Hersha Hospitality Trust Class A Common Shares of Beneficial Interest

Hello everyone and welcome to the Hersha Hospitality Trust second quarter 2023 earnings conference call and webcast. My name is Emily and I'll be coordinating your call today. After the presentation, there will be the opportunity for any questions which you can ask by pressing the star followed by the number one on your telephone keypads. I'll now turn the call over to our host, Andrew Tumacchio with Hersha Hospitality Trust. Please go ahead, Andrew.

Thank you, Emily, and good morning to everyone joining us today. Welcome to the Hersha Hospitality Trust second quarter 2023 conference call. Today's call will be based on the second quarter 2023 earnings release, which was distributed yesterday afternoon. Before proceeding, I would 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. Neal H. Shah, Fresh Hospitality Trust's President and Chief Executive Officer. Neal, you may begin.

Good morning, and thank you for being with us on today's call. Joining me this morning are Ashish Parikh, our Chief Financial Officer, and Jay Shah. I'll begin by covering this portfolio's performance in this quarter, including a deep dive on our New York portfolio, before touching on our capital allocation and strategic outlook. When we last spoke in late April, despite economic uncertainty and general market volatility, our positive outlook was driven by the accelerating performance at our hotels, especially in our core urban markets. While the macroeconomic picture for the back half of the year remains uncertain, and forecasts vary significantly among economists, overall GDP forecasts have continued to improve, and we are seeing more confidence by both businesses and the consumer than at any time in the previous 12 months. In fact, in June, consumer spending, adjusted for inflation, increased the most since January, while annual U.S. inflation rose at its slowest pace in more than two years. During the second quarter, our urban markets achieved 12.2% rev part growth, And we recorded a similar level of growth and performance in July as compared to July 2022. This strong growth in our urban markets has helped our portfolio offset some of the retracement the lodging industry has experienced at domestic resorts. Although we have seen a pullback at these properties compared to the record-setting year of 2022, our resorts are still significantly outperforming pre-COVID levels. And with this segment stabilizing as we move through the summer, We view 2023 as a new base year for growth moving forward for the resort portfolio. We believe the stabilization at our resorts, coupled with the continued outperformance of our urban markets, which account for nearly 60% of our room count, will allow us to drive cash flow and profitability as we continue to progress through the ongoing travel recovery in the back half of 2023 and into 2024. With that, I will move on to discuss our portfolio's performance in the quarter. Our comparable hotel portfolio generated approximately 77% occupancy at an ADR of $303, resulting in rev par of $234 for the second quarter of 2023. This equates to nearly 4% rev par growth to 2022. Urban demand remained robust throughout the quarter, with occupancy growing over 800 basis points compared to the second quarter of 2022. Urban EBITDA of $22.5 million represented 67% of total portfolio EBITDA production, an expansion of 11% from the second quarter 2022. Our strategy to retain a high-quality portfolio of properties in New York is delivering outsized results, and we remain extremely positive about the runway ahead of us in that market. Overall, Manhattan was our largest EBITDA producer for the quarter, generating $8.4 million or 25% of total portfolio EBITDA. The Hilton Garden Inn Midtown East and the Hyatt Union Square were the highest producing New York assets in the second quarter, generating $2.4 million and $2.1 million in EBITDA respectively. and four of our top 10 EBITDA producing assets were located in Manhattan. Meanwhile, our total New York City portfolio, including the boroughs, recorded 13.4% rev car growth compared to the second quarter of 2022. Strong summer performance in New York and Manhattan was driven by a robust return to midweek leisure and long-term group demand. According to SCIFT, New York is the top searched US travel destination for the summer of 2023 and ranked in the top 10 globally. On the ground, international room revenue grew 21.2% from the first to the second quarter of 2023 at our top five New York assets. However, despite this growth, international room revenue in the New York portfolio remains 23% below pre-COVID levels, suggesting more growth opportunities in the coming quarters and years. On the corporate front, for the partnership for New York City, New York City experienced 5% employment growth from Q1 2022 to Q1 2023. This is the third highest growth rate in the United States, behind only Dallas and Tampa, and is now solidly in line with most other major metros when it comes to office attendance, where it had previously trailed the national average for most of the pandemic. Our Manhattan portfolio recorded occupancy of 86% in the second quarter, more than 1,000 basis points greater than 2022. In June, our Manhattan hotels topped 90% occupancy for the first time since 2019. Strong demand carried into July with occupancy of approximately 91%. As we begin to reach pre-COVID occupancy levels in our New York portfolio, I want to point out that during the last cycle, we had record demand for hotel rooms in the city. But year-over-year, mid-single-digit supply growth resulted in a very challenging operating environment for owners. As we look forward, a key differentiator from the prior cycle to today's operating environments are the much more favorable supply dynamics, coupled with very strict zoning regulations and many alternate use conversions. These factors are forecasted to result in a net supply reduction of 1% to 2% of inventory for the short to medium term, with very little new supply forecasted after that time period. New York is our largest overall exposure, and