Q1 2020 Earnings Call

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Quarter 2020 financial results conference call at this time, all participants are in 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 there on your telephone keypad. As a reminder, this conference is being recorded that's all my pleasure to introduce your host Castelli owner of daily.

Great. Thank you Mr. Dale you may begin.

Thank you Evan.

Hi, everyone and welcome to the Chatham Lodging Trust first quarter 2020 results Conference call. Please note that many of our comments. They 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 in her most recent form 10-K and other FCC filings.

All information in this call is there may 11, 2020, unless otherwise noted the company undertakes no obligation to update any forward looking statement to conform the statement to actual results or changes in the company's expectations.

You can find copies of our FCC filings as earnings release, which contain reconciliations to non-GAAP financial measures reference on this call.

On our website Chatham lodging trust Dot com.

No to provide you with some insight into chathams 2021st quarter results allow me to introduce jumped Fisher, Chairman, President and Chief Executive Officer.

It is Craven executive Vice President and Chief operating Officer, Jeremy Wegner, Senior Vice President and Chief Financial Officer.

<unk> session over to Jeff Fisher, Jeff.

Okay, Chris. Thank you very much good morning, everyone first and foremost. Thank you for your interest in channel and we sincerely appreciate your participation. During these unusual times. The covert 19 pandemic has been one of the most destructive events to the global or national economy in history and its impact on the lodging in.

Industry is unprecedented, forcing hotel owners and operators to quickly assess hotel operations under the most dire scenarios complicating the assessment is not knowing the duration of the current trends and the length of the recovery. Accordingly, all lodging companies are having to analyze liquidity needs, which is something on hurdle.

In our space, especially for well capitalized companies, such as Chatham, whose leverage was reasonable going into the pandemic.

We start to feel the impact from pandemic. The second week of March and knew that we needed to take rapid action to protect our long term financial stability key corporate actions include the following.

Of course, we made the extremely difficult decision to suspend our dividend preserving $64 million of cash flow on an annual basis.

We suspended all renovations that had not started and all non emergency capex or capex required by local regulations preserving $10 million, we slowed down capex spending on our Warner Center development, we amended our credit facility enhancing our liquidity by 77 million.

<unk> and providing key covenant relief to the end of the 2021 first quarter. We appreciate the support of our bank group and that endeavor.

Reduced cash corporate DNA expense by 3 million or approximately one third Dennis and I took voluntary pay cuts of 50% and all other Chatham employee used to voluntarily pay cuts of 25%. Our board of Trustees also voluntarily agreed to the 25% reduction.

In comp.

I am thankful to have our best in class operating platform, but island hospitality, especially now which gives us the tools to act.

Probably and more expeditiously than others and has a meaningful impact on the top and bottom line. Furthermore, our teams it Chatham an island have the experience to persevere through these situations, having successfully navigated through numerous cycles and we have thankful to have this platform.

Dennis has 20 years of public logic read experience and I am now working on my 25th year as a public lodging Reid CEO.

We know how to lead a public company through these challenging times.

Contrary to other hotel companies that closed a significant number of their hotels. We've kept all 40 of our hotels open as we've been able to provide accommodations to our nation's military infrastructure related workers first responders and critical medical workers dedicated to ending this pandemic.

Our revenue management in direct sales teams are aggressively sourcing revenue opportunities daily and we all review and look at our National sales team working at Islands reports.

Every single day.

I believe that our portfolios going, especially appealing to the limited amount of demand in our markets has over 70% of our portfolio EBITDA was generated from extended stay hotels. You can also see that our efforts are paying off with the sharp increase in Revpar index over the last three months going.

From an index of 120 in February to now over 150, if you look at our hotel performance since early March occupancy for us bottomed out at a low of 17% on March 29, and today sits at approximately 30%.

Not surprisingly the industry and we are no different.

We've been unable to hold race, which have slowly decline since early March since early March our lowest 80 hours are happening now and the low $90 range, having said that revpar is at its highest since bottoming out on March 29 at the lower $20.

Does that mean, the darkest days are behind Us I sure hope so and the current trend is somewhat encouraging but if we've learned anything it's in these times. These times are in comparable and there is currently really no way of accurately projecting the future looking forward as locality start to rise.

