Q1 2022 Chatham Lodging Trust Earnings Call

May 4, 2022

Okay.

Greetings and welcome to the Chatham Lodging Trust first quarter 2022 financial results Conference call.

At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad and please note that this conference is being recorded.

I will now turn the conference over to Chris Daly President of D. G. Public relations. Thank you you may begin.

Thank you John .

Good morning, everyone and welcome to the Chatham Lodging Trust first quarter 'twenty to 2022 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 in our most recent Form 10-K and other SEC filings.

All information in this call is as of May four 2022, unless otherwise noted and 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 SEC filings and earnings release, which contain reconciliations to non-GAAP financial measures referenced on this call on our website at Chatham Chatham lodging Trust's Dot com.

All right with some inside of chat on the 2022 first quarter results allow me to introduce Jeff 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, Let me turn the session over to Jeff Jeff.

Thanks, Chris I appreciate everyone joining us this morning for our call.

As I look at these results I'm very proud of our teams at Chatham and island, who did a fantastic job during the pandemic maximizing revenue and operating profits, while minimizing cash burn and executing key corporate transactions that have been.

Enhanced our financial position.

In fact for the eight quarters just ended we produced positive corporate cash flow before principal amortization and Capex.

As we sit here today the business traveler is coming back across the country and our five primarily tech driven hotels in Silicon Valley in Bellevue, which historically comprised 25% to 30% of our EBITDA are seeing demand accelerate rapidly.

As a reminder, these five hotels generated EBITDA of $35 million in 2019, but only a mere $7 million in 2021. This recovery is going to be a major driver behind our outperformance over the foreseeable future.

Strategically we're excited to announce that were expected to close within the next week on the sale of four hotels, comprising 537 rooms for approximately $80 million and two separate transactions. These older hotels are on average 27 years old that I produced revpar below.

So our portfolio average in 2019 and 2021, they produced Revpar of $96 $59 below our 2019 and 2021 portfolio Revpar.

By 28% and 32% respectively.

Additionally, two of the four hotels were set for renovation in the next 12 months and we believe we can put that money to better use buying assets through the four hotels are going to be converted for multifamily use and would represent our second and third hotels sold over the past two years at a very low cap rate for the purposes.

Of converting two apartment use the proceeds will be used to pay down most of the borrowings on our $250 million credit facility, which will have only $30 million outstanding.

When they close.

We exit the waiver period down on our credit facility. After the second quarter, we will have the full capacity available and we will have a substantial number of unencumbered assets available to provide flexibility to acquire hotels and address at the right time, a very manageable $114 million of fixed rate debt.

Charities excuse me debt maturity next year.

We sit here today with substantial dry powder, our refined portfolio given the sale of the four hotels and a platform that can grow quickly.

Over the past two years, we did a great job putting heads in beds pivoting away from the higher rated business traveller during the pandemic since mid February we are seeing now a substantial acceleration in business travel and just like we did on the downside on the upside pivoting again.

Pivoting, our sales and revenue management efforts to capture the higher rated travelers our message to our operating team is to push rates.

We are in a heightened inflationary environment and have the opportunity to push higher rates our opportunity is much better than it was in the years leading into the pandemic when supply growth was significant and there was resistance to any type of rate growth.

Previously we stated our belief that the business traveler was going to return with a vengeance I've never bought into the belief that business travel is permanently appear impaired.

I've lived through a lot of cycles here and I heard for many years.

Online meetings, we're going to be the downfall of the business traveler and many other external events that were supposedly going to really cut down business travel.

People still like to travel, that's clearly evident and everybody's numbers.

To meet in person they like to do business in person.

And now we've got two new kind of travelers to the space, the bleser or digital Nomad traveler and the people who live away from the office and are being asked to come back to their office regularly.

And for those new travelers I think.

They are going to be staying for more than one or two nights that's already evident.

And extended stay hotels, the majority of the hotels, we own should be the primary beneficiary of this new added demand.

We're becoming more and more confident with respect to this outlook as we see weekday demand really start to accelerate weekday occupancy is the best indicator of our business travel and it rose significantly through the first four months of the year weekday occupancy was 48% in January before jumping into 60% February .

68% in March and 72% in April April .

April weekday and full month occupancy of 73% are the second highest levels since the start of the pandemic April 2019 weekday weekend Occupancies were both 82% so given where we are in the recovery of the business traveler, we are already in a.

Very good.

<unk>.

With the with the sharp uptick in occupancy ADR and <unk> are also advancing quickly a sign of great things to come our 2021 April ADR.

$161 Skus me that's 22.

It was only $4 shy of our 2019 ADR of $165.

We've been encouraged by the return of some tech related group business in Silicon Valley in Bellevue, Washington.

Officers before you open which will be the.

And for us to travel both in and out of these markets in Silicon Valley Q1, 'twenty two witnessed office vacancy decline for the first time in two years falling to 10, 6%.

And that decline in vacancy is notable given that $9 5 million square feet of New office product was delivered to the market over the same period office developers and owners remain bullish anticipating the great return for the region's highly profitable and growing tech companies.

Revpar at those five hotels has basically been 70 to $75 for the better part of the last year, but April Revpar is up 45% over the first quarter figures so that business is coming in.

Fast.

More great news out of the valley in Bellevue, we can confirm that later this month tech companies such as.

Apple ebay and T mobile are going to be hosting in person internships. This summer.

2019, as we've said before this business accounted for over $7 million in revenue. This year, we allocated more rooms for this business knowing that the return of the international business traveler and long term consulting business in these markets would be gradual over the course of the year at this point.

Approximately $15 million and in turn revenue on the books for the summer ADR or approximately $200 compared to approximately $220 in 2019, so pretty close there an added benefit is that our operating margin on this business is very high.

As there is limited room servicing as part of the arrangement, we expect the second half of the year to be especially strong in these markets and it will be an impetus to drive our portfolio growth higher relative to our peers.

