Q3 2019 Earnings Call
Greetings and welcome to the Chatham Lodging Trust third quarter 2019 financial results Conference call. At this time, all participants are to listen only mode. A brief question answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star as you're on your telephone keypad. As a reminder, this conference is being recorded.
It's now my pleasure to introduce your host Chris Daily present daily Great. Thank you Mr. daily you may begin.
Thank you David Good morning, everyone and welcome to the Chatham Lodging Trust third quarter 2019 results Conference call. Please note that many of our comments today are considered forward looking statements as defined by federal Securities laws.
These statements are subject to risks and uncertainties, both known and unknown as described her most recent Form 10-K , another FCC filings.
All information in this call is as of October 31st 2019, unless otherwise noted as a company undertakes no obligation to update any forward looking statement to conform the statement actual results or changes in the company's expectations.
You can find copies of our FCC violence and earnings release, which contain reconciliations to non-GAAP financial measures reference on this call on our website, a Chatham lodging Trust Dot com.
Now to provide you with some insight to check them at 29, <unk> third quarter results allow me to introduce your Fisher, Chairman, President and Chief Executive Officer, Dennis Craven Executive Vice President and Chief Operating Officer, Jeremy Wegner, Senior Vice President and Chief Financial Officer.
Yes, it over to Jeff Fisher, Jeff.
Alright. Thank you Chris good morning, everybody glad to be here again earlier today, we reported our third quarter results in Revpar finished.
At the upper end of our guidance range that adjusted EBITDA and FFO beat consensus and the upper end of our guidance due to very strong margin performance that we'll talk about here.
Our 220, 18 acquisitions ramping up our third quarter adjusted EBITDA rose over 3%.
Adjusted FFO rose over 2% after accounting for the sale of our to Western P.A. assets earlier this year.
Our improved performance in the third quarter is driving our raised guidance for the full year, which is nice to deliver to our shareholders. As we initially guided at the beginning of the year and have reminded everyone. Since then we do have a very tough fourth quarter Revpar cop due to the significant amount of revenue we earned in 2018.
Came from the gas explosions and north Boston as well as a huge corridor in San Diego, Our 2018 fourth quarter Revpar grew 4.1% as a reminder, that was driven by a whopping 36% gain at the four hotels, which benefited.
From the gas explosions, and 34% Revpar gain and San Diego last year.
Turning back to our third quarter. This year I'm, particularly proud of our ability to increase operating margins in the quarter as I said when comparable Revpar was down 30 basis points, even when you look at our year to date performance our comparable operating margins are only down 10 basis points while revpar.
Our has declined 50 basis points.
This performance is of course is not typical nor what you should expect from us going forward when revpar declines, but I will say that we have invested in our continuing to invest a tremendous amount of energy working with island hospitality to examine all facets of our operations with the goal of Maxim.
I think our topline and bottom line during the challenging generally flat revpar environment that we're in through these efforts were adding revenue as we've talked about a and reducing expenses or minimizing expense increases wherever we can.
And I can tell you that we're not done yet we're continuing to find ways and look for ways to enhance our operating results and enhance our free cash flow as we look forward to 2020 and work with island and setting the budgets for 2020.
We firmly believe we have the best in class operating plot platform as you've heard before but our collaborative efforts really with the island really have paid off over the last couple of years you could see the proof in.
The lack of margin erosion, if not improvement.
Everything's on the table in our ability to move quickly is paramount our other revenue is significantly off our revpar market share is.
We're adding SMB outlets that are bringing incremental profits in the select service hotels, we are converting inefficient or nonprofitable spaces into when we say SMB outlets. It really ought to be an asphalt, let's because we're looking for beverage primarily is small.
Bars is the key in some of these extended stay hotels.
We're rolling out efficiency programs aimed at improving our housekeeping and maintenance departments and we're investing dollars to reduce our energy usage, where the return on investment is worthwhile, we're enhancing our risk management programs to reduce losses or minimize premium increases.
Turning back third quarter results Revpar declined, 0.3%, which was at the upper end of our guidance range of flat to minus 1.5% Silicon Valley was particularly strong with revpar up almost 5% excluding the one hotel that was still under renovation and that Revpar gain was a few hundred basis points.
