Q3 2022 Chatham Lodging Trust Earnings Call
Good morning, and welcome to the Chatham Lodging Trust third quarter 2022 financial results Conference call.
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Please go ahead.
Thank you Andrew Good morning, everyone and welcome to the Chatham Chatham lodging Trust's third quarter 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.
K and other SEC filings.
All information in this call is as of November eight 2022.
2022 excuse me 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 companys 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 lodging Trust's dotcom.
Thanks, Chris and I, certainly appreciate everyone joining us this morning for our call.
Again, I'm real proud of our results for the quarter, continuing the strong operating trends and certainly continuing the strong flow through to the bottom line of incremental Revpar and ADR.
Revpar remained strong in the third quarter up 34% over the same quarter last year, and importantly up approximately 1% over the 2019 third quarter strengthened by strong ADR growth of 6% and offset by lower relative occupancy quarterly occupancy.
80% is still an impressive achievement.
Sequentially third quarter Revpar of $150 was up a meaningful 9% over the same.
Quarter and finally, the quarter finished strong what's the capital Revpar up 6% over 2019, the highest monthly growth over 2019. This year October Revpar. It looks strong also with what with excuse me with Revpar only down around one.
Per cent compared to 2019 and of course your stock to a seasonal downturn as.
As you head into the fall as normally occurs.
Next our operating margins were strong again as I said this quarter with same store hotel margins of 55%.
160 basis points over 2019, and produced with only a 1% increase in revpar over the 2019 third quarter.
Historically, we produced the highest operating margins of all lodging Reits and our third quarter margins put us right at the top.
Of all our peer companies again.
Im certainly pleased and proud of that kind of result, particularly as I indicated with revpar up only 1%.
Our third quarter, adjusted EBITDA, and <unk> were up substantially and as a result, we saw a healthy increase in free cash flow, which was almost $25 million in the quarter up almost 25% over our 2022 second quarter and up.
150%.
Our third quarter.
Lastly, I'm very pleased with our financial condition, which is extremely healthy as we sit here at our lowest leverage levels in over a decade since the start of the pandemic, we have reduced our net debt by approximately 40% by far the highest reduction of any watching rate, we exited our credit for.
So the covenant waiver period during the quarter and just recently, we successfully refinanced our senior unsecured credit facility and issued a new $90 million term loan with both facilities now mature in 2027.
With no outstanding borrowings on either facility, we have the flexibility to acquire hotels and a glass or refinance maturing debt over the next couple of years and we have 24 unencumbered assets that could serve as additional sources of liquidity.
Touching quickly on external growth as I stated, we have the capacity and desire to acquire a hotel, but as I'm sure you've heard the Transat transaction market is essentially dormant.
The significant recent rise in interest rates combined with strong operating results in the industry. There really is a pretty wide bid ask spread between buyers and sellers.
We are looking at deals we don't expect to announce soon however, we are certainly looking forward to.
What I can tell the story because I really do believe that that that spread will narrow I believe that they will be.
So debt maturities that owners.
I have a difficulty dealing with and refinancing in this market and I also think some of the pressures as part of the bias should be significant relative to capex and deferred capex that certainly has occurred.
Over the last few years and during the pandemic.
As we've previously stated we do have the ability also to develop another hotel on a parking lot in Portland, Maine extra our Hampton Inn and suites, there certainly as you'll hear from Dennis.
Jim used to be unbelievably strong market and we are working.
Working on a development plan that would work in a difficult environment at Citi to develop at.
Turning back to our operations our portfolio is still recovering.
Our reliance on the higher rated business traveler and certain of our markets walnuts to 2019 September was our best month of the year and that is primarily due to the surge in business travel.
Driven outperformance during the week and we saw that continue into October .
It's the week of Labor day, Tuesday, Wednesday occupancy jumped to 87%, surpassing Friday Saturday the occupancy of 82% over that same period, marking the first time since before the pandemic whereby weekday occupancy has consistently outperformed the weekend.
Although November to February begins our seasonally slower period.