We're seeing increased demand in many of our other primary business travel driven markets, such as Washington, DC, the northeastern U S, Dallas, and especially Austin, all posting sizable gains here lately.

In Austin, where we acquired two hotels last year Revpar was about $115 in the first quarter and in April that has jumped to $140 are two hotels with a domain should be top performers.

As that market is benefiting from tech company expansions and relocations to the area.

I want to quickly point out how things are going at our recently opened home two suites and woodland Hills Warner Center.

After opening in late January it's ramping up nicely and latest trends are very encouraging there April occupancy was over 63% and ADR was approximately $185, we've seen occupancy to exceed 90% and ADR is in excess of $200 on.

Certain nights already.

This area is in the midst of a massive growth for more great news in the market. It was announced about a month ago that the Super Bowl champion Los Angeles Rams closed on the acquisition of a 38 acre site just a few blocks from our hotel that's going to be turned into a mix.

Use development, which will include the team's headquarters post season.

Season training activities as well as other football events during the year and welcome fans all year round, our hotel that home two suites brand is perfectly positioned for the kind of business and demand.

This development should generate we're real excited about that.

As I mentioned on our last call. We are confident in the ultimate recovery and trajectory of that recovery in our portfolio and want to see continued improvement as we expect we will in the business traveler, especially in our tech driven markets before reinstating the dividend Silicon Valley in Bellevue and other primary business travel markets.

Rebounding and increases our confidence in generating consistent and distributable cash flow, we've historically targeted paying out 100% of taxable income and when we look at any potential distribution of course, we'll carefully analyze our taxable income for the upcoming years, while also considering you.

Of taxable deductable NOL carryforwards that came as a result of the pandemic.

With that I'd like to turn it over to Dennis for a little more color. Thanks, Jeff.

<unk> 2019, our monthly Revpar improved each month of the first quarter down 36%, 27%.

<unk>, 2% and then only down 13% in April the acceleration is definitely attributable to the return of the business traveler, especially in our tech driven markets of Silicon Valley in Bellevue, which saw Revpar jumped approximately 45% compared to the first quarter large group and convention business is also coming back to life.

We're seeing healthy gains at our hotels in these downtown markets, such as San Diego, Dallas and San Antonio.

Our five highest hotels with absolute revpar in the quarter, where our residence Inn Fort Lauderdale on the intercoastal waterway with Revpar over $250 on occupancy of 93% followed by our Hilton Garden Inn Marina del Rey with Revpar of $147 than our residents in New Rochelle, New York, and then rounded out by <unk>.

<unk> is making their first appearance in our top five in some time, which is our residence Inn, San Diego Gaslamp and Homewood suites, San Antonio Riverwalk again, just seeing the return of convention and group business in those two markets, especially our top five absolute occupancy hotels in the quarter, where the residence Inn Fort Lauderdale, followed by.

Residents in new Rochelle, our Homewood suites in Maitland, and then our residence Inn, Charleston, Summerville and lastly, our newly acquired residents in Austin at the domain, which is its first time, making our top five and all five hotels had occupancy of at least 80% for the entire quarter.

Our portfolio did significantly better than the industry with first quarter occupancy of 60% compared to industry wide occupancy of 56% and we continue to see an average length of stay much longer than our historical leverage levels at our residence Inn hotels. Our average length of stay was three nights still well above the two and a half nice pre.

Pandemic and at our Homewood suites hotels, our average length of stay was $3 five nights again pretty meaningfully above our pre pandemic average about $2 seven nights.

For the quarter total revenue of $55 million was up 75% compared to last year's revenue of 31 million.

To generate incremental GOP at $12 million for flow through of approximately 50% on that total revenue increase.

Lots of good trends on the topline and our bottom line is also trending in the right direction. We fully expect that same store margins will be higher post pandemic, our first quarter GOP margins were 38% on revpar of $88, 15% below 2019 first quarter margins at 44%, but that was.

Revpar was $33 or 38% higher.

March was really the only stable month in the quarter and our March margins were 44% on Revpar of $119. The same margin as our first quarter 2019 margins when Revpar was 11% higher.

Our teams have produced great results throughout the worst year in the history of our of our lodging industry and positive developments for margin expansion moving forward.

The impact of <unk> on the first quarter, we were able to generate positive cash flow before capex is noteworthy because it marks four consecutive quarters of positive corporate cash flow.

<unk> pandemic, we produce positive corporate cash flow after debt service and preferred dividends of $22 million over the past four quarters, we generated positive corporate EBITDA each month during the quarter at the corporate level, we generated adjusted EBITDA of $13 $3 million versus about $1 million last year, we generated <unk> per share.

Seven.

Up 22 over the same quarter last year, when we had an SSL loss per share of <unk> 15.

During the first quarter, all but one hotel generated positive GOP and all but five hotels generated positive hotel EBITDA or top five producers of GOP in the quarter, where our residence Inn Gaslamp all of our residence Inn Fort Lauderdale third was our recently acquired residence in Austin, and then followed by our residents.

Anaheim and then our courtyard downtown Dallas, making its first appearance on the list.

Despite opening in late January and not having access to the reservation system until opening or.

Home to as Jeff talked about has ramped up very quickly on the comp and even the bottom line in March the hotel produced GOP margins of 22%, which is particularly impressive when you think about the amount of staff, we have in place to handle the ramp up process.

On a per occupied room basis at our comparable hotels payroll and benefit costs were approximately $36 down approximately 3% from the first quarter of 2019 cotton breakfast costs were zero point $8 million in the quarter.

Up about zero point $4 million or 20 basis points over the same quarter last year, but down approximately 400000 or 10 basis points compared to the 2019 first quarter.

As we've talked about before the brand's proposed new standards that reduce some of the offerings and should lead to same store savings.

So far that still seems to be the case on a per occupied room basis breakfast costs were $2 44 in the 2022 first quarter, which compares to $2 82 in the 2019 first quarter.

Meaningful decrease of approximately 13%.