Okay, and we believe the regional drive to leisure and then corporate demand markets will be the first to come back where the urban drive to next followed by fly to urban markets and then lastly group or large scale events. We also believe that premium branded extended stay and select and limited service hotels.

We'll perform best for the foreseeable future due to their ability to accommodate a variety of different travelers added attractive price point that provide a safe and reliable environment at a positive experience.

Big box hotels with massive amounts of rooms, as well as on branded hotels will face a longer road to recovery.

In addition to the concentration or premium branded extended stay hotels in our portfolio more than 96% of our hotels are limited service rooms, the highest percentage among public lodging Reits this should bode well for our portfolio as demand returns as markets.

Open we're situated to capture more the forthcoming demand and better bridge the gap to recovery.

Our hotels are benefiting from the closure of course of many other mostly full service hotels in our markets and since our hotels are open they'll be minimum costs related to ramping up our hotels when the economic recovery begins we're able to generate more revenue retain more.

Please and lose less money and better our overall cash position, which is paramount during this pandemic.

I believe we've got the capital structure to withstand this pandemic. If you assume the full line of credit is drawn the ratio of our net debt to investment in hotels at cost us approximately 40% with current cash available borrowings on our credit facility, our liquidity of 135 million allows us to operate.

<unk> revpar $25 until at least January 2022.

We certainly don't expect that trend to be the case of course, and Additionally, remember we've got six hotels unencumbered by debt with an aggregate investment value of $276 million available as additional source of cash if necessary.

Operationally as a major Hilton and Marriott franchisee I do believe that our operating model. My model is going to look very different going forward. The pandemic has triggered us as an industry to reevaluate. How guests are served whether that is with respect to housekeeping food and beverage.

Rich or other complementary services and what the gas should have to pay first for those services that we offer.

As most of you have heard from us for a while we've been pushing for change. These changes won't happen overnight, but of course. The brands are now are very much in concert with us relative to making the necessary changes to be successful.

Additionally, the impact of new supply as I'm sure you've read should mitigate as we move forward hotels under construction or at least most will be completed but slow down or if you are are under construction, it's gonna be difficult to underwrite the appropriate returns to justify can.

Instruction and I do believe it's gonna be more difficult than ever to obtain construction loans for new hotels with that I'd like to turn it over to Dennis.

Thanks, Jeff I want to spend a few minutes, providing a bit more color on her hotel operating activities. Since early March when the pandemic commenced in the U.S. relying on our experience from prior down cycles or shocks to the lodging industry working with island, we are implementing massive changes to our operating structure on basically a daily basis.

US using real time daily access.

<unk> revenue and expense data trends emphasizing direct sales outreach early on we were able to soften the sharp decline and start building back our revenue base, we've had to make a lot of adjustments to our expense structure.

First and foremost unfortunately that lay off or furlough, approximately 70% of our hotel employees, reducing our head count from approximately 800 employees.

At the end of February to essentially 500 employees at the end of April across our 40 hotels as of the end of April full time equivalents were essentially 370 employees, an average of about eight and a half employees per hotel.

Weve shuttered all of our FNB outlets, we do provide a limited grab and go breakfast, where it's necessary for in case of the businesses in the hotel we've consolidated operations of nearby hotel such as in Silicon Valley, Houston that the Medical Center, Houston West University, Dallas, Denver Summerville Charleston.

Lineup to gain greater economies of scale and these locations were essentially shifting newly arriving guest to a partner hotel.

And obviously in some of these other in every every hotel, we've reduced service levels at hotels, including housekeeping hospitality hospitality offerings.

And having said that we're adopting the best practices for cleaning that are being rolled out by Hilton and Marriott and Hyatt along the way.

Analyzing all where we've been analyzing all of our purchasing programs and maintenance programs for additional cost savings opportunities and we're limiting utility cost as much as possible by consolidating occupancy within hotels, a certain locations are floors and adjusting ongoing utility costs are not occupied rooms are floors by monitoring temperatures lighting et cetera.