This trend is gaining weekday occupancies is a good indicator of what business travel might trend towards next year, and we continue to push ADR as much as possible.
As a matter of fact as we look ahead, particularly the next year, we see and our operators are seeing and budgeting for continued strong ADR growth.
We know that as I stated earlier, the operator has always produced great flow through to the bottom line.
We're seeing increased demand in many of our primary business travel markets, such as Silicon Valley, Seattle, Dallas, and Boston and strong group demand also in Dallas, San Diego and San Antonio from their convention chairs, our macro view is that business travel including groups will cause.
Turning to gain traction next year and I believe leisure travel will remain strong but saw the white part leisure markets over the past couple of years will give shovel has popped back like we saw with our guest and hotel, which saw Revpar decline.
<unk>, 3.7% compared to the 2021 third quarter, but still a slight decline.
As this transition occurs over the balance of 2022 and 2023.
We will derive the most benefit and changing demand trends as compared to many of our peers, who really have become more dependent and reliant on leisure and resort business.
Although still down 11% to 2019 levels Silicon Valley Revpar has had a good quarter as we benefited from two months of interim demand in the quarter October Revpar trended backwards, a little bit versus 2019, with revpar up about 30% better than what we experienced before the summer.
But still down from September air travel to both S. F L a and San Jose remain well below 2019 levels.
So domestic deployments were down about 25% in the quarter slightly below the 23% Miss in the second quarter, while international deployments improve come down almost 40% to now down about 25% and similar in San Jose the placements were up.
23% in the third quarter versus down 25% in the second quarter, So a slight improvement, but still a lot of room for more improvement going forward.
If you look at our residence Inn in Bellevue, Washington, It's October was up 15% to 2019 versus business travel was a bit stronger than the valley.
If you look at deployments, they're domestic supply and much improved from up 11% in the second quarter to off about 9% in the third quarter International deployments were up 16% to 2019 in the quarter, which is improved from down 24% in the second quarter.
Given the reliance on our return to office international travelers in the longer term consulting and training business as we've said Silicon Valley, and Seattle will be a little slower to recover than the rest of the markets, but we can say that our top clients are continuing to travel we're in discussions with us.
2023 travel expectations.
Including the trying to reach out into 2023 insurance programs, which at this point initial indicators seem to be bigger.
Certainly at higher rates than this year. So we're encouraged by the trajectory of these markets and the emergence of potential nomads that we've talked about traveling back to the valley, we think will generate incremental new demand over the long term.
Our other tech related market Austin is bumping all of these tracks with Revpar up 9% versus 2019 at our residence Inn. Our top play suites was not open in 2019, it's note versus last year and this is relevant since Austin was an open market relative to Covid revpar.
Both hotels was up almost 25% to $150. This market is benefited by strong demand and of course augmented by healthy leisure component.
We believe as I said, the future's bright people still like the travel people like to do business in person and we got some new travelers to the space. The digital nomad that employees can work away from the official will now be asked to come back more frequently.
These new travelers will be staying for more than one or two nights. So we've got the flexibility of course to do that.
We are over 60% extended stay hotels, and we think those hotels start like will be the primary beneficiary of this new added demand.
Added to Great top line performance of course is our ability to generate very strong operating margins and thus high flow through of that top line growth to the bottom line, which means our free cash flow will grow our balance sheet as I said is in great shape I think.
We are poised to outperform continue to outperform and stock re correct returning cash to our common shareholders in the near future through the reinstatement of a quarterly dividend will be talking more about that in the ensuing months or so with that I'd like to turn it over to Dennis.
For a little more color.
Compared to 2019, our monthly Revpar was essentially flat in July and August before accelerating in September as we talked about on our last earnings call. This quarter marked the return of in person internships and significant room demand from high Tech companies, such as meta Apple E Bay and T mobile it bled off in those programs.
In early September .
Having wrapped up our intern programs our revenue was approximately $13 million in 2022, and that's almost double from our 2019 levels.