we are extremely encouraged with the market's recovery to date and remain optimistic on the long-term outlook for the growth in the city, which in our view is as positive as any market in the country. Boston had yet another strong quarter, with 10.5% RevPAR growth compared to 2022, driven by nearly 8% ADR growth. The Boston Envoy was the top EBITDA producer in our consolidated portfolio, generating $3.4 million of EBITDA. For the quarter, the Envoy recorded occupancy of 84% at a $431 ADR, resulting in RevPAR of $361. up 14% from the second quarter of 2022. The Philadelphia Westin generated nearly $2.4 million of EBITDA in the quarter, despite disruption from the total rooms revenue, which completed in April. Looking ahead for the balance of the year, Philadelphia, which has been one of our slower recovering markets, has several tailwinds related to group and corporate travel. Comcast NBC Universal, one of the city's largest employers, is requiring employees back in the office four days a week post-Labor Day. I've been in Philadelphia all summer, and the momentum is palpable. Office occupancy, retail activity, and street life has improved meaningfully. For the third quarter, business transient room revenues are 15% ahead of 2022 for the entire Philadelphia market. And looking ahead to the fourth quarter for Philadelphia, group pace is impressive with the reemergence of convention demands. The Westin has three considerable convention-related room blocks on the books in October and another in November. At the Rittenhouse, group pace is driven by stronger corporate board meeting demand and a social group base, including wedding room blocks and the like. As corporate and group demand continues to return in Philadelphia, we remain confident that our newly renovated Philadelphia Westin and the Rittenhouse Hotel, the city's only independent Forbes five-star hotel, will be beneficiaries of the increased demand in the market. In Washington, D.C., the Ritz-Carlton Georgetown recorded occupancy of 71% at a nearly $700 ADR, resulting in rev par of $492. The Ritz's $1.2 million in EBITDA is up nearly 10% from the second quarter of 2022. Meanwhile, the St. Gregory Hotel generated over $1.2 million in EBITDA, up 72% from prior year. Looking forward in the third quarter, Washington, D.C. will be impacted by a limited congressional calendar with the House and Senate on vacation for the entirety of August. However, both the House and Senate are forecast to be in session for the majority of October, November, and the first two weeks of December, which will boost overall demand in the city. Washington, D.C. is also expected to host four city-wide in the fourth quarter, with the largest expected to generate nearly 60,000 room nights for the market. Moving on to our resort portfolio. As I mentioned earlier, the broader lodging industry has experienced a pullback in resort markets compared to the record-setting 2022. As service levels normalized and alternative travel options and destinations became available, Despite that softness versus 2022, we are performing well above pre-COVID levels, and we have seen a stabilization of these results that has continued into July. We view 2023 as a base year for growth moving forward. Despite the difficult comparisons to a very strong 2022, our resorts generated just under $11 million in EBITDA, down approximately 24% to prior year, but up 37% to 2019. The Annapolis Waterfront Hotel, the Mystic Marriott, and the Ambrose Hotel Santa Monica turned in strong quarters with $2.3 million, $1.8 million, and $1.2 million in EBITDA, increases of 15%, 5%, and 6% to 2022, respectively. In July, REVPAR for our resort portfolios continued to stabilize compared to 2022. Prior to handing it off to Ashish, I will briefly cover our strategic outlook. We are encouraged by the resilience of our portfolio and the strength in our urban markets. Our outlook on the current lodging recovery and the sector's long-term fundamentals, including a low supply environment and long runways in the recovery of international and business travel remains very positive. The debt and transaction markets remain somewhat muted. while we anticipate a more active transaction environment as the year progresses. As noted last quarter, we are unlikely to be acquisitive in the near term. We are more likely to use our cash on hand to continue to reduce floating rate debt, similar to the pay down of our corporate facility and the St. Gregory mortgage, which were immediately accretive. With a handful of non-core assets currently on the market, we will continue to refine the portfolio and reduce leverage. Since the pandemic, our most efficient cost of capital has been realized via asset sales, at or near NAV, and averaging well above our public market valuation. Last year, we sold 11 hotels for over $650 million. Our urban select service portfolio traded at $360,000 per key, while the sales of our lifestyle and luxury properties achieved per-key values in the mid-$400s. Creating older, non-core assets with upcoming capital needs has allowed us to right-size our balance sheet and significantly improve leverage. And as Ash will cover in detail, we are in a very strong financial position heading into the second half of the year. The values we've achieved with our asset sales are a testament to both our portfolio assembly, our strategy, and importantly, the hard work our team has done to manage our portfolio. which ranges from property renovations and repositioning to very active asset management, a focus on efficient operations and sustainability that has resulted in industry-leading property operating margins. These valuations affirm our firm belief that we've traded an outsized discount to our private market value, and we are focused on closing that gap without diluting our shareholders. We will remain open-minded and nimble in our approach And given our financial flexibility in a time of economic uncertainty, we remain well positioned to act swiftly when the right opportunities present themselves to reduce the public to private discount. 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.