Better than our expectation.
Also as I alluded to earlier, we're continuing to gain Revpar index, which was up almost 1% in the quarter quarter and is up a strong 1.2% for the year. This is really impressive I think considering all the new supply that has come into a lot of our markets and continues to.
Be absorbed.
So as we look forward to touch briefly on supply again, new upscale supply in our market tracks as measured by Smith travel peaked at 5% in 2015 and declined each year to 4% and 16, 3% 17, 2% in 18, but tick.
Back up slightly to 3% in 29 team, we would expect new supply numbers to be pretty similar in 2020.
Strategically well continue to explore asset sales on a limited an opportunistic basis with the intention of using those proceeds to invest an additional development opportunities on a limited basis, where we believe we can add long term value an incremental cash flow such as our 55 million dollar Warner Center project.
In Allied acquisitions remain challenging due to what we believe our unreasonable expectations as to going in cap rates for stabilized assets. So take a pretty special situation for us to make an acquisition more of a value add opportunity I think.
Looking ahead to 2020, it's still too early for us to disclose Revpar expectation was working with a and through our budgeting process with island and continuing to negotiate with top corporate accounts across the country 2020 does set up better for us, though on the renovation front.
As we will always be renovating four hotels next year compared to six this year and this year six includes two of our largest hotels silly, one and silly to the Sunnyvale resident sans the number rooms, where renovations are commencing there's got to be down 32.
Percent next year. This helps our revpar performance on a comp basis and reduces our expected capex by $5 million to $10 million and of course, enhancing our free cash flow with that I'd like to turn it over to task for a little more detail Dennis Thanks, Jeff Good morning, everyone Revpar declined 30 Bips.
$145 in the quarter for our 40 comparable wholly owned hotels 80, our.
Rose, 0.5% to $173, while occupancy declined 80 basis points to a very strong 85%.
We had some nice revpar gains in four of the top six markets Houston continues to be week, and L.A.'s underperforming our expectations by a little bit October revpar is forecast to be down a little over 5% for our portfolio was most with most of all all of that decline due to the for Boston gas explosion hotels that.
Helped us in 2018 as well just at the San Diego market off in 2018, and we've also got a little bit of an extended renovation going on at our San Mateo residents and that's carried into the fourth quarter.
Looking into our sixth largest markets. So what's starting with Silicon Valley, which is by far largest market contributing approximately a fourth of our EBITDA Revpar was up almost 5% $294 80, our was up 3% to $245 and occupancy was up 2% to 90%.
Tells it a fantastic job with some of our key corporate accounts, including.
Welcoming our largest group of interns earlier this summer.
San Diego represents our second largest largest market and revpar was up 1% in the quarter to $180 over a pretty tough comp in the third quarter of 18, our mission Valley residents and had a solid quarter with Revpar up 3% as it continues to battle and absorb new supply over the last couple of years in that market and.
Our gas lamp, rather than 10 was down 1%.
As downtown San Diego as Jeff alluded to a bit earlier had a pretty big second half of 2018, Washington, D.C. experienced revpar gain of 5.4% $252 driven by strong gains that are tysons, rather than 10, where revpar grew 14%.
The hotel benefiting from a great renovation earlier this year, that's bringing back some corporate guest as well as the de flagging of a hotel that was in our comps at a in the past our three northeastern coastal market hotel in New Hampshire in Maine continue to outperform with Revpar advancing 4% to $225 the highest.
As far as our top 10 markets. All three hotels are benefiting from healthy consumer spending and our Portsmouth Hilton Garden Inn has done a great job securing both corporate and leisure business.
Within the quarter.
Houston, which is our fifth largest market continues to struggle with revpar declining 17% to $84 to the hotels render innovation during the quarter, but our other two hotels were also week.
Supply in our directly competitive markets is up while demand is down we're especially impacted by a new residents and at the medical center as well as a 354 room intercon at the medical center as well.
That yeah, we believe our art art, certainly trying to ramp up occupancy as quickly as possible and of course that comes at a sacrifice to the overall market.