More of this business was definitely the right decision is proven out by pretty Big Revpar index gains at our two Sunnyvale hotels, an added benefit is that our operating margin on this business is very high as limited room servicing as part of the arrangement our operating margins at those five tech driven hotels in September was over 60%.
As Jeff mentioned in his prepared comments.
Our tech driven hotels before in Silicon Valley and the one in Seattle are still well off of 2019 results.
We do expect that they will ultimately recover and surpass those levels, they're just going to be a bit slower.
As a reminder, in 2019 lease of five hotels did about 35 million in hotel EBITDA and are expected to be around $23 million to $24 million in 2022, So it's still about 30% off.
Of 2019 with some good internal growth to come.
If you look at our portfolio for the quarter, excluding Silicon valley or excluding Silicon Valley and in our residence Inn in Bellevue, Our third quarter Revpar was up 4% versus 2019 with ADR growth of 11% offset by a decline in occupancy of about 7%. So again taking out this.
Five pretty significant hotels, the portfolio performed really well relative to 2019 large group and convention business continues its search and we posted gains in all of our convention related markets with Dallas, and San Diego, posting revpar gains of <unk>, 43, and 20% respectively versus 2019.
San Antonio posting a revpar gain of approximately 4% versus 2019, so far the schedules are setting up for a pretty good 2023 and at least there continues to be talks in Dallas about the expansion of its cable pay badly Convention center.
In the future without closing any of the convention space, it's really going to be expansion.
That space, So that's going to do nothing but attract larger conventions and given our close proximity to convention center should set us up pretty well.
During the third COVID-19 of our comparable hotels generated revpar greater than 2019 compared to 17 of our hotels last quarter. So again, a gradual improvement.
We can travel which for US average just over 85% of occupancy occupancy in the quarter continued to outperform our weekday travel that's great, but the gap has continued to compress.
Do in most part again to the business traveler coming back weekday occupancy, which is the best indicator of the business traveler rose to 79% in the quarter compared to 76% in the second quarter October weekday occupancy was still healthy at 77%.
As Jeff talked about.
Pretty interesting for us that says that we could wait ready our Tuesday Wednesday occupancy at 87% are Friday Saturday occupancy of 82%.
Coinciding with the rising demand, we continue to push our rates.
Our ADR throughout the week third quarter weekday ADR was $184.
175 in the second quarter and weekend ADR was $193 versus $186 last quarter October ADR was slightly higher than our September ADR, our five highest cost highest hotels with absolute revpar in the quarter or are at the top of our Hampton Inn in Portland at 200.
$85 and then our Hilton Garden and unfortunate the $221 followed by a foggy bottom residence Inn at two O six and then our residence in advanced gasoline Hilton Garden Inn in Marina del Rey with Revpar of approximately $200. Our portfolio is significantly better than the industry in the third quarter revpar growth more than double the <unk>.
Industry performance with outperformance in both occupancy and ADR occupancy reached 80% compared to industry wide occupancy of 67%. Additionally, our growth relative to 2021 versus the industry clearly shows that our portfolio is growing more rapidly than the industry as a whole with our occupancy ADR and revpar.
Growth of 10, 22, and 34%, respectively compared to industry growth of 511% and 16%.
Our top five absolute occupancy hotels on the in the quarter were a Hampton Inn in Portland with occupancy of 98% followed by a residence in new Rochelle, our Hampton and that's there are residents in White Plains, New York, and then our Homewood suites in Bloomington, and making its first appearance, but all five hotels that occupancy exceeding 90% and our top.
Five hotels with higher ADR were led again by the Hampton in Portland, with an ADR of $350 $50 higher than our second rank hotel the Portsmouth Hei and then the remainder of our top five while our Hilton Garden Inn in Marina del Rey, San Diego Gaslamp residence Inn, and then our residence in mountain view, all three with <unk>.
Over $235.
We continue to see an average length of stay longer than our historical levels, which is consistent with Jeff's comments regarding today's traveler staying longer and harder to our hotels, our average length of stay at both the residence Inn and Homewood suites brand still remains about 20, 20% higher than pre pandemic levels for the quarter total hotel revenue of 88 million.
