Hersha Hospitality Trust Class A Common Shares of Beneficial Interest

Hello and welcome to the Hersha Hospitality Trust second quarter 2022 earnings conference call and webcast. My name is Harry and I'll be coordinating your call today. If you would like to ask a question during the Q&A session, you may do so by pressing star one on your telephone keypad. I would now like to hand you over to your first speaker, Andrew Tamachio, Director of Investor Relations to begin. Andrew, please go ahead.

Thank you, Harry. And good morning to everyone joining us today. Welcome to the Hersha Hospitality Trust second quarter 2022 conference call. Today's call will be based on the second quarter 2022 earnings release, which was distributed yesterday afternoon. Before proceeding, I'd like to remind everybody 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 bonds with the SEC. With that, it's now my pleasure to turn the call over to Mr. Neal H. Shah, Hersha Hospitality Trust's President and Chief Operating Officer. Neal, you may begin.

Thank you, Andrew, and good morning to everyone. Joining me this morning are Jay H. Shah, our Chief Executive Officer, and Ashish Parikh, our Chief Financial Officer. When we last spoke in late April, we were excited to share that we had entered into a definitive agreement to sell seven of our urban select service properties outside of New York for gross proceeds of $505 million. The closing of this transaction is anticipated to be completed in two tranches, with the sale of six assets to be completed imminently, while one hotel will close later due to the timing of the CMBS loan assumption process for the assets. With the divestiture of our select service properties complete, we are sharpening our focus on our portfolio of luxury and lifestyle hotels, which have continued to achieve historic pricing power and have generated excellent operational and financial results, as our second quarter financial results show. Additionally, we are retaining our exposure to New York, which we believe is at the beginning of a very strong and extended recovery. We recognize the tremendous value and upside in both portfolios. As a result of the sale of our select service portfolio, we are improving our operational metrics and significantly increasing our go-forward pro forma asset quality, ADR, and rev par. As an example, while second quarter rev par for our comparable hotel portfolio is still 4.7% below 2019 levels, comparable hotel rev par for the go-forward portfolio was 1 percent above second quarter 2019 levels, with EBITDA margins growth 179 basis points above our reported comparable hotel portfolio and 414 basis points above the 2019 period. We intend to use the proceeds from the sale to provide liquidity for significant corporate debt repayment, including paying off the junior notes in full and a recast of our credit facility. which our sheesh will cover in detail. Our resulting credit profile will provide significant financial flexibility as our gateway markets recover and we continue executing on our strategic initiatives. With that, I'll turn to the quarter. Rate integrity was broad-based in our portfolio as every sub-market grew ADR during the quarter. For our comparable portfolio, we drove 12.2% ADR growth versus 2019 levels in the quarter. Excluding our urban select service portfolio, the growth is even more notable as comparable portfolio ADR was up 17.2% versus the comparable period in 2019. We have strong conviction that the pricing power our revenue managers are driving is not only sustainable, but has runway for continued growth. Particularly in luxury and experiential hotels, upper tier customers are price inelastic and have fewer alternatives. Property level cash flow more than doubled to $46.4 million from the prior quarter. We began the second quarter on strong footing with portfolio generating $15.4 million of cash flow in April, driven by continued strength in our South Florida cluster. We were very encouraged that our cash flows remain consistent at roughly $15.5 million per month for May and June, driven by the resurgence of our urban non-resort markets. Non-resort contribution improved sequentially from 59% in April to 72% in June, resulting in approximately two-thirds of our portfolio-wide EBITDA driven by our non-resort assets, nearly double that of the prior quarter. The second derivative of this extended recovery will be driven by the urban markets that have been slower to recover as compared to the resort and leisure segments. Our assets located in some of the strongest coastal gateway cities in the country are at the nascent stages of recovery and are positioned extremely well to benefit from long runways in the business travel, convention, group, and international channel recoveries that continue to build. As I transition to our market performance in the second quarter, let me stay on our non-resort portfolio, which turned in its best performance since the onset of the pandemic. Urban rev par increased 17% from April to June, and the portfolio generated $31.6 million of EBITDA, more than triple that of the prior quarter. There is no doubt that a significant portion of the urban performance was leisure-driven, as the summer months are usually much lighter on business transient travel. But the midweek strength in our urban markets is very encouraging, and this portfolio is particularly well positioned for continued growth, as all indications point to increased business, group, and international travel in the coming months. We were able to drive rate growth in our urban markets as compared to 2019. Our urban ADR of $277 in June was 5.6% above June of 2019. even as occupancies continue to recover to well below pre-COVID levels. Among our urban markets, we are most encouraged by performance in New York City in the second quarter. New York was our highest EBITDA-producing market, generating $9.4 million in EBITDA for the quarter. Our high at Union Square, Hilton Garden Inn Tribeca, and the new Hotel Brooklyn exceeded Q2 2019 EBITDA, while the Hilton Garden Inn 52nd Street came in just below 2019 levels. In total, our Manhattan portfolio drove 90% of 2019 EBITDA. As we've noted in the past, New York City has historically been the market leader in occupancy. According to New York City & Company's June Travel Outlook, New York is expected to welcome 57 million visitors in 2022. more than double the 22 million visitors from 2021. This number is projected to grow to nearly 64 million visitors in 2023. This study, along with the actualizing results on the ground today, fuel our confidence that New York will revert back to prior levels over the next few years, which will further drive rate. Pricing power was especially robust in Manhattan, which in June drove ADR growth of 14% compared to 2019. despite occupancy still trailing pre-pandemic levels by 1,600 basis points. 