In Los Angeles, Revpar was down 5%, our residents and anime was down 8% in the quarter as demand related to.
Related to Disneyland and specifically the new Star Wars opening earlier this summer remains a softer than expected.
In the market.
As Jeff already highlighted it was really a standout quarter with our operating margins up despite a decline in Revpar total revenue was up 2.6 million in our 40 comparable hotels and operating profit was up 1.2 million. So obviously had some pretty good flow through 46% on that incremental revenue year over year.
Parking revenue was up 400000 or 22% in the quarter, we continue to roll out parking charges at additional hotels, where the market allows an increasing secondaries and other hotels were examining corporate accounts to ensure that we're earning the approximate amount of total revenue from those accounts, which includes obviously the impact of parking revenue on that.
Great.
I roll benefits represent approximately 36% of our overall operating expenses and 18% of our revenue on a per occupied room basis payroll and benefits rose 1.5% in.
In our overall cost, which includes casual labor labor and overtime payroll was up 4.3%, while our benefit costs are actually down 7.6% on a per occupied room basis wage pressures remain our biggest concern introduced to historically low unemployment rates, which is obviously driving hourly wage is higher but also.
Causing a shortage in qualified workforce within the quarter casual labor doubled and was up $150000 and our hotels.
We're communicating and again going back to the platform, we're communicating with our customers to understand the services that they value most on a daily basis. So that we can spend our time performing tas most critical to our guest satisfaction, we're using that knowledge to customize our guest service model. We're sharing those experiences with our brands are also rolling out pilot program.
Ends around the country, we expect to spend over $60 million on payroll and benefits in 2019, and our rooms departmental will comprise about 60% of that expense.
Looking more efficiently will allow us to employment improve employee satisfaction and offer competitive wages to our employees and hopefully reduce overtime casual labor and employee related claims.
Working better and more efficiently to him to art to improve our employee retention without sacrificing guest experiences.
I would be a model change or that could benefit us down the road lastly, during the quarter I guess acquisition costs were down 1% in the quarter and this aided our margins by approximately 18 basis points brand related costs were the primary driver as our retail segment production was down about that same 1% and the third quarter.
That I'll turn it over to Jeremy Thanks, Dennis Good morning, everyone for the quarter, we reported net income of $10.1 billion compared to net income of 14.7 million. In Q3, 2018 3.3 million of the decline was related to impairments recorded on three hotels and the Jvs in Q3 2019.
The primary differences between net income and FFO relate to non cash costs, such as depreciation which was $12.9 million in the quarter other charges, which were zero point threemillion and our share of similar items within the joint ventures, which were approximately $5.3 million in the quarter.
Adjusted FFO for the quarter was 28.6 million compared to $28.4 million in Q3 2018, an increase of 1% adjusted FFO per share was 60 cents compared to the 61 cents per share generated in Q3 2018.
Adjusted EBITDA for the company increased 2.1% to 39.4 million compared to 38.6 million in Q2 Q3 2018 in the quarter. Our two joint ventures contributed approximately 5 million of adjusted EBITDA in 2.6 million of adjusted FFO third quarter Revpar was down 0.3% in the inland.
Portfolio and down 25% in the innkeepers portfolio.
Our balance sheet remains in excellent condition at the end of Q3, we had $86 million drawn under our revolving credit facility and $164 million of remaining availability are reasonable leverage in significant credit facility availability will enable us to fund the remaining $50 million of costs for our 65 million dollar Warner Center.
California Hotel development entirely with their credit facility.
At the end of Q3, we had $574.9 million of that our weighted average cost of debt was 4.5% and our weighted average debt maturities 4.2 years.
Transitioning to our guidance for Q4 and full year 2019, I'd like to note that our Q4 guidance takes into account the renovations of the residents in San Mateo and residents in Sunnyvale too.
We expect Q4, Revpar declined six and a half a percent of 5% and full year 2019, revpar declined 2% to 1.5%.
As a reminder, our Boston area properties will face very difficult Q4 comparisons due to the surgeon onetime ghastly related business in Q4, 2018, we expected the challenging comparisons for our Boston properties will impact our Q4 revpar by approximately 330 basis points.
