Hersha Hospitality Trust Class A Common Shares of Beneficial Interest

Good morning. Thank you for attending today's Hersha Hospitality Trust First Quarter 2023 Earnings Conference Call and Webcast. My name is Alicia, and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star 1 on your telephone keypad. I would now like to pass the conference over to your host, Andrew Tamachio, with Hersha Hospitality Trust. You may now proceed.

Thank you, Alicia, and good morning to everyone joining us today. Welcome to the Hersha Hospitality Trust first quarter 2023 conference call. Today's call will be based on the first quarter 2023 earnings release, which we 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 A. Shah, Hershaw Hospitality Trust's President and Chief Executive Officer. Neal, you may begin.

Thank you, Andrew. And good morning, and thank you to all of you for being with us on today's call. Joining me this morning is Ashish Parikh, our Chief Financial Officer. I will kick things off by covering the portfolio's performance in the quarter before touching on our capital allocation outlook. Ash will talk through our second quarter guidance, discuss our margin outlook, and provide an update on our balance sheet. From when we last spoke in mid-February, there has been increased volatility in the market, which has been felt by every sector, but has had an outsized impact on the credit markets, banking sector, and commercial real estate. We remain confident that lodging fundamentals are positive and the current setup continues to point to a multi-year recovery ahead for our sector, while being cognizant of the possibility of continued market volatility and the potential for a more challenging economic landscape or recession in the back half of this year. Many of the signs that led to our optimism in February have come to fruition. We recorded nearly 15% year-over-year REVPAR growth in the first quarter, driven by more than 30% year-over-year growth in our urban portfolio. Our portfolio is generating cash flow and experienced significant acceleration in performance as the first quarter progressed, which is historically our slowest seasonally. With nearly $200 million in cash on hand and access to a $100 million undrawn revolver and no meaningful debt maturities on the horizon, we can focus our efforts on driving cash flow through operations. In the first quarter, we executed several significant renovations across our portfolio. The common area upgrades at both of our Manhattan Hilton Garden Inns and a major guest room renovation at our Philadelphia Westin were completed in time for our spring season. We also completed the first phase of upgrades at our Sanctuary Beach Resort in Monterey, California, and are close to opening our new restaurant and bar, The Helmsman, at the Mystic Marriott Hotel and Spa in the coming weeks. These projects were strategically undertaken in the portfolio's slowest season to minimize their financial impact, but had a greater impact on our first quarter operating results than we originally forecasted, largely due to weaker demand in those markets, some of which was related to weather impacts across the quarter. With the renovations behind us, we expect these newly renovated properties to perform at levels above their historical performance and drive organic cash flow growth for the remainder of this year and beyond, and deliver an attractive return on investment in a similar manner to our pre-pandemic renovations at hotels like the Parakeet Resort and Villas, the Cadillac Hotel and Beach Club, the Ritz-Carlton Coconut Grove, and the Annapolis Waterfront Hotel. With that, I will jump to our performance in the quarter. Our comparable hotel portfolio generated approximately 68% occupancy, and an ADR of $268, resulting in REVPAR of $182 for the first quarter 2023. This equates to 20% ADR growth driving 2.8% REVPAR growth and a 1% EBITDA expansion for the first quarter compared to 2019, despite disruption from our properties under renovation. Excluding our properties under renovation, Our portfolio generated over 73% occupancy, just 600 basis points below 2019, and an ADR of $290, resulting in rev par of $212, an 11% increase to 2019. This subset of the portfolio generated EBITDA of just under $15 million, a 19% gain on the first quarter of 2019, EBITDA margin of 24.1%, was approximately 200 basis points greater than 2019. The disparity in the results illustrates the impact of the renovation disruption, and we are excited to move into the spring season with the projects completed. As I transition to our market performance, I'll start off with our resort portfolio, which continued its robust performance in the first quarter, generating rev par of $242 an increase of nearly 25% to 2019. This growth was primarily the result of pricing power, as resort ADR of $321 was nearly 27% ahead of 2019. Overall resort EBITDA of $13.1 million was nearly 43% greater than 2019 production, and EBITDA margins increased by 535 basis We remain confident in the demand for high-end, differentiated, and experiential offerings and believe our resorts will benefit from their appeal to the modern traveler in both leisure and business segments. All of our resorts are located on premium real estate. They've been well maintained and thoughtfully renovated and face very low supply dynamics in the coming years. And we believe in the long-term fundamentals for growth in each of these markets. As a reminder, all but two of our resorts are located in markets that cater to additional travel segments aside from leisure. These markets benefit from multiple demand generators, including convention centers, corporate headquarters, and universities. The two pure leisure resort markets of Key West and Monterey, California, are coming off of two years of unprecedented performances in 2021 and 2022, and will face more challenging comparisons. The Parakeet Hotel and Villas benefited from the extraordinary pricing power and demand in a time where international travel, particularly