Hersha Hospitality Trust Class A Common Shares of Beneficial Interest

Welcome to today's Hersha Hospitality Trust third quarter 2022 earnings conference call and webcast. My name is Jordan and I'll be coordinating your call today. If you'd like to register an audio question, you may do so by pressing star followed by one on your telephone keypad. I'm now going to hand over to Andrew Tamachio to begin. Andrew, please go ahead.

Thank you, Jordan, and good morning to everyone joining us today. Welcome to the Hersha Hospitality Trust third quarter 2022 conference call. Today's call will be based on the third quarter 2022 earnings release, which was distributed yesterday evening. 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's now my pleasure to turn the call over to Mr. Neil H. Shah, Hersha Hospitality Trust President and Chief Operating Officer. Neil, you may begin.

Neil H. Thank you, Andrew, and good morning to everyone. Joining me this morning are Jade Shah, our Chief Executive Officer, and Ashish Parikh, our Chief Financial Officer. As you've seen or read, we have had an extremely active and productive third quarter. on the operations, transactions, and refinancing fronts. And we've been looking forward to update you on our meaningful progress and provide our outlook for the remainder of the year for our refined portfolio. We are clearly experiencing a robust recovery in demand in our urban portfolio as midweek occupancy builds month over month in each of our gateway markets. Pricing power remains impressive in our resort and leisure-oriented markets. For the quarter, our hotels were 72% occupied at a rate of $289.75. Our comparable portfolio RevPar growth of 3.7% in September surpassed the comparable month of 2019, driven by a 16.5% ADR growth to 2019. And we are seeing this trend accelerate into October, with increased business transient demand as we are on pace to record RevPar growth of approximately 8% compared to 2019, driven by 20% ADR growth to 2019. In October, we're trending towards a $326 ADR. We recently announced the closing of both the Hotel Milo Santa Barbara and the Pan Pacific Seattle. These sales, coupled with our previously announced Urban Select service disposition, and the pending sale of our leasehold interest in the Gate JFK will generate approximately $650 million in gross proceeds, allowing us to reduce our cumulative debt load by approximately $500 million and contribute nearly $120 million in unrestricted cash, leaving us a forecasted cash balance approaching $225 million by year end. Ash will cover this in more detail But in this uncertain environment, we are very pleased to have refinanced our credit facilities, reduced our weighted average cost of financing, and to have no meaningful maturities through 2024. The result of our strategic disposition strategy is a streamlined portfolio comprised of differentiated luxury and lifestyle offerings located on premium real estate in gateway urban and resort markets. and a purpose-built New York City cluster. Our portfolio is already generating higher profitability than pre-pandemic levels and will not require major capital infusion or disruption in the near term. Looking ahead, our comparable portfolio is positioned to generate significant cash flow growth in the coming year, as our unique portfolio composition allows us to disproportionately benefit from the long runways in the recovery of business transient, small group, and international travel, and a continuation of strong leisure demand. With that, I'll turn to performance in the quarter. Once again, pricing power was strong across the portfolio in the third quarter. The comparable portfolio recorded an ADR growth of 16%, with virtually all of our markets experiencing double-digit ADR expansion compared to 2019. Our view on rate integrity remains unchanged from prior calls. as we are currently experiencing robust ADR growth for October, both to 2019 and to the prior month. Demand in our non-resort portfolio accelerated throughout the quarter, as non-resort portfolio EBITDA contribution rose from just under 54% in July to 77% in September, ending at 64% for the third quarter. This trend bodes well for the portfolio, as roughly 60% of our pro forma room count is located in urban gateway markets. Another promising trend was the increase in weekday demand as the quarter progressed. Non-resort weekday RevPar increased 33% from July to September, including gains of 38% in Washington, D.C. and Philadelphia, respectively, and just under 12% in Boston. From August to September, the weekend to weekday RevPar premium decreased in each of those markets, with Boston's weekday and weekend REVPAR achieving parity for the month of September. Strength in our non-reserved urban portfolio has carried forward into October, which is on pace to post-ADR growth and generate 5% greater EBITDA than October of 2019 on a same-store basis. As expected for the fourth quarter, we're experiencing a seasonal change in EBITDA production away from leisure travel. In the more leisure-heavy third quarter, our resort portfolio continued to outperform, generating 24% rev par growth through the third quarter of 2019, driven by ADR growth of 29.5%. In what is typically a seasonally slower quarter, our South Florida portfolio posted nearly 35% rev par growth to 2019, driven by 25% ADR growth. Total property level cash flow of $33.4 million in the third quarter marked the second highest EBITDA production since the onset of the pandemic. And we achieved this level of cash flow despite closing on the sale of six of our seven Urban Select Service assets in early August. The comparable portfolio generated just under $31 million in EBITDA for the quarter, an increase of over 8% from 2019. EBITDA margin for the comparable portfolio of 32% represented a 249 basis point increase to 2019, with margins at our resorts increasing by 704 basis points. And despite a seasonal shift to more leisure oriented travel in the third quarter, our non-resort business transient focused hotels realized EBITDA margin growth of 71 basis points compared to the third quarter of 2019. We are confident in our ability to generate improved levels of profitability in the fourth quarter, as it is typically the best quarter for New York City and much stronger in South Florida than Q3. As I transition to our market performance, I will begin with our urban portfolio. In the third quarter, three of our top five EBITDA-producing assets were located in our northeast urban market. The Boston Envoy led the way for the portfolio for the second straight quarter with $4.1 million in EBITDA, a 4.7% increase to 2019 and a nearly 54% gain to 2021. EBITDA