In addition, our Q4 revpar will be impacted by approximately 70 basis points due to renovation delays at our residents in San Mateo property and by an additional 70 basis points due to onetime business in our two San Diego properties in Q4 2018.
Our full year forecast for corporate cash DNA is nine and a half million dollars.
On a full year basis. The two joint ventures are expected to contribute $15.9 million to $16.4 million of EBITDA.
And 6 million to six and a half million dollars about FFO.
Our full year adjusted EBITDA is now expected to be 128.7 million to $131.1 million.
Our full year AFA FFO is now expected to be 85.4 million to 86.8 million, which is an increase of $500000 for one cent per share at the midpoint.
I think at this point operator that concludes our remarks, and we'll open it up for questions.
Thank you we will now be conducting a question answer session. If he would like to ask a question. Please press star one on your telephone keypad a confirmation total indicate your line is another question.
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Our first question comes from the line of Ari Klein with BMO capital markets. Please proceed with your question.
Good morning, you mentioned, a yet EBITDA margins are holding up a little bit better. Despite the revpar declines, but you also mentioned not necessarily expect that kinda performance going forward.
How should we think about the trade off between Revpar and EBITDA as we look to next year.
Hey, sorry. This is Dennis thanks for joining the call appreciate you're having us having have being with us.
And with Chatham, So listen I think specifically when we look at the fourth quarter, obviously with Revpar down.
5% to 6.5% Theres no way in heck, we're going to be able to to maintain our margins for the fourth quarter, but as you asking as we look ahead to 2020, we've been pretty consistent in saying that you know for up for our portfolio, it's going to take somewhere around a 2% revpar green gain on a stabilized basis to to be able to Maine.
18.
Our operating margins I think as Weve continued to to make things a little more efficient and really driving the other revenue over the past kind of six quarters or so and we still got some ramp and that that number comes down a little bit.
As we move into 2020, so I think we still got some run rate.
For for year over year growth there, so maybe that comes down into the.
Zero to 1% Revpar gain and we can possibly maintain margins but.
I think certainly we believe that it's a little bit less for our portfolio than you know that 2% as we move into 2020.
But.
I think that's pretty encouraging compared to a lot of our peers.
Yeah. Thanks for that and then the for hotel renovations for for next year or was that always part of the plan or if you pull back a little given the current environment.
We actually that it's we originally scheduled from its a great question were originally scheduled for five hotels.
The one that we pushed into 2021 from 2020 as our Hampton Inn in Portland, Maine, which is just due to condition in performance. We were able to I think we think we can competitively.
Such that off 12 months. So it was five we push that down before.
Okay, and then just last one for me to what extent has the the parking.
The fees been rolled out across across portfolio, how much opportunity you think is left in that.
There's a couple of different opportunities related around that so we still have.
A few hotels that we are not charging for parking yet.
So ultimately yeah, we'd like to say that will roll out something there.
But theres two other parts to it which is one is continuing to find markets that can absorb rate increases into is and what I alluded to in my prepared comments is the execution of charging and collecting those parking parking revenues whether that be for a transient customer or in the in the essence of a corporate costs.
Summer, where we're negotiating or eight for next year and the past we might have waved parking charges or we might not have had parking charges. So as we move forward into 2020, you know we have to analyze for a total revenue for a corporate customer to say hey are we going to be able to get the right right out of this customer eight.
Customer b.
Depending on whether we're going to be able to include parking our charge for parking for that customer. So yeah. We still have some some ramp as we get into 2020.
To grow that revenue line item.
Great Thanks to the color.
Thank you sorry.
Thank you. Our next question comes from the line of Tyler Battery with Janney Capital markets. Please proceed with your question.
Hi, good morning, Thanks for taking my questions I'm sort of one of the follow up a little bit more on the third quarter specifically.
Just talk a little bit more about some of the market. That's showed some variance versus your budgets and I'm also curious you called out from weakness in Houston, Los Angeles, and Boston, How did performance and those three markets come and versus what you guys were originally budgeted.