On the Capex front, the company incurred capital expenditures of $4 1 million, excluding any spending related to the Warner Center development. Our 2022 capital expenditure budget was approximately $23 7 million, but once the sale of four hotels closes our total total budgeted spend will be reduced to approximately 19.

That includes five renovations at five hotels, our Hampton Inn and exited in Portland, both of those renovations have been complete.

And came in about $200000 below their budgeted cost of $4 million and then in the later this year in the fourth quarter, we have three hotel scheduled for renovation, which our residence Inns and Washington D. C. Downtown our residence Inn in White Plains, New York, and hopefully New York.

As a reminder, we are hosting in person meetings at REIT week in early June .

Please email me directly if we haven't locked up a time with you yet I'll turn it over to Jeremy. Thanks, Dennis Good morning, everyone. <unk> Q1, 2022, Revpar $88 represented 56% increase versus our Q1 2021, revpar of $57 and 27, 2% decline versus.

Our Q1 2019 revpar of $146 Rev.

Revpar in January in the first half of February was impacted by the omicron ways, but performance has been strengthening significantly since mid February March Revpar of $109 was down 21, 6% to 2019 and April Revpar of $119 was only down 13, 4% to 2019.

The early stages of the recovery were driven primarily by leisure travel, but in recent weeks. We've been we've seen a significant uptick in midweek results, which indicates the business travel is now starting to make a meaningful recovery.

We expect performance to continue to improve with decreasing revpar declines relative to 2019 throughout the remainder of 2022 with much of this recovery being driven by improving demand for business travel.

We were able to generate a Q1 GOP margin of 38, 3% and hotel EBITDA margin of 29, 2%. Despite the January and February impacts of the <unk> variant.

GOP margins recovered as revenue improved during the quarter and in March Chatham GOP margin reached 44, 4% when Revpar was $109 are.

Our Q1 2022 hotel EBITDA was $15 $9 million adjusted EBITDA was $13 3 million and adjusted <unk> was <unk> <unk> per share and cash flow before capital with represents hotel EBITDA less corporate G&A cash interest and $2 3 billion of principal amortization was positive $2 eight.

Million.

Chatham took a number of steps to strengthen its balance sheet and non dilutive ways during the pandemic and our balance sheet is now in the best shape. It's ever been at March 31, we had $158 million of liquidity between our unrestricted cash balance of $18 million and $140 million revolving credit facility availability.

As mentioned earlier, we have some pending asset sales, which is completed with further enhanced channels liquidity, we have no debt maturing in 2022, and only $114 million of maturities in 2023.

While we have more than enough credit facility availability to absorb all of our 2023 seen MBS maturities were likely to begin refinancing our 2023 debt maturities in the second half of 2022.

With a reasonable leverage solid liquidity and meaningful free cash flow, we are well positioned to opportunistically pursue attractive investments.

In Q1, we completed the development of the $70 million home to Warner Center, which opened on January 24th and acquire the Hilton Garden Inn destined for $31 million in March eight these two new high quality hotels, along with the resident than in TPS, Austin, which were acquired last year will meaningfully enhance chatham growth and the quad.

City of our portfolio, we plan to continue enhancing the quality of our portfolio by acquiring.

New hotel in markets with strong growth and recycling capital in places, where we believe sale prices are attractive relative to future growth prospects.

We're very encouraged by the improving operating trends that we've seen in March and April , especially the recent strength, we have seen a business travel the growth that we expect in Austin, and Dustin acquisitions, and the Warner Center development to generate and our ability to pursue additional growth opportunities given our strong balance sheet and significant liquidity.

While we're not going to provide guidance at this time for those of you building your own projections I want to remind you that Q2 will include a full quarter of interest expense associated with the home to Warner Center and the borrowings used to finance the acquisition of the Hilton Garden in Destin based.

Based on our debt balance as of March 31, our cash interest for Q2 should be approximately $7 $1 million with GAAP interest of approximately $7 5 million, including amortization of financing costs.

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

<unk>.

Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the queue. You May press star two if you would like to remove your question from the queue and so.

Using speaker equipment and may be necessary to pick up your handset before pressing any star keys.

I'm pleased when we poll for any questions.

Our first question comes from the line of Anthony Powell with Barclays. Please proceed with your question.

Hi, good morning, guys.

Hello.

Good morning, I appreciate all the color on business travel is definitely encouraging I.

I guess looking at leisure travel have you seen any decline in either a REIT or demand on a year over year basis relative to 2021 and whats your outlook for those that segment as we kind of approach.

The peak summer timeframe.

Yes. This is Jeff Hi, Anthony I think I think it's fair to say.

We'll be a better judge of that and most folks will be this summer.

When especially our northeastern annuity, new England hotels experienced a huge amount of demand there, but I will say that that.

Every particularly weekend and now mid week, our highest ADR hotels are.

Leisure related for the most part whether it's Laguna.

Bright Davina Savannah Crazy Crazy winter. They are wonderful winter. They are great spring there. So I would say leisure demand is still very very strong very strong yes, I think just based on the comments from our operator Anthony.

North East hotels, as Jeff just alluded to Baxter in Portland, and Portsmouth feel pretty good at the moment about this summer.

Yeah.

Got it so no real sign of any kind of my consumer weakness relative to inflation or price fatigue. It sounds like things at least as of now are or are not showing that is that fair.

Not showing up yet I think we'll have to wait and see where this economy goes.

But our efforts, especially on the operating side or just all around maximizing and working.

The corporate accounts now that theyre showing willingness to start traveling again.

Okay. Thanks, and then maybe related to that.

How do you kind of get out of a covenant waiver any as you start to kind of.

By hotels over the next few quarters.

Talk about business travel coming back and that would be favorable but most of the acquisitions across the industry have been.

Leisure focused and often it's a bit of a given the mix I'm curious as you seek to grow the portfolio size again, what kind of a target hotel shifted over the past few quarters.

We haven't really substantially shifted our focus and we'd never afraid of acquiring business related.

Our driven hotels as evidenced by Austin I mean.