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 and held down rates. Based on what we are seeing in New York, we believe that is about to change. According to our detailed internal analysis, as well as third-party studies, approximately 10,000 keys may be removed from the hotel inventory for the foreseeable future, if not permanently, by way of demolition, resizing, or alternate use conversions. In our view, this reduction, coupled with the new special permit laws enacted by New York City's City Planning Commission, results in a net supply reduction of 1 to 2%. Now, as the cost of construction and financing continues to rise, supply should be limited to the low single-digit range for the foreseeable future. These positive supply trends, multiple channels of pent-up demand returning to the market, and pricing power in the highest occupancy market in the country significantly improve the operating environment for current New York hotel owners in this next cycle. We believe New York, is in the early stages of a long recovery period, and we are very optimistic about the growth potential of this market moving forward. As mentioned previously, we feel strongly that incremental growth in business travel will provide a significant tailwind to our portfolio and amplify our growth thesis. While there is speculation as to how business travel will look as we move beyond the pandemic, and what impact the macro environment will have on corporate travel. The fact remains that more people are traveling today than at any point since 2019, and that all indications from our corporate accounts, industry publications, results on the ground point to the growing demand for business travel. According to the GBTA's June poll, in-person meetings are a priority for companies when budgeting for corporate travel. with 80% of travel buyers feeling more optimistic about a recovery versus earlier in this year, and 84% of travel management companies reporting increased bookings from the prior month. Airlines, travel agents, and credit card companies are reporting more robust booking pace for the fall than this time in 2019. The return of the business traveler, who is historically less price sensitive, coupled with price inelastic upper tier leisure demand, bodes well for continued ADR growth as gateway urban markets compress. With that, I will shift the focus to our resort portfolio, which once again continued its stellar performance throughout the quarter, with occupancy just shy of 75% and REVPAR growth of 36.5% to the second quarter of 2019. The resort portfolio generated $15.8 million in EBITDA, an increase of over $7 million, or 80% growth over the second quarter of 2019. Our properties in Miami and Key West once again benefited from the unique market dynamics we are witnessing in South Florida. The Parrot Keys 74% occupancy and $497 average daily rate resulted in a $368 rev par. which surpassed the second quarter's 2019 rev par by 59%. Parrot Key generated $2.9 million in EBITDA for the quarter, 127% increase to the same period in 2019. While the late summer and early fall are typically slow seasons in Key West, we have seen continued strength at the Parrot Key and expect continued outperformance throughout 2022, especially to close out the year. The Miami Beach market turned in another outstanding quarter, as the Cadillac recorded 80% occupancy at a $283 ADR, resulting in a rev par of $226 for the quarter, a 66% increase to 2019. The hotel generated $3.3 million of EBITDA, a 158% increase from the second quarter of 2019. The Ritz-Carlton Coconut Grove drove nearly 50% ADR growth, and over $1 million in EBITDA, 148% increase to the second quarter of 2019. As noted on our last call, we expect to see very strong momentum in the South Florida markets moving forward, driven not only by the traditional leisure traveler, but also by the uptick in future business travel related to the influx of financial and technology companies that have relocated to or opened new and significant office space in the market during the pandemic. To give you an example of the evolving South Florida demand, tentative 2023 convention and major group events in the Miami market are expected to drive a 51% increase in related room nights from 2022. This would represent a 30% increase to 2019 levels. Compression from convention and small group events and large group events and the ramp up in international demand has begun. But there is a long runway for growth on Miami Beach and Coconut Grove. In California, the Sanctuary Beach Resort continued its robust performance, posting an ADR of $572 for the quarter, an increase of 49% to 2019, leading to rev far growth of 29% for the quarter. The resort posted EBITDA of nearly $1.8 million for the quarter, an increase of 73.5% to the same period of 2019. The Hotel Milo in Santa Barbara generated just under $1.5 million in EBITDA in the second quarter, an increase of 80% to the second quarter of 2019. In closing, I want to reiterate that robust performance across the travel sector is a clear indication that the lodging recovery is underway and accelerating. and there is a long runway of value creation ahead in our exceptional portfolio of hotels. During the first half of the year, we took significant action to transform our portfolio and to right-size our balance sheet by the sale of our select service portfolio. As we move forward with our coastal luxury and lifestyle portfolio and our purpose-built New York City cluster, we are extremely well-positioned to benefit from the tailwinds of the return of business traveler and international segments, while also enjoying the unprecedented pricing power of our differentiated experiential hotel offerings. 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. From a strategic standpoint, our public market valuation continues to be significantly discounted to private market values for our assets, as evidenced by our hotel sale transactions in both 2021 and 2022. As property performance continues to accelerate, we will close this valuation gap through our continued focus on both operational excellence and strategic transactions. With that, let me turn it over to Ash to discuss in more detail our financial performance and outlook, as well as meaningful improvements to our financial flexibility and credit profile.