Hey, Tyler this is Dennis yes, I mean, especially compared or expectations I think silicon valley was better to the tune of a few hundred basis points better than what our third quarter expectations were Houston was pretty much spot on our expectations for the quarter I think maybe it was our expectation was down 16, and it was down 17 or was it was.
Pretty darn close and the same for Boston. So generally we were right on top of what our expectations were the biggest outperformer compared to what we are guidance was silicon valley with and that wasn't outperformed the positive.
Okay, and then how about Houston in Los Angeles and Boston.
But Houston Boston were spot on.
Basically very close to our expectations for the third quarter L.A. was still left was weaker.
And I don't have the number on it but it will definitely weaker by 100 or 200 basis points compared to what we had built into our guidance for the third quarter and that's primarily due to our Anaheim market, which is just still weaker than what we thought with the with the Star Wars opening in June .
Okay that makes sense and then switching to the guidance here you talk a little bit more about what you're seeing early in the fourth quarter.
Jim has your view on how the fourth quarter is going to shape up changed since the last time you guys reported.
No it basically in line.
For October right now obviously, we're at October 31st, but our expectation is for revpar to be down kind of in the five to five and a half range for October and if you actually look at you know the the three kind of main disruptors for us in the fourth quarter, which is the for gas explosion hotels, the to San Diego hotels in the San Mateo.
So extended renovation.
Back those out in our October Revpar is down.
It's either flat to down kind of 50 basis points in that range. So.
Those obviously for those three different items.
I have about a 500 basis point impact on where our October performances.
And last question for me just you talked a little more about the 2018 acquisitions on the ramp up is going up those assets.
Yeah, I mean, I think consistent with what we talked about last call.
Tyler you know the acquisitions are I think underperforming in terms of total revenue, especially at our Somerville Summerville residence Inn I will say that as we've kind of gotten through October summerville is doing a little bit better than what we you know what what what has been the run rate for the last few months, the Dallas downtown who.
Well, even though it's some underperforming our original model I think listen I think we're very encouraged by the the efforts of our team there and I think.
Because it has.
Because of the courtyard has not only a tie in given its proximity to the convention center and getting a handle on that business and bringing it in house. It also has some nice meeting space on the bottom end the top floor.
And I think it's taking some time to ramp up those sales efforts to get that business coming in that hopefully, we'll see some some growth some outsized growth in 2020 at that hotel.
Okay, Great. That's all from me thank you for the detail.
Thanks Tyler.
Thank you. Our next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.
Hi, good morning, just.
Stepping back others, the Ministry of reported kind of a deceleration of business and leisure travel trends in September and October it seems like.
You are seeing more stable trends is that the case and why do you think that is.
I mean listen I think part of that Anthony Good morning to you I think part of it is.
We we've absorbed a lot of new supply over the last couple of years that has waned in 2018 in 2019, So thats certainly helpful for us, especially in our asset classes.
And I think thats, probably the biggest reason behind that.
It's really just work I think hopefully starting to see the end of that I mean, we've got.
We've got hotels that are starting to that have been hit pretty hard in the past such as Cherry Creek.
Savannah, which had pretty decent quarters with mid to upper single digit revpar gains.
So I think a little bit difference this year versus last year is we're starting to see it little bit of of change there and I do think Anthony it's Jeff that sometimes.
Management teams or others will just comment on slowing demand.
And a tribute frankly and in my view new supply to.
Well not attribute the new supply to what they say is just slowing demand, let's put it that way in reality.
Most of the issue seems to be new supply very competitive pressures, particularly on a D.R. that we're all familiar within these markets.
Because occupancy for the most part.
Is stable or down.
50 basis points, Max so that kind of tells you that there's still plenty of people out there walked in the travel.
Got it it makes sense and it's going to Houston Revpar, there's $84 I think thats, 43% below your portfolio average.
I would point to that market become non core or something somebody that you may want to exit.
Well, it's certainly had a pretty pretty huge decrease.
From the peak there so far I think that we're going to still be a believer in Houston as one of the top markets and top cities in the United States and and I think stay with the hotels because were not really fond of exiting something.