It was up 37% compared to last year's revenue of $64 million and we were able to generate incremental GOP of almost $19 million for flow through of a very strong 65% on that increased topline.
Certainly our revenue growth doesn't mean nearly as much if he can't push it through we've seen.
All of our peers, who saw margins decline relative.
Relative to 2019, our margin growth is based on our entire comparable portfolio and our same store third quarter operating margin surpassed 50% and we're up 160 basis points over the 2019 third quarter.
It's pretty impressive to be able to achieve that kind of margin growth on a 1% increase in revpar, but we've certainly been able to produce meaningful growth.
And pretty hard high margins, given kind of where we are in a revpar recovery.
A good bit of this increase is attributable to more efficient operating structure, especially with respect to labor our employee head count remains down about 20% compared to pre tax pre pandemic levels certainly like many we're a little bit understaffed out there and we're making up for it in terms of with casual labor and efficiencies.
But we certainly believe at least on a permanent on a long term basis, there will be a permanent head count reduction.
But obviously everybody knows the pressures we've seen with labor rates over the last few years.
On a per occupied room basis at our comparable hotels.
<unk> costs were approximately $33 a decline of about $2 or about 5% relative to 2019.
During the quarter, all hotels generated a positive hotel EBITDA GOP, our top product producers of G. O P. In the quarter were a gasoline rather than Jim which was also the highest producing GOP hotel and.
The first and second quarter, followed by a Silicon Valley two residence Inn, and then a residence Inn Bellevue Washington.
And then lastly, and fifth was our Hampton Inn in Portland in terms of gross GOP production.
The fact that three of our top five hotels are tech driven hotel serves as a reminder of the upside.
That is underpinning those hotels as the markets recover all five of our top of our tech driven hotels were in the top nine produces producers of <unk> in the quarter and if you actually look at the 36 comparable hotels compared to 2019, our third quarter Hotel EBITDA was about 105% of the third quarter of 2009.
A great result.
Looking at our recent acquisitions and our development all four hotels were in the top 20 producers of GOP and as a group generated revpar of 153 in the quarter above our portfolio average of 150 and margins at the four hotels were encouraging with Austin generating a mark with our Austin hotels generating operating margins.
54% and our cone too in the woodland Hills, a 44% followed by our HCI guesstimate, 39%.
On the Capex front, the company incurred capital expenditures of $3 million in the quarter and.
During the fourth quarter, we are going to commence renovations at three hotels are residents and in Washington D. C. Our White Plains, New York and wholesale New York with total spend for those three renovations are going to be approximately $11 million and we've already incurred about half of that in advance of commencement of the renovation with that I'll turn it over to Jeff.
Thanks.
Everyone, China, Q3, 2022, Revpar of $150 represents a 34% increase versus our Q3 2021 revpar of $112 was up 1% from our Q3 2019 Revpar of $149. This excellent top line performance was driven by exceptionally strong leisure demand.
An unprecedented levels of summer intern business at our Silicon Valley in Bellevue hotels, and the continuing recovery of business transient demand, which really picked up after labor day.
We expect business transient demand to continue to improve in Q4 overall revpar levels in Q4 relative to Q4 2019 are unlikely to match, our Q3 growth of 1% versus 2019, given the checkout of the tech related in turn business and the seasonality of the leisure travel in our portfolio.
In addition to the exceptional topline results Chatham was also able to generate outstanding margins in Q3, Chatham Q3 Hotel EBITDA margins of 43, 6% are among the highest in the sector and were 240 basis points higher than our margins in Q. <unk> Q3, 2019, we were able to achieve a significant increase in margins.
Despite revpar only being $1 higher than in Q3 2019.
While we're starting to see cost increase we believe continued growth in revpar should help offset the potential impact on margins are.
Our Q3 2022 hotel EBITDA was $38 2 million adjusted EBITDA was $35 1 million adjusted <unk> was 50 cents per share and cash flow before capital, which represents hotel EBITDA less corporate G&A cash interest and $2 2 million of principal amortization was positive $24 6 million.