to the Caribbean and Europe, was limited. This demand, coupled with an unsustainable staffing model, resulted in record EBITDA production at the resort, even in off-peak seasons. The performance in 2022 will result in difficult comps for 2023, with more normalized growth expected in 2024. But to be clear, we do not expect significant retracement to pre-COVID levels. In fact, in the first quarter of 2023, the Parrot Key Hotel and Villas generated REVPAR growth of 30% to 2019, driving EBITDA expansion of 70% to $2.9 million. The Parrot Key Hotel was our second largest EBITDA contributor in the first quarter, and we anticipate the resort to continue to be one of our top EBITDA producing assets for many years to come. As I discussed, the Century Beach Resort was impacted by the renovation. This disruption, coupled with economic headwinds in the Bay Area and severe weather and flooding experienced in Northern California, impacted the resort's first quarter performance. In addition, the unprecedented snowfall in the western U.S. extended favorable ski conditions well into the first quarter and drew some of our typical travelers to alternative destinations. The first phase of the resort's renovation has now been completed, and the remaining scope will be completed over the slow winter months in time for next year's peak season. This renovation will reposition the property for another level of growth moving forward. The Miami market was the biggest EBITDA contributor, generating just over $8 million. The Cadillac and the Ritz-Carlton Coconut Grove were two of our top three EBITDA contributors, generating $4.9 million and $2.2 million, respectively. We remain very optimistic on South Florida's long-term prospects. Although missing our very bullish internal forecast for the first quarter, Miami did exceed 2022 REVPAR by over 11% and 2022 EBITDA by more than 2%. On the West Coast, our hotel Ambrose generated just under $1 million in EBITDA for the quarter, surpassing both 2019 and 2022. In what is typically a very slow quarter, the Annapolis Waterfront Hotel's 80% occupancy was nearly 800 basis points above pre-COVID levels. And the hotel's EBITDA of $724,000 was 87% above 2019 production and 43% ahead of 2022. With that, I'll transition to our urban portfolio. Q1 is typically the slowest quarter in our urban markets. And after surpassing 2019 RevPAR in Q4, which is one of our strongest urban quarters due to the strength of business travel in October and New York's holiday surge in December, we are still recovering to pre-pandemic levels as of April in our urban portfolio. That being said, Q1 2023 Urban RevPAR was 31% ahead of 2022. And as the first quarter progressed, we experienced tremendous acceleration. Washington, D.C., Boston, and Manhattan led the way for our urban markets, as RevPAR increased 120%, 58%, and 55% from January to March, respectively. The turnaround in D.C. was a welcome sign after being one of our laggard markets in 2022. Also of note, occupancy in our New York City cluster of 77% in March was just below the fourth quarter of 2022, which is seasonally much busier in the holiday season than the start of the year. And this is a great sign heading into the spring season. Thus far in April, month-to-date REVPAR is up more than 15% in each of these markets from March. To put that into perspective, April EBITDA is expected to exceed the entire first quarter production for these markets, as our urban portfolio continues its acceleration into the second quarter. This pickup has been driven by weekday demand in particular. Month to date in April, urban weekday REVPAR is up 80% for our urban portfolio versus the same time period in January, with every market experiencing growth greater than 25%. Performance in Philadelphia was challenged in the first quarter. While much of this is attributable to the renovation disruption at the Westin that I touched on earlier, there was softness in the market, and we did not see pickup in the back half of the quarter that we had forecasted. But we are confident that given the new rooms product at the Westin, we will see improved performance moving forward. Meanwhile, our Rittenhouse Hotel was named the first and only independent Forbes Travel Guide's five-star hotel recipient in Philadelphia in 2023, which will meaningfully drive leisure, international, and the group segment across the coming years. We anticipate additional return of occupancy and demand in the urban markets and are encouraged by the acceleration from March to April, aided by an increase of group, business transient, and international travel as markets around the globe continue to open up from pre-pandemic era restrictions. Transitioning to the corporate front, We are encouraged by our sector fundamentals, not only from the long runways for the return of business and international travel, but also the extremely low supply environment in the coming years due to a dearth in construction financing. We are confident in our market's long-term outlook, and due to significant cash on hand, access to an undrawn revolver, and a lower leverage profile, we are very comfortable concentrating our focus on driving cash flow at our existing portfolio. The debt and transaction markets are muted, and due to these market conditions, we are unlikely to be acquisitive in the near term. We are more likely to use our capital to pay down a portion of floating rate debt, which in today's interest rate environment is immediately accretive. We will remain flexible and entrepreneurial in our approach. Given our financial flexibility in a time of economic uncertainty, we are very well positioned to act swiftly when the right opportunities do present themselves. We firmly believe now more than ever that we trade an outsized discount to our private market value and are focused on closing that gap without diluting our shareholders. With that, let me turn it over to Ash to discuss in more detail our financial outlook, margin performance, and our updated guidance for the quarter.