At the bottom.
Yeah, I think growing and diversifying is another way to kind of get out of the Houston problem frankly over time.
And just have less exposure there by growing as opposed to.
Just talking wrong, but we'll see where this thing goes.
Alright, and on Silicon Valley demand seems pretty strong there despite some supply growth.
Okay. That's on the plans that you had to expand your hotels in that market.
I mean, yeah. Those are those I think at this point or are our tabled.
You know will continue to you know, we've got great real estate and a lot of land there. So.
As land get sucked up but all these trillion dollar companies and everything yes, we'd like having that those plots of land, but as far as the expansions at the moment those are table.
Okay.
Great. Thank you.
Thanks. Thanks.
Thank you. Our next question comes from the line of Bryan Maher with FBR Riley. Please.
Yeah, well what's your.
And.
Good morning.
Yes, a little bit.
Thank you made a comment about.
Reasonable seller expectations kind of.
Being prohibitive when it comes to making acquisitions.
At what point do you consider maybe putting a couple of hotels on the market to play into that yes, hi valuation that they're getting.
We're always looking at that as you know, Brian and try to.
Try to see where the real opportunity is to make a good positive spread on a trade and we'll continue to look at bad and I wouldn't be surprised as we move forward in the next 12 months that we take advantage of.
Of one or two of those kind of opportunities.
Okay, and then the Warner Center when did that scheduled to open again.
It's going to be sometime middle of 2021.
And our their thoughts within the region and maybe pursue another development opportunity besides that.
Yeah, I mean, I think we've talked about a previously Brian I think we would certainly be open to.
To doing on a limited basis, whether that's another one or one or two more but.
There are probably going to be staggered in terms of timing.
To some degree so listen I think we believe we can.
Generate some good value there so it, especially as Jeff just talked about potentially selling a couple of hotels opportunistically and taken some of those proceeds and putting it into an investment we believe that delivers a little bit more return.
But there's not a development opportunity kind of eminent and the next quarter to outside of water correct.
No not an immediate future now.
Okay, and then lastly from me on the Labor cost I mean, it was good to see that the benefits work coming down as that cost, but can you talk about what specifically in the benefits health care what was it that drove the benefits component down and which markets are you operating in where labor costs continued to put the most pressure.
So yeah, so on the benefit side, it's a combination of.
On the it's a combination of premiums on the health side as well as claims on the health side and the third point is workers comp, which is also down.
Year over year, So I think on the premium side again going back to the our platform in our close working relationship with island hospitality.
To have an owner such as Chad and where we can sit in with our operating partner and on renewal meetings.
You know and talk about plan design premium allocation copays.
Availability of drugs networks, you name it.
We've made some tweaks there.
And we were a little bit more aggressive in 2018.
To reduce those costs, but we have seen a pretty good drop in claims both on the health side on the workers comp side, and we've invested some dollars into incremental step or not we but island invested some dollars on the risk management side that I think has been pretty beneficial in reducing and being.
A little more active on health and workers comp claims.
As far as addressing closing.
And minimizing.
Keep in a clean out a claim open.
Just incurs additional cost so yes, I think those investment dollars of paid off as well already.
So I think Thats that and then I think the second question was wage pressure wage pressures in key markets wasn't the main thing for US you know obviously, we've got a lot of value in California.
And in Seattle those are those have clearly been the markets where demand labor demand is high.
And the of the availability of labor has shrunk. So we're certainly still seeing the most pressure out west.
Okay. Thanks, Thats all for me.
Thanks, Brian .
Thank you we have no further questions at this time I'd like to turn the floor back over to management for closing remarks.
Well, we appreciate everybody's attendance today good questions today and.
We tried hard to set the expectations.
Straight for the fourth quarter, the overall year results, even when you bake those those results and.
We think are pretty much right in line and feel good about where we're headed in terms of some new initiatives for 2020 that we're working on with the operator and the operating team to again.
Yes, maximize EBITDA here in a flattish I'll call. It revpar environment. So we've got to keep blocking and tackling on those fronts and look forward to speaking with you again soon thanks a lot.
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