[noise] our hotels have never operated at these types of levels before in our release, we disclosed our current estimate of monthly cash burn after all debt service and before capital expenditures based on certain levels of Revpar. These are preliminary estimates based on our April operating results, which had some noise and it related to just.

Staffing changes.

Occasion benefits and the like and certainly we'll refine our model as we get through the second quarter at some of these depressed occupancy levels on a geo p. basis. When you look at breakeven cash flow. It's essentially a at Revpar of you know kind of in the low to mid Thirtys and 32 to 35.

Dollars on a hotel EBITDA basis or breakeven it revpar of approximately $50.

And on a cash flow basis, after all debt service and before Capex were breakeven it revpar.

Approximately kind of 90 to $100.

Again, just depending on the mix of 80 are an occupancy, which I think will again got together some more detail as we get through the quarter.

What are some of the year with approximately 5 million of that spending occurring in the second quarter as we finish up to her innovation in Anaheim and newer shell New York as well as 32 rooms at our Silicon Valley number two location, that's essentially been waiting final inspections from the city, but the city, which has been shut down.

With all inspections due to the Corona virus stoppages.

Turning to the first quarter, obviously, it's a different world. So we're not going to spend a lot of time, just rehashing the details wrapped far decline, 22% to $96 with 80, our dipping 5% to $153 and occupancy declining 17% to 63%.

Through <unk> through February Revpar was flat year over year, and and before the pandemic effects hit us.

And though repowers down 22% for the quarter. Other revenue was down about 10% again, you know as a major emphasis for us over the last couple of years was improving that other operating revenue line, which we we're still seeing some year over year benefits to that before before this down.

Cycle occurred.

Another you know only expense side payroll benefits, obviously down only 10% of the quarter again, a little bit of a trail in terms of operating costs specific to payroll with respect to labor in benefits our benefits on the benefits side are can cost continued to turn down with those costs down about 15.

Present, you over here in the corridor.

On the supply front in our markets as measured by Smith travel new supply, which peaked at 5% in 2015 had basically been declining each year through 2018, it did perk up a little bit to three per cent in 2019 and remain there as of the end of the first quarter when you take out our for Houston Hotel.

Which is where there was a says six still a significant amount of new supply a new supply for us as down about 2% for the if you look at it on a march 31st basis in as Jeff remarked, we certainly believe hotel supplied and the lack there of should be should be a tail wind for the industry over the coming.

Ears as hotel development, most likely it'll be severely impacted.

Due to a lot of the effects that Jeff talked about some I think with that I'll turn it over to Jeremy. Thank the good morning, everyone, even though the phone back to the Cobin 19 pandemic was only felt for just over half of Marge Chathams March row far with down 55.6% <unk>.

8%.

<unk> down 38.9% to $16.5 million and Q1, despite the 21.8% rough part declining Q1, Chathams Hotel EBITDARM margin was 27.6% and the quarter well. This was that represents an 800 base was pointing declined from our Q1 2900 margin is not far off.

From the hotel margins that many of our lodging <unk> peers generated prior to the <unk> endemic.

Adam's adjusted Fo per share with 13 cents in Q1, 2020 down 62% from the 34 sense of adjusted Fo per share in Q1 2019.

Are two joint ventures were highly leveraged before that the cobin 19 pandemic on her facing significant challenges in the current operating environment.

For the full year 2019 before the start of the pandemic. The two J. These had combined leverage of 9.9 times that the but both J.T.V.'s have not made their debt service payments in April and May Connie in Chatham are pursuing potential relief from the service or isn't lenders for these loans, both JV loans or non recourse to job.

Except for certain bad boy, <unk> and default under the J.V. that do not trigger cross the fault under any Chatham debt.

In light of current circumstances, Chatham recorded a 15.3 million dollar impairment on an equity investment in England, J.V., which represented the full carrying amount of this investment.

Basis than the Innkeepers J.B. of negative so no impairment was necessary for that investment.

Chathams balance sheet and liquidity profile significantly different from R.J.V. is Chatham has a strong balance sheet that position that well to whether the Kurt the disruption being caused by the covert 19 pandemic. We ended Q1 with $58 million unrestricted cash and 11.6 million over restricted cash I scrubbed with loan servicer.

That can be used for capital expenditures property taxes and insurance.