Domain Tech driven all you hear about.

Second word.

Austin is always Tac.

And there we were in Silicon Valley with no business and we bought these hotels.

As you said, there's some diversified demand generators, there as well.

And we will certainly continue to look for markets like that.

We have some other sources of business.

And one thing that we tried not to do is just completely shift our strategy in terms of the kinds of hotels that we believe it because we've experienced.

For me almost 40 years of doing this.

Very good results in the kind of business and frankly, the kind of brands and particularly extended stay and thats not a new idea on our part either as you well know, even though it's being talked about as the best part of the lodging business for the most part, especially during the pandemic.

I think that where we feel good about our focus on the brands that we do look to acquire.

Okay. Thanks I appreciate it.

Our next question comes from the line of Ari Klein with BMO capital markets. Please proceed with your question.

Thanks, and good morning, maybe.

Maybe just on Silicon Valley it looks like it's on the path to recovery the similar thing.

Turns coming back.

How are you thinking about the occupancy recovery more broadly through the portfolio and the remainder of the year.

Given that whats been lagging seems to be recovering pretty strongly here how close can we get in 2019 Occupancies over I guess, the second and third quarter.

Hey, good morning, this is Dennis.

Listen I think we're going to get pretty pretty close to 2019 levels from an occupancy perspective in the second half of the year one thing that once this interim business.

We started talking to them earlier this year and that's kind of morphed over the last 120 days.

And the expansion of the interim programs now, we're really seeing some robust requests for rooms outside of the internal business, even starting this month with some some long term corporate business I E. Two to four weeks of it and the relationship.

<unk> and the goodwill that we've built.

Over the last two plus years with some of our key corporate clients. They are talking about and wanting to secure rins for the fall again for kind of some more long term product development type business as well. So I think we're pretty encouraged at the moment of what that second half of the year it looks like from an occupancy perspective.

And just from a rate perspective already I think it's important to note that.

When we first were negotiating didn't turn rates for this summer as Jeff talked about they're about 20 Bucks are 10% below 2019, but since we kind of allocated the first chunk of rooms to the entire program and those companies and other companies are coming back for additional demand.

Those rooms are getting priced substantially higher.

And I think that bodes well for <unk>.

Host in turn business into the fall and for the rest of the year. So.

I think not only from an occupancy perspective at a rate perspective.

Things are looking.

Pretty good out there.

And just following up on that are those late booking with you about some rates higher than the original rates are higher then yes absolutely.

Higher than the original and higher than 2019.

Got it and then just on the supply side it seems like the environment is.

Improving the lowest by outlets, but if you can just pop across the portfolio.

What youre seeing there.

Yes.

I think from a supply perspective.

<unk> set up I think pretty well, we absorbed a tremendous amount of supply leading into the pandemic I think one of every select service brand was in one of our were introduced if not more than one.

In certain of our key markets.

As we're in this period post pandemic very little new supply in those markets I think everything if you look at kind of what's being announced and new developments that are out there.

Those are in markets that generally we're not in so.

I think we're pretty confident that we've.

I think we have a pretty good runway here.

Appreciate the color.

Thanks.

Our next question comes from the line of Kyle <unk> with B Riley Securities. Please proceed with your question.

Good morning, Kyle on for Brian .

Hey, Carlos you mentioned hi.

I was curious you mentioned the four hotels that you have under agreement to sell all of those who are among the lowest performing hotels in the portfolio I'm curious for the opportunities to sell the other 11.

Well I mean listen we're not going to sell all of the other 11, but I think it's really just.

A highlight of.

Those assets it really been kind of.

Just steady producers of Revpar, but certainly nothing from a major growth perspective or anything like that so we're going to continue in two of those as Jeff mentioned in his prepared comments are being converted to multifamily.

Within a short timeframe so.

We will just continue to be opportunistic.

With recycling capital that which is what we've been doing.

Listen I think even though those four are definitely below our portfolio averages, we're not just going to up in mass sell any of our lower revpar. If we believe that those assets have some nice room for growth.

I'm here on.

Okay. Thanks for that color and then how do you feel like you're situated from a staffing perspective, especially in Silicon valley as Occupancies expected to ramp through 2022.

Yes, good question and I think one of the benefits and again I think in Jeff's prepared remarks that he talked about the beauty of that in turn business is we're going to be running 90% to 100% occupancy in those five hotels and with that interim program. We.

Might be cleaning the rooms once a week.

Uh huh.

I think for the most part at least no more than once a week so even in the even in a hotel like that and even in a market like that where hotels are hiring a lot of people.

Because hotel because their occupancies are starting to ramp up we're not going to need the same level of housekeeping.

Services, because the frequency of cleaning is going to be so little so that.

That bodes well to be.

Really high margin business for the summer so from a staffing perspective.

We're generally I think in a pretty good position.

Across the portfolio, especially in those five markets.

For five hotels.

Okay. Thanks, that's all from me.

Our next question comes from the line of Tyler and battery with Oppenheimer. Please proceed with your question.

Hey, good morning, Thanks for taking my questions a few follow ups for me here in terms of.

The asset sales did you run a process.

Inbound inquiries and can you also talk about pricing.

Evaluation for these properties now versus potentially pre Covid and then also I'm not sure. If you can say how much EBITDA that contributed to Q2 2019 as well.

Yes, Tyler I mean, I think it will.

Talk about kind of pricing and everything but the four hotels I think generated $2 $2 million of EBITDA.

In 2019, and 2020 I'm sorry in 2021.

And the recently acquired Destin Hotel actually has had 2021 hotel EBITDA of $2 3 million so that one hotel.

Producing more than the four that are out the pricing we think is attractive as it was.

6% cap rate on 2019 NOI.

NOI and a 2% cap rate on 2021 NOI so it.

Those assets were part of a process.

We've been working on and I think we've talked publicly about here for a couple of quarters that we're going to look to opportunistically sell some assets.

And again I think one of the keys is that.

Again, two of those four hotels.