margin for the Envoy was 50% in the third quarter, 327 basis points ahead of 2019. In Philadelphia, the Westin generated nearly $2.2 million in EBITDA with a 35% EBITDA margin. And in New York City, the Hyatt Union Square produced over $2 million in EBITDA, a 4% increase to the third quarter of 2019, with an EBITDA margin of 34.9%, representing an increase of 495 basis points to 2019. In total, our New York urban portfolio produced just under $10 million in EBITDA for the quarter, the highest contribution of any market, and achieved an EBITDA margin of 38.1%, with an increase of 180 basis points to 2019. In September, our New York portfolio exceeded 2019 REVPAR by 1.8%, despite reduced occupancies, resulting in an 11% increase in EBITDA from September of 2019. Excluding our Holiday Inn Express Chelsea, which will have a subset of rooms offline for renovation throughout the year's end, we project RevPar and EBITDA growth to 2019 in each month of the fourth quarter for this New York urban portfolio. Now, shifting our focus to our resort portfolio, the Annapolis Waterfront Hotel led the way with 85.8% occupancy at an ADR of $356.13. resulting in a rev par of $305.68, 32.4% greater than 2019. The hotel generated $2.6 million in EBITDA for the quarter, second highest contribution in the entire portfolio, nearly 55% greater than 2019, and 5% above the record setting 2021. EBITDA margin of 53.6% was 641 basis points greater than 2019. On the West Coast, the Sanctuary Beach Resort in Monterey continued to demonstrate its pricing power as the resort's third quarter ADR of $709.97 drove rev par of $490, a nearly 23% increase to 2019. Generated $1.8 million of EBITDA for the quarter, a 36.5% increase to 19, and an EBITDA margin for the quarter of 42.2%. Fortunately, our South Florida portfolio sustained no material damage from Hurricane Ian. As expected from a major hurricane, we did see cancellations during the last week of September and into early October. In total, we estimate approximately $500,000 of revenue was lost due to travel disruption caused by the storm in September. In Miami Beach, occupancy and ADR growth at the Cadillac Hotel and Beach Club led to 12.1% rev part growth for the third quarter. And this is compared to the record setting 2021 performance. The property's third quarter EBITDA of 1 million was up 425% compared to 2019, as the hotel was still ramping from the impact of Hurricane Irma in that earlier period. The Parakeet Hotel and Resort ended the quarter with 68% ADR growth compared to 2019, The hotel generated over $1 million of EBITDA for the quarter, an increase of 100% to 2019. As we mentioned, 2019 figures at Parrot Key are also hampered by the recovery from Hurricane Irma. Before I transition to Ash, a few thoughts on capital allocation. Since the beginning of the pandemic, we have been laser focused on increasing our financial flexibility, without diluting shareholders or encumbering our portfolio with long-term debt. The quality of our hotels, the exceptional capability of our teams, and frankly, tremendously hard work from inside our offices to the folks at our hotels allowed us to manage through this pandemic while increasing liquidity, reducing debt, and meaningfully improving our portfolio during this most challenging period. As our team has communicated consistently throughout the pandemic, our most efficient cost of capital has been realized via asset sales at or near an AV. And as Ash will cover in detail, we are now in a strong financial position with an attractive leverage profile and the runway to create substantial value. The assets we sold and the timing of our dispositions has been strategic. and aligned with our vision of minimizing the public to private market value disparity within our portfolio while maximizing shareholder value. The initial round of dispositions in 2021, which totaled approximately $215 million, reduced our exposure in each of our markets, consisted of some of our older, slower growth assets with capital needs in the near to medium term that did not meet our return requirements. Our decision to hold the next tranche of dispositions into 2022 allowed us to benefit from the increased hotel cash flows in the first half of the year as market valuations approached our internal NAV. We sold our seven hotel urban select service portfolio to a single buyer in the first half of the year and then transacted on the Pan Pacific Seattle and the Hotel Milo with two different investors through the summer and early fall. In each case, the high quality of our hotels and the improving cash flow profile allowed us to transact at or near our internal NAV for the assets. Sales proceeds from this year, coupled with the continued operational ramp up and cash flow generated by our portfolio, gave our Board of Trustees confidence to reinstate our common dividend to begin returning capital to our shareholders. As noted last quarter, our board continues to monitor and evaluate market conditions, and if in the best interest of the company, intends to declare a special cash dividend to holders of common shares and limited partnership units in the fourth quarter of 2022. In closing, I would like to reiterate the substantial impact of our corporate initiatives. The board and management team has remained committed to maximizing shareholder value, and we remain flexible and opportunistic in our approach. Our strategies have allowed us to significantly improve our leverage profile, reduce the weighted average cost of debt in a period of rising interest rates, reinstate our dividend, and build up substantial cash reserves without diluting shareholders and while refining our portfolio. Exceptional locations in the most valuable markets in the nation. Hershey's coastal luxury and lifestyle portfolio and our purpose-built New York City cluster are extremely well positioned to continue driving significant cash flow. And with few capital expenditures on the horizon, we can continue to focus on hotel operations to drive high absolute rev par on industry-leading margins, generating significant EBITDA and free cash flow growth in the coming years. As we have previously noted, the valuations at which we have transacted this year highlight the significant disparity between the public and private valuations of our portfolio. We believe the significant cash flow generation and low leverage profile will drive the closure of this valuation gap while we continue to return capital to our investors via dividends. With that, let me turn it over to Ash to discuss in more detail our financial performance and outlook, including a deeper dive into our credit facility and portfolio profitability.