End of Q1, we had 173 million drawn under a rough revolving credit facility and an early may we completed it an amendment to our credit facility. The provides of covenant really for the next year and the ability to utilize the Empire 250 million capacity of the facility.

When covenants begin to be tested again, starting in June 2021, <unk> figures used for covenants will be calculated on and analyze basis through the end of 2021.

At March 31st we had $135 million of liquidity between or unrestricted cash balance and <unk> credit facility availability.

Even at a rough par of $25, our monthly cash burn, including corporate G.N.A. interest in principle amortization is approximately six and a half million dollars for cutbacks.

Current liquidity position should cover us for approximately 20 months at current performance levels, We expect operating performance will improve materially before that point.

While we don't believe that we will need additional liquidity, we have six unencumbered hotels with a book value of $276 million that could serve as collateral to raise additional dot proceeds.

Chathams balance sheet also benefits for minimal debt maturities over the next several years the only that we have muttering between now and the end of 2021 is a single 12.8 million dollar nonrecourse mortgage loan matures in September 2021. After that the next maturity. We have is for our credit facility in March 2022.

But we have an option to extend that maturity through March 2023.

We will have a significant amount of time for both hotel operating for performance and the capital markets to recover before we need refinance a material amount of debt beginning in 2023.

With the current lack of visibility around operating performance. We withdrew are earning guy earnings guidance in March since we're in the very early stages of a reopening of the economy invisibility around the timing of a recovery and hotel operating performance remains limited, we're not going to provide guidance at this time.

Concludes my portion of the call operator, please open the line for questions.

Thanks.

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Capital markets. Please proceed with your question.

Thank you good morning.

You mention Hey, <unk>, you mentioned operating model looking potentially lifting different post Kobe and can you elaborate a little bit on some of the changes do you expect most likely be implemented and now what this could mean from a structural profitability standpoint longer term.

Yeah. Thank you the conversations whether they'd be with married or hills and of course for limited service hotels, but frankly for all.

Revolve around two highest cost items housekeeping and food and beverage.

Keeping front and again the all these conversations are currently ongoing.

Between the brand the brands various advise you know advisory groups of which I sit on that residents in board. So I can't disclose too much until they really settle on what they want to do with us but for I think for example for stay overs.

There will not be.

Automatic cleaning up the room or frankly any service depending upon the brand you're talking about for I'd say at least three or four nights, maybe it'll even extend beyond that but of course, you're going to pick up some extra costs on whatever the new cleaning requirements are going to be.

That each brand is also going to roll out to make gas and the general public feel comfortable about come into hotels again, and that's going to be a pretty significant effort and we think it may even take a normal cleaning the the 220 minutes or 25 minutes per room, maybe even up to 45 minutes.

A room so all of that has to really come out in the wash in real practical everyday experience to see the impact to overall costs and margin on food and beverage side at least in select service hotels, we all provided a pretty extensive breakfast buffet.

As you probably know I'd expect those to go away for the foreseeable future with most brands go into some grabbing go concept and a little Brown paper bag, you know with a few items in it so that you reduce costs pretty substantially in our residents ends in our home would sweets there were evening.

You know hours of pre cocktails with some food items at least three times a week I'd expect to see that go away. So there you know there's significant opportunity there, but as I said I think we need to get her occupancy rates up a little bit more and.

Start testing, what the impacts going to be.

And it and then what what have you seen from an advanced smoking standpoint in recent weeks, maybe I can look out <unk> June or July and then it sounds like versus Bonders.

And others are accounting for for a decent percentage provocative right now yeah, I think recovered <unk> <unk> <unk> <unk> <unk> maybe improvement.

I Miss the last part of the basically do you know listen I think there will be you know it as far as an industry right. I mean, I think as first responders military that are needed for some of these you know urban areas as they check out and you have business travelers or whomever it might be leisure travelers coming back in.

There will be a little bit of a disconnect I think and the timing of how that happens I don't think you're going to see a massive fall off though because I think you know what you know, especially and you know certain locations primarily in the southern part of the United States, where you know some of the shelter and place restrictions have been.