Ultimately going to be converted for multifamily use switch.

Obviously from the multifamily buyer theyre able to get a great product.

At a reasonable cap rate, but it's a very attractive cap rate for us.

Okay great.

In terms of trends in the business here.

The base case that.

May is better than April June better than May.

July was better than June et cetera, and we just continue to progress going forward. When do you think it plays out.

Like that.

Yes.

A reasonable reasonable expectation here.

It should yes, it should in that also.

It's back to what I would call normal seasonality.

If you think about our portfolio or the hotel business. So you'll get that kind of run up as you always did in the past and then launched October start.

Then you start into.

Lower seasonal months.

Okay, and then just last in terms of the dividend I know you want to see continued improvement in business travel.

The return in the Tech markets.

Give any more specific color in terms of trigger points that you're that you are looking for I mean is there.

Revpar level, perhaps or comparing EBITDA versus 2019, I'm, just trying to get a sense of perhaps perhaps a benchmark.

You might look at to start with.

Thinking more seriously about about about reinstating the dividend.

It's really all of those things there's no one thing taxable income drives the board's decision obviously, but.

Yes, I think it's considering every metric that you can in terms of where the cash flow is and where it's going.

Okay.

And then just the last one I wanted to put a.

Finer point on the corporate travel commentary.

Are you seeing any price sensitivity from that guest.

Starting to come back and traditionally when you look at leisure versus corporate it's usually the corporate side of things, that's not that price sensitive but over the past.

Six plus months, perhaps at leisure.

Less price sensitive.

As corporate starts to come back and who is your expectation that the pricing power should be similar to what we've seen.

Or is your focus on talent.

I'm sure in some circumstances essentially charge whatever whatever you want and guests are still coming.

So I wouldn't say, we can charge whatever you want but I will say that the business travel or at least so far and as we kind of look over the next.

Four or five months.

Is less averse to pricing as they were pre pandemic I think they've.

Most travelers have been conditioned over the last year and a half, especially.

For increasing rates, we have is certainly an inflationary environment, where everybody is paying more for everything.

That they are buying on a daily basis. So I think again, there's less aversion to what that pricing is at the moment and I think as we talked about in our prepared comments.

Our message really since.

Last year has been push rate hold rate.

Or is there going to be there and let's capture as much as we can.

While we are in kind of this environment.

Okay great.

All for me. Thank you for all the detail.

Thanks Tyler.

Okay.

Thank you at this time, we have reached the end of the question and answer session and I will now turn the call back over to Jeff Fisher for any closing remarks.

Appreciate it thanks, everybody for being on the call and again, we'll continue to do what we're doing and look forward to our next call with even better results.

As we go forward. Thank you.

This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.

Yeah.

[music].

Greetings and welcome to the Chatham Lodging Trust first quarter 2022 financial results Conference call.

At this time and participants are in a listen only mode. A question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad and please note that this conference is being recorded.

I will now turn the conference over to Chris Daly President of D. G. Public relations. Thank you you may begin.

Thank you John .

All information in this call is as of May 4th 2022, unless otherwise noted and 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.

All right with some inside of the Chatham 2022 first quarter results allow me to introduce Jeff 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, Let me turn the session over to Jeff Fisher Jeff.

Thanks, Chris I appreciate everyone joining us this morning for our call.

And enhanced our financial position.

In fact for the eight quarters just ended we produced positive corporate cash flow before principal amortization and Capex.

Our portfolio average in 2019 and 2021, they produced Revpar of $96 $59 below our 2019 and 2021 portfolio Revpar.

Slide, 28% and 32% respectively.

Additionally, two of the four hotels were set for a renovation in the next 12 months and we believe we can put that money to better use buying assets through the four hotels are going to be converted for multifamily use and would represent our second and third hotels sold over the past two years at a very low cap rate for the purposes.

Of converting two apartment use the proceeds will be used to pay down most of the borrowings on our $250 million credit facility, which will have only $30 million outstanding.

When they close.

Charities excuse me debt maturities next year.

We sit here today with substantial dry powder, our refined portfolio given the sale of the four hotels and a platform that can grow quickly.

Over the past two years, we did a great job putting heads in beds pivoting away from the higher rated business traveler during the pandemic since mid February we are seeing now a substantial acceleration in business travel and just like we did on the downside on the upside pivoting again and pivoting.

Our sales and revenue management efforts to capture the higher rated travelers our message to our operating team is to push rates.

Previously we stated our belief that the business traveller was gone your return with a vengeance that never bought into the belief that business travel is permanently and Pierre impaired.

I've lived through a lot of cycles here and heard for many years, how online meetings, we're going to be the downfall of the business traveler and many other external events that were supposedly going to really cut down business travel.

People still like to travel, that's clearly evident and everybody's numbers.

To meet in person they like to do business in person.

And now we've got two new kind of travelers to the space. The Bleser, our digital know that traveler and the people who live away from the office and are being asked to come back to their office regularly.

And for those new travelers I think.

They are going to be staying for more than one or two nights that is already evident.

And extended stay hotels, the majority of the hotels, we own should be the primary beneficiary of this new added demand.

68% in March and 72% in April April .

Very good.

<unk>.

With the sharp uptick in occupancy ADR is are also advancing quickly a sign of great things to come our 2021 April ADR.

$161 Skus me that's 22.

As only $4 shy of our 2019 ADR of $165.

We've been encouraged by the return of some tech related group business in Silicon Valley in Bellevue, Washington.

Offices, reopen which will be the.

Impetus to travel both in and out of these markets in Silicon Valley Q1, 'twenty two witnessed office vacancy declined for the first time in two years falling to 10, 6%.

Revpar at those five hotels has basically been 70% to $75 for the better part of the last year, but April Revpar is up 45% over the first quarter figures so that business is coming in.

Fast.

More great news out of the rally in Bellevue, we can confirm that later this month tech companies, such as Apple ebay and T mobile are going to be hosting in person internships. This summer.

