotel saw significant demand continue into the fourth quarter with 83% occupancy in October, 80 basis points higher than 2019. Demand was fueled by the return of the boat show, smaller conferences in corporate groups, collegiate sports, and alumni reunions at the Naval Academy. We completed a major renovation in Annapolis in 2020, and this hotel also has several years of growth ahead. In California, The Sanctuary Beach Resort continues to lead our resorts from a rate perspective, as its $510 ADR and 69% occupancy resulted in 32% revpar growth versus the fourth quarter of 2019. Our Hotel Milo in Santa Barbara reported 29% revpar growth this quarter, recording 64% occupancy at a $346 ADR. Both of these hotels set record ADR levels and maintain pricing power even after the peak travel season to the California coast, further demonstrating that the leisure traveler remains very price elastic for high-quality, well-located, differentiated hotels. Our repositioning of the Sanctuary Beach Resort and the upgrades we made in Santa Barbara have clearly paid dividends during the pandemic, but the nearly absolute barriers to new entrants and the likely return of corporate group and international in the quarters and years ahead provide optimism to our team in sustaining significant growth in the years ahead at our coastal California resorts. The rapid recovery and continued robust performance of our regional resort destinations has led to record-setting EBITDA performances at multiple properties. While this narrative echoes what others in the industry have experienced, and has led to an unprecedented influx of capital into resort-oriented assets. It's our core urban portfolio, consisting of 75% of our rooms, that also saw steady demand increases to close out the year. We believe this provides a clear trajectory of growth for Hersha's uniquely positioned portfolio in this next leg of the recovery. The fourth quarter provided us a lens into how a return of the business transient and international traveler will manifest in our core urban markets, particularly in Manhattan. Weekday and weekend occupancies in Manhattan grew 2,230 basis points and 1,580 basis points respectively from September to November, with weekends aided by the reopening of Broadway, the New York City Marathon, international travel, and strong domestic leisure visitation. Although December faced headwinds from the Omicron surge, weekday occupancy was up 2,080 basis points versus September, and rates remained resilient as weekend ADR in Manhattan surpassed 2019 levels by 390 basis points. Omicron cases peaked in New York City in January and continue to plummet. February results have been encouraging and fuel our optimism for a rapid recovery in New York for the back half of this quarter and the second quarter. Events such as New York Now Winter 2022 at the Javits Center, which occurred last week, and the 2022 Big Ten NCAA Tournament at Madison Square Garden in March will not only help drive compression in the market, but also act as an inflection point for the city. We anticipate, as events continue to occur in person, and case counts continue to fall, that demand, particularly for the business traveler, will return to and surpass the levels we saw in October and November. New York City has historically been the market leader in occupancy, and this quarter we achieved 74% occupancy in Manhattan, by far the highest of our gateway or regional resort locations, and we remain confident that we'll revert back to prior levels over the next few years. Our market knowledge, and cluster strategy provides us with significant data and operating leverage to consistently drive meaningful outperformance in New York. And we remain optimistic that New York will once again be an early market leader in this 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 this year with more on pace to open over the next 12 months, it is important to note that offsetting this new supply, many hotels have permanently closed. And although a few have recently reopened following the passage of the severance law in the city, the midterm supply picture looks extremely encouraging. Based on our internal projections as well as third party studies, approximately 10,000 keys may be removed from inventory for the foreseeable future. if not permanently, by way of demolition, resizing, or alternate use conversions. On top of these changes, the special permit rules that New York City's City Planning Commission enacted at the close of 2021, which we have touched on in the past, have now come to fruition. Hotel developers will need to obtain a special permit before constructing a hotel in Manhattan, converting an existing structure to a hotel, or expanding an existing hotel by 20% or more. The special permit requires City Planning Commission approval, which is estimated to take at least two years to obtain. When we factor in this analysis and the aforementioned new supply, net supply over the next few years will actually be negative 1 to 2%, especially as the cost of construction and financing remain exorbitantly high. And with the new regulations, over the longer term, supply should be limited to the low single-digit range for years to come. and should significantly improve the operating environment for current New York hotel owners in the next cycle. New York City weekday trends show clear signs of acceleration heading into December, but the return to more stable business travel post-Omicron 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, Notable banks in New York, including Citi, Bank of America, Jefferies, and Goldman Sachs, who have instructed employees to work from home in December, have already called employees back into the office in some capacity. Other firms such as Microsoft, Facebook, BNY Mellon, and American Express have all communicated a return to the office in March. Conversations with our corporate accounts indicate we should continue to see a resumption in companies opening their doors and encouraging travel as case counts wane. Our view is that the Omicron variant delayed but did not halt the return of business travel. We anticipate the later part of this quarter and the spring as the next inflection point in demand growth from this segment. 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 75% of our rooms situated in major gateway cities, the return to office, along with the resumption of business travel, will present a major catalyst for us. We have benefited from the strong performance at our resorts, which drove significant growth last year and allowed us to generate property-level cash flow quicker than most of our peers. But because of our strategic approach of clustered hotels in urban gateway markets our growth runway also remains long with the pending rebound of business travel demand. Achieving solid profitability and generating free cash flow as the industry continues to recover from the worst crisis in its history is testament to the quality of our hotels, the effectiveness of our cluster operating strategy, and our mix of urban and resort markets. Our ability to generate industry-leading margins and cash flow growth highlight the operating leverage inherent in our portfolio. With a refreshed portfolio and 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 and expect to generate significant EBITDA and free cash flow growth in the coming years. This operating leverage positions us for outsized growth in a stabilizing environment. And with the Omicron wave rapidly receding, local and international governments beginning to lift COVID restrictions, and businesses returning to an office setting and ramping up travel, we expect 2022 will still be an inflection point for the lodging recovery. From a strategic standpoint, we will continue to seek out ways to close the significant discount in our public market valuation to private market values for our assets and portfolio without diluting our shareholders. or taking on long-term portfolio-wide encumbrances that limit our financial or strategic flexibility. We have carefully and methodically assembled this portfolio over the last decade and believe that we have some of the strongest growth prospects in the industry as we look at our market exposures, brand affiliations, manager relationships, and the market knowledge from the highly skilled and cycle-tested team here at Hersha. With that, let me turn it over to Ash to discuss in more detail our financial performance and outlook.