Relaxed a little bit we are seeing a pickup and you know leisure related demand you know whether it was two weekends ago to this past weekend at our Savannah Hotel you know that essentially you know jumped up about 50% now again, a low level from essentially kind of 17% to now 25.

5%.

Of leisure demand, but you know I think that you know it really just depends on the timing, but certainly there is at some point going to be nurses and first responders checking out, but others I think will be checking in.

In there and you also on the prepared remarks shut to think you're talking about you know current trends someone encouraging you talked about the occupancy bottoming at 17% snap closer to 30% with a little bit more can you just get more precise in terms of you know, what what's driving that which markets you're seeing distract me throughout Savannah.

I'm just trying to get a sense of you know a little bit more detail you know real time, what you're seeing in some of these markets, where the shelter and place rules have been removed you know just what you're seeing in terms of leisure demand at some of those hotels with would be helpful.

Hey, Tyler Yeah, I mean, just to hit your last 20 real but I mean leisure demand is really just last two weeks phenomenon and it's only in a couple of market. So the the example, I gave you for Savannah, because George I think relaxed its standards you know two weeks ago.

You know the the occupancy demand in Savannah was again kind of upper teens, two weekends ago. This past weekend. It was mid twenties. So you know I think that's it's just one hotel that I think you know as leisure markets I think will be some of the first to come back you know our leisure room count as a.

Percentage of our total portfolio is probably in the you know around 25% of total rooms, so that should bode well for that now as far as you know from the you know 17% to 18% occupancy now to 30.

Tell you is the you know for us across and most of our portfolio. You know it's occupancy is in kind of amid teamed you know 35% to 45% occupancy we have a half a dozen markets are so that are performing meaningfully better and I would characterize those as coastal markets where.

There's at least a mix of not only first responders, but also military so between you know our San Diego markets.

We're even have some you know some military a naval related business in Silicon Valley, a little in Seattle in the northeast, we have some as well as well as you know in in our Charleston, Somerville area. So you know I think those types of areas, where we're getting a mix of first responders plus some naval or military.

No, Sir where we're seeing the highest out performers.

Okay, perfect Christmas that makes them and.

<unk> train of thought just you know I'm curious how you guys are thinking about you are and you're in New York strategy look now, but also when things reopen the mean out some of these markets are going you get some more demands no need to <unk> going to be potentially or a race to the bottom in terms of some other hotels trying to capture the market some market share.

Yeah concerned about being in this year.

Yeah, No I mean, we're concerned about any I think listen everybody. That's all the all the companies that are giving occupancy break even levels are just basically line.

No because it it it at the end of the day if it if it all depends on what the Heck your rate is.

And you know for US you know one you've got a lot of hotels that are closed so as what in similar to what you've seen in China and Korea. You know you have as hotels, you know as hotels open back up your occupancy level stay depressed.

You know because again more hotel rooms are open as you say rates are going to become challenging because as that new hotel inventory opens backup people are going to try and get business. So rate is going to be an issue. So you know I think that's why we think it's most appropriate to tell Ya Hey, you know on a break even basis.

You know, we believe that Revpar, which is a mix of Och and 80 are is the best guideline at least at this point to what the heck that looks like so you know I think for US 80, our you know and everybody 80, our is going to be an issue as hotel started to come back up even though demand is going to be picking up there will be a a rate.

Issue for the short term and let me just add to that.

Because of islands day to day.

Communications with us and sharing all information relative to what businesses out there and not out there.

And conversations.

And to be around.

The at least desire and ability of the large corporate users the ones that really drive corporate rates.

To come back when they start traveling again and there's already a little conversation going on.

Here and they are let's just say with their expectations.

To start anyway at an E.D.R., that's way lower than the A.D.R. They were paying you know before this whole thing here in March. So you know hotels will be responding to those requests and we'll be looking to put heads and beds and we don't want to be two Barry.

But you know we will work like every body else I hope to maintain rates and rage that.

Looked similar to pre printed pandemic rage, but I wouldn't bank on it.

Oh, Okay. <unk> My question for me I apologize if I'm by Memphis, No. The Warner Center developments, just where are you guys in terms of constructions spend on <unk> premature, but just <unk>, possibly you could provide on on timeline in terms of you know one that could be finished or money.