In 2019, as we've said before this business accounted for over $7 million in revenue. This year, we allocated more rooms for this business knowing that the return of the international business traveler and long term consulting business in these markets would be gradual over the course of the year at this point.

We have approximately $15 million and in turn revenue on the books for the summer ADR or approximately $200 compared to approximately $220 in 2019, so pretty close there an added benefit is that our operating margin on this business is very high.

As there is limited room servicing as part of the arrangement, we expect the second half of the year to be especially strong in these markets and will be an impetus to drive our portfolio growth higher relative to our peers.

Austin, where we acquired two hotels last year Revpar was about $115 in the first quarter and in April that's jumped to $140 are two hotels as the domain should be top performers.

That market is benefiting from Tech company expansions and relocations for the area.

I want to quickly point out how things are going at our recently opened home two suites and Woodland Hills Warner Center. After opening in late January it's ramping up nicely and latest trends are very encouraging there April occupancy was over 63%.

<unk> was approximately $185, we've seen occupancy exceed 90% and ADR is in excess of $200 on certain nights already.

This area is in the midst of a massive growth spur more great news in the market. It was announced about a month ago that the Super Bowl champion Los Angeles Rams.

<unk> on the acquisition of a 38 acre site just a few blocks from our hotel that's going to be turned into a mixed use development, which will include the team's headquarters post op season training activities as well as other football events during the year and welcome fans all year.

Year round, our hotel that home two suites brand is perfectly positioned for the kind of business and demand that this development should generate we're real excited about that.

Silicon Valley in Bellevue, and other primary business travel markets are rebounding and increases our confidence in generating consistent and distributable cash flow. We've historically targeted paying out 100% of taxable income and when we look at any potential distribution of course, we will carefully analyze our taxable income.

For the upcoming years, while also considering use of taxable deductable NOL carryforwards that came as a result of the pandemic with that I'd like to turn it over to Dennis for a little more color. Thanks, Jeff compared to 2019, our monthly Revpar improved each month of the first quarter down 30.

6%, 27%.

22% and then only down 13% in April .

Accelerations definitely attributable to the return of the business traveler, especially in our tech driven markets of Silicon Valley in Bellevue, which saw Revpar jumped approximately 45% compared to the first quarter large group and convention business is also coming back to life and we're seeing healthy gains at our hotels in these downtown markets such as San <unk>.

Dallas and San Antonio.

<unk> is making their first appearance in our top five in some time, which is our residence Inn, San Diego Gaslamp, and our Homewood suites, San Antonio Riverwalk again, just seeing the return as convention and group business in those two markets, especially our top five absolute occupancy hotels in the quarter, where the residence Inn Fort Lauderdale, followed by <unk>.

Evidence in new Rochelle, our Homewood suites in Maitland, and then our residence Inn, Charleston, Summerville and lastly, our newly acquired residents in Austin at the domain, which is its first time, making our top five and all five hotels had occupancy of at least 80% for the entire quarter our.

Our portfolio did significantly better than the industry with first quarter occupancy of 60% compared to industry wide occupancy of 56% and we continue to see an average length of stay and much longer than our historical leverage levels at our residence Inn hotels. Our average length of stay was three nights still well above the $2 five nights pre.

Pandemic and at our Homewood suites hotels, our average length of stay was $3 five nights again pretty meaningfully above our pre pandemic average up to seven nights.

For the quarter total revenue of $55 million was up 75% compared to last year's revenue of $31 million were able to generate incremental GOP at $12 million for flow through of approximately 50% on that total revenue increase.

When revpar was $33 or 38% higher.

March was really the only stable month in the quarter and our March margins were 44% on Revpar of $119. The same margin as our first quarter 2019 margins when Revpar was 11% higher.

Our teams have produced great results throughout the worst year in the history of our of our lodging industry and positive developments for margin expansion moving forward. Despite the.

Impact of <unk> on the first quarter, we were able to generate positive cash flow before capex is no.

Worthy because it marks four consecutive quarters of positive corporate cash flow. Despite the pandemic, we produced positive corporate cash flow after debt service and preferred dividends of $22 million over the past four quarters, we generated positive corporate EBITDA each month during the quarter at the corporate level, we generated adjusted EBITDA of <unk>.

<unk> $3 million versus about $1 million last year, we generated <unk> per share of seven.

22, <unk> over the same quarter last year, when we had an <unk> loss per share of <unk> 15.

All by a residence Inn Fort Lauderdale third was our recently acquired residence in Austin, and then followed by our residence Inn, Anaheim and then our courtyard downtown Dallas, making its first appearance on the list.

Despite opening in late January and not having access to the reservation system until opening our home to as Jeff talked about has ramped up very quickly on the comp and even the bottom line in March the hotel produced GOP margins of 22%, which is particularly impressive when you think about the amount of staff, we have in place to handle the ramp up process.

On a per occupied room basis at our comparable hotels payroll and benefit costs were approximately $36 down approximately 3% from the first quarter of 2019 comp breakfast costs were zero point $8 million in the quarter up about zero point $4 million or 20 basis points over the same quarter last year, but down approximately.

400000, or 10 basis points compared to the 2019 first quarter.

As we've talked about before the brand's proposed new standards that reduce some of the offerings and should lead to same store savings.

So far that's still seems to be the case on a per occupied room basis breakfast costs were $2 44 in the 2022 first quarter, which compares to $2 82 in the 2019 first quarter pretty meaningful decrease of approximately 13%.

That includes five renovations at five hotels, our Hampton Inn and exited in Portland, both those renovations have been complete.

Came in about $200000 below their budgeted cost of $4 million and then in the later this year in the fourth quarter, we have three hotel scheduled for renovation, which our residence Inns and Washington D. C. Downtown our residence Inn in White Plains, New York and Holtzapple New York.

As a reminder, we are hosting in person meetings at REIT week in early June .

Please email me directly if we haven't locked up a time with you yet I'll turn it over to Jeremy. Thanks, Dennis Good morning, everyone. <unk> Q1, 2022, Revpar of $88 represented 56% increase versus our Q1 2021, revpar of $57 and the 27, 2% decline versus.

Q1, 2019 revpar of $146 Rev.

The early stages of the recovery were driven primarily by leisure travel, but in recent weeks. We've been we've seen a significant uptick in mid week results, which indicates that business travel is now starting to make a meaningful recovery.

We were able to generate a Q1 GOP margin of 38, 3% and hotel EBITDA margin of 29, 2%. Despite the January and February impacts of the <unk> variant.

GOP margins recovered as revenue improved during the quarter and in March Chatham GOP margin reached 44, 4% when Revpar was $109.

$8 million.

<unk> took a number of steps to strengthen its balance sheet and non dilutive ways during the pandemic and our balance sheet is now in the best shape. It's ever been at March 31, we had $158 million of liquidity between our unrestricted cash balance of $18 million and $140 million revolving credit facility availability.

As mentioned earlier, we have some pending asset sales, which if completed was further enhanced Chatham liquidity, we have no debt maturing in 2022, and only $114 million of maturities in 2023.

While we have more than enough credit facility availability to absorb all of our 2023 CBS maturities were likely to begin refinancing our 2023 debt maturities in the second half of 2022.

With a reasonable leverage solid liquidity and meaningful free cash flow, we are well positioned to opportunistically pursue attractive investments.

<unk> of our portfolio, we plan to continue enhancing the quality of our portfolio by acquiring.

New hotel in markets with strong growth in recycling capital in places, where we believe sale prices are attractive relative to future growth prospects.

Based on our debt balance as of March 31, our cash interest for Q2 should be approximately $7 $1 million with GAAP interest of approximately $7 $5 million, including amortization of financing costs.

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

<unk>.

Thank you at this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the queue. You May press star two if you would like to remove your question from the queue and for participants using speaker equipment and may be necessary to pick up your handset before pressing any star keys.

One moment, please when we poll for any questions.

Our first question comes from the line of Anthony Powell with Barclays. Please proceed with your question.

Hi, good morning, guys.

Hello, Good morning, I appreciate all the color on business travel is definitely encouraging.

I guess looking at leisure travel have you seen any decline in either a REIT or demand on a year over year basis relative to 2021 and whats your I guess outlook for those that segment as we kind of approach.

The peak summer timeframe.

Yes. This is Jeff Hi, Anthony I think I think it's fair to say.

It will be a better judge of that and most folks will be this summer.

When especially our northeastern annuity, new England hotels experienced a huge amount of demand they are but I will say that.

Every particularly weekend and now mid week, our highest ADR hotels that are.

Leisure related for the most part whether it's L. Laguna.

Right Diana Savannah Crazy Crazy Winter. They are wonderful winter. They are great spring there. So I would say leisure demand is still very very strong very strong yes, I think just based on the comments from our operator, Anthony the northeast hotels as Jeff just alluded to Baxter in Portland and Portsmouth.

Feel pretty good at the moment about this summer.

Got it so no real sign of any kind of my consumer weakness relative to inflation or price fatigue. It sounds like things at least as of now are are not showing that is that fair.

Not showing up yet I think we will have to wait and see where this economy goes.

But our efforts, especially on the operating side or just all around maximizing and working.

The corporate accounts now that theyre showing willingness to start traveling again.

Okay. Thanks, and then maybe related.

As you kind of get out of a covenant waiver and as you start to kind of.

By hotels over the next few quarters.

Talk about business travel coming back and that would be favorable but most of the acquisitions across the industry have been.

Leisure focused and often as a bit of a mix I'm curious as you seek to grow the portfolio size again, what kind of a target hotel wanted to shifted over the past few quarters.

We haven't really substantially shifted our focus and we're never afraid of acquiring business related or driven hotels as evidenced by Austin I mean.

Domain Tech driven all you hear about the next word second word.

Austin is always check.

And there we were in Silicon Valley with no business and we bought these hotels.

But as you said, there's some diversified demand generators, there as well.

And we will certainly continue to look for markets like that.

Have some other sources of business.

And one thing that we've tried not to do is just completely shift our strategy in terms of the kind of hotels that we believe because we have experienced.

For me almost 40 years of doing this very very good results in the kind of business and frankly, the kind of brands and particularly extended stay and thats not a new idea on our part either as you well know, even though it's being talked about as the best part of the.

Lodging business for the most part, especially during the pandemic. So I think that where we feel good about our focus on the brands that we do look to acquire.

Okay. Thanks I appreciate it.

Our next question comes from the line of Ari Klein with BMO capital markets. Please proceed with your question.

Thanks, and good morning.

Maybe just on Silicon Valley it looks like it's on the path to recovery the semi within turns coming back.

How are you thinking about the occupancy recovering more broadly through the portfolio and the remainder of the year.

Given that whats been lagging.

During pretty strongly here, how close can we get in 2019 Occupancies over I guess, the second and third quarter.

Hey, good morning, this is Dennis.

Listen I think we're going to get pretty pretty close to 2019 levels from an occupancy perspective in the second half of the year. One thing that once this interim business, we started talking to them earlier this year and that's kind of morphed over the last 120 days.

The expansion of the entire programs.

Now we are really seeing some robust requests for rooms outside of the interim business, even starting this month with some some long term corporate business I E. Two to four weeks of it and.

The relationships and the goodwill that we've built.

I think over the last two plus years with some of our key corporate clients. They are talking about and wanting to secure rins for the fall again for kind of some more long term product development type business as well. So I think we're pretty encouraged at the moment of what that second half of the year it looks like from an occupancy perspective.

And just from a rate perspective, I think it's important to note that.

When we first were negotiating the return rates for this summer as Jeff talked about Theyre about 20 Bucks are 10% below 2019, but since we kind of allocated the first chunk of rooms to the entire program and those companies and other companies are coming back for additional demand.

Those rooms are getting priced substantially higher.