<unk> start working on that again.

Yeah, Tyler Yeah, I mean on that we've listened we've back about you know I'm going to say three weeks ago four weeks ago. We finish the majority of the concrete poor of the building, which is up through level three for us and kind of given the challenges associated with the labor getting it to the site construction, we decided to.

Slowdown construction at least for the next 60 days essentially to July to early July.

To hopefully get to where we can be at full operational efficiency isn't reconsider kind of the timeline <unk> you know as as we talked about before you know we were expecting kind of a July 2021 opening I think you know with with this 60 day pause you now going to push that probably into the fourth quarter of 2020.

One, but we certainly didn't feel in in felt that you know our best use of dollars at the moment.

Was essentially to say hold on let's wait until we can you know get that development up full scale and you know I think we're on the advice of are contractors in the field.

That you know we thought it was best to to kind of slow down things at least for the <unk> next 60 days, we are still doing some concrete work on the exterior and we are still doing some what they call be permit work away real related to utilities and everything like that around the site. So it's still active just on a little bit of a lower.

For the next two months.

<unk> great. That's all from thank you for the detail.

You're welcome.

Thank you are next question comes from line of not Boone with F.B.I.F.B.I. Riley. Please proceed with your question.

Hey, guys been morning, I'm on for Brian I, just had a quick question. All liquidity you mentioned that you had six hotels that are currently on encumbered Oh that could serve as collateral for you know raising additional debt, but I was just curious if you had considered potentially pursuing any dispositions help improve real couldn't you profile.

Yeah, Hey, Matt This is Dennis I mean listen we we'd certainly we certainly consider it but at this point there you know there's not a whole lot of it you know acquisitions or disposal activity. I think you see everybody. That's out there that had you know contract hotels under contract those are all everybody's backing out.

So you know the the the ability at least in the short term to get any proceeds from a disposition is you know really really limited so you're not going to see us do that I mean, certainly I think if if things started to come back and you know people can at least started seeing where it's going to go maybe somebody's willing to buy a hotel, but you know.

<unk> every hotel doesn't know what next month looks like so it's it's going to be hard to buy a deal at that point.

And with our read done.

There's no fire sale here and that's the only transaction that I believe in an X. 90 days, you'll see occur. So yeah, I think the liquidity car you know relative to other hotel reads like cash Byrne and the ability to kind of manage day in day out with dial.

And you know will prevent us from having to go down that road.

Okay. Thank you that's helpful. And then you know turning to cost savings are there any additional you know initiatives that you're considering deploying at the moment or do you believe that everything that you've already instituted should you know put you in a good luck position to whether any additional near term headwinds.

Yeah, I mean, I think everything we've done so far.

Provide significant yeah, the significant benefit of what we've done today as I've taught you know talked about them I prepared remarks, I mean, we are still looking at you know vendor relationships and pricing and and you know utility types of savings, but you know quite honestly, there's not a whole lot of volume anyways on the purchasing side or.

The utilization of services, such as garb garbage and everything that we haven't already you know cut back so because because of limited occupancy and a lot of hotel. So you know the the the grunt work and the majority of the work has been done to will you know obviously continued to look at you know little bits here and there that can help us.

Got it and then my last question is what <unk> can you remind me what the exact breakdown is supposed to be over the next two quarters I'm, sorry, I missed that.

Yeah, we've got about 7 million that we're going to spend and this isn't related to Warner Center, but 7 million of cap x. for the balance of the year with about five of that in the second quarter.

Related to our Anaheim in new Rochelle residence ends that are going to be wrapping up their renovations.

I think we appreciate it.

Mm.

Thank you there are no further questions at this time I'd like to turn the floor back over to management for closing comments.

Well. Thank you all for listening and we obviously are looking forward to better days in better times ahead.

I think on a cop basis, you and of course, you have to look at things on a relative basis were positioned as well as we can be and we are by the way proud of our teams if any of those which I expect they are those folks are listening and particularly proud of our sales teams for the business that'd be.

Secure around the country and put in these hotels. Thank you all.

That's concludes today's teleconference. You may disconnected lines at this time. Thank you for your participation and have a wonderful day.