And I think that bodes well for post in turn business into the fall and for the rest of the year. So.

I think not only from an occupancy perspective at a rate perspective.

Things are looking pretty good out there.

And just following up on that are those late booking early about some rates higher than the original rates are higher then yes absolutely.

Higher than the original and higher than 2019.

Got it and then just on the supply side it seems like the environment is.

Clothing lowest play out let's say if you can just pop across the portfolio.

What youre seeing there.

Yes, I think from a supply perspective.

We're set up I think pretty well, we absorbed a tremendous amount of supply leading into the pandemic I think one of every select service brand was in one of our were introduced if not more than one.

Certain of our key markets. So I think as we're in this period post pandemic.

Very little new supply in those markets I think everything if you look at kind of what's being announced and new developments that are out there.

Those are in markets that generally we're not in so.

I think we're pretty confident that we have.

<unk>.

We have a pretty good runway here.

Appreciate the color.

Thanks.

Our next question comes from the line of Kyle <unk> with B Riley Securities. Please proceed with your question.

Good morning, Kyle on for Brian .

Curious you mentioned.

I was curious you've mentioned the four hotels that you have under agreement to sell all of those were among the 15 lowest performing hotels portfolio I'm curious what the opportunities to sell the other 11.

Well I mean listen we're not going to sell all of the other 11, but I think it's really just.

A highlight of.

Those assets that really been kind of.

Within a short timeframe so.

We will just continue to be opportunistic.

With recycling capital, which is what we've been doing.

From here on.

Okay. Thanks for that color and then how do you feel like you're situated from a staffing perspective, especially in Silicon Valley as occupancy is expected to ramp through 2022.

Might be cleaning the rooms once a week.

<unk>.

I think for the most part at least no more than once a week so even in the even in a hotel like that and even in a market like that where hotels are hiring a lot of people.

Because hotel because their occupancies are starting to ramp up we're not going to need the same level of housekeeping.

Services, because the frequency of cleaning is going to be so little so.

That bodes well to be.

A really high margin business for the summer so from a staffing perspective.

We're generally I think in a pretty good position.

Across the portfolio, especially in those five markets.

Five hotels.

Okay. Thanks, that's all from me.

Our next question comes from the line of Tyler and battery with Oppenheimer. Please proceed with your question.

Hey, good morning, Thanks for taking my questions two follow ups for me here in terms of.

The asset sales did you run a process.

Inbound inquiries and then can you also talk about pricing valuations for these properties now versus potentially pre Covid and then also I'm not sure. If you can say how much EBITDA that contributed to 2019 as well.

Yes, Tyler I mean, I think we'll talk about kind of pricing and everything but the four hotels I think generated $2 $2 million of EBITDA in 2019, and 2020 I'm sorry in 2021.

And the recently acquired Destin Hotel actually has had 2021 hotel EBITDA of $2 3 million so that one hotel.

Producing more than the four that are out the pricing we think is attractive as it was.

6% cap rate on 2019.

NOI at a 2% cap rate on 2021 NOI so it.

Those assets were part of a process.

We've been working on and I think we've talked publicly about here for a couple of quarters that we're going to look to opportunistically sell some assets.

And again I think one of the keys is that.

Again two of those four hotels are.

Ultimately going to be converted for multifamily use switch.

Obviously from a multifamily buyer theyre able to get a great product.

At a reasonable cap rate, but it's a very attractive cap rate for us.

Okay great.

In terms of trends in the business here.

The base case that.

May is better than April June better than May.

<unk> done a good June et cetera, and we're just continuing to progress going forward. When do you think it plays out.

Like that.

Yes.

A reasonable reasonable expectation here.

Yes, sure, yes, it should and that also refer back to what I would call normal seasonality.

Think about our portfolio or the hotel business, so you'll get that kind of run up as you always did in the past and then launched October started.

And then you start into.

Lower seasonal months.

Okay, and then just one.

I ask in terms of the dividend I know you want to see continued improvement in business travel.

Return in the Tech markets I mean can you give any more specific color in terms of trigger points that you or that you are looking for I mean is there.

Revpar level, perhaps or comparing EBITDA versus 2019, I'm, just trying to get a sense of perhaps perhaps a benchmark.

You might look at to start thinking.

Thinking more seriously about about reinstating the dividend.

It's really all of those things there's no one thing taxable income drives the board's decision obviously, but.

I think it's considering every metric that you can in terms of where the cash flow is and where it's gone.

Okay.

And then just last one I wanted to put a finer.

Final point on the corporate travel commentary.

Are you seeing any price sensitivity from that guest.

Starting to come back and traditionally when you look at leisure versus corporate it's usually the corporate side of things thats not that price sensitive but over the past.

Six plus months, perhaps leisure.

Less price sensitive.

Our corporate starts to come back or is your expectation that the pricing power should be similar to what we've seen.

Your focus hotels, where you can I'm sure in some circumstances essentially charge whatever whatever you want and guests are still coming.

Well I wouldn't say, we can charge whatever you want but I will say that the business traveler at least so far and as we kind of look over the next.

Four or five months.

Is less averse to pricing as they were pre pandemic I think they've.

Most travelers have been conditioned over the last year and a half, especially.

For increasing rates, we have is certainly an inflationary environment, where everybody is paying more for everything.

That they are buying on a daily basis. So I think again, there's less aversion to what that pricing is at the moment and I think as we talked about in our prepared comments.

We are are met.

Message really since <unk>.

Last year has been push rate hold rate.

The travelers, they're going to be there and let's capture as much as we can.

While we are in kind of this environment.

Okay great.

That's all for me. Thank you for all the detail.

Thanks Tyler.

Okay.

Thank you at this time, we have reached the end of the question and answer session and I will now turn the call back over to Jeff Fisher for any closing remarks.

We appreciate it thanks, everybody for being on the call and again, we will continue to do what we're doing and look forward to our next call with even better results as we go forward. Thank you.

This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.

Q1 2022 Chatham Lodging Trust Earnings Call

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