Over the last two years Chatham has taken a number of steps to strengthen its balance sheet and as a result, we now have the lowest leverage in most liquidity that we've ever had.
In late October we replaced our $250 million revolving credit facility that was scheduled to mature in 2023 with a $305 million credit facility that consists of a $215 million revolving line of credit and a $90 million delayed draw term loan.
Including all extension options, the new revolver and term loan how vital maturities.
October of 2027.
The revolver and term loan are both currently completely undrawn and we intend to drive a $90 million term loan in the first half of 2023 and used the proceeds to repay the majority of the $112 million of debt we have maturing in 2023.
With a reasonable leverage solid liquidity and strong operating performance sizable portfolio of unencumbered hotels and meaningful free cash flow, we are well positioned to refinance our remaining debt maturities when needed.
If at any time your question has been addressed and you'd like to withdraw. Your question. Please press Star then two.
The first question comes from Ari Klein with BMO. Please go ahead.
Good progress there, but are there any significant incremental cost that you still expect to bring that back and should provide some color on what you're seeing from that from a labor cost standpoint.
You know you do have Marriott came out with kind of updating their near cleaning standards.
In that respect so.
But yeah, I think we're gonna be good at it.
Got it and just following up how are you.
Are you thinking about employee costs on a year over year into 2023 on a like for like.
So it's a little bit down from our from our year to date increase last year I think as we move into 2023. We're still you know we would still expect wages to be up kind of in that kind of middle single digits.
Well I mean, we saw it you know first of all we don't think it's gonna be canceled or anything like that I mean, yeah, we've been doing that business for a long time, the only thing that ever stopped it.
Yeah listen I think if we if we were faced with that challenge. We obviously would have to revert to what we did in the 2020 in 2021, which as you know get as much business as we can.
Each of Austin Silicon Valley in Bellevue.
Competent and what's going to happen next year and we've already started the discussions with them a little bit earlier than we used to in regards to rates for that business next year, which right now are pretty encouraging.
Got it okay, and maybe one more on I guess, the Portland potential development could you maybe update us on when a project like that would take to complete in terms of timeframe.
What do you think that where you think the overall opportunity is for that project.
It's the Hampton Inn in Portland has been one of our top performing assets since we bought it a decade ago. The process there is quite time consuming.
Round that project, but I think in terms of building it.
And getting first of all getting approval to build it and then building it it's probably still a good couple of years off from being opened in that market.
Yeah.
Hey, Thank you. Good morning first question for me I really want to dive into the trends in the business and what you're seeing in October I think down versus 2019 and September up 6%, which one in 19. So just trying to understand the delta there in terms of the performance versus 2019, and then if you.
Could you.
You know how you think in November and December should shape up compared with the 2019.
At the moment, so it's a little too early to tell what were looking like in terms of revpar for the full month, but it's a little bit down from certainly from an absolute revpar perspective down from October usually our revpar kind of once you get past October it goes down in November down further in December and then start building back.
Okay. Okay. That's helpful.
And then in terms of the acquisition commentary I'd imagine, perhaps structuring there aren't more opportunities out there right now to transact.
It's got a it's got to come from pressure.
For deals to happen so partners will put up the extra capital, but there's always those deals and those partnerships that don't.
Instead, they say, let's see if we can sell this hotel or sell this hotel and that's what opportunities occur. It's a I don't know the timing exactly it's hard to predict but we've positioned our balance sheet purposely to be in.
Good stead.
Certainly have the capacity to do it look we've got to get [laughter], so to be clear, a really strong returns and pricing really nice job given the environment today, and given our multiple and given where the stock trades. So there's a variety of different.
And I think we've been around long enough to understand the bat.
You know to really make an acquisition work.
And then last question for me on capital allocation your balance sheets in great shape, our performance is really strong.
And here I'm kind of what are your expectations. What are you looking at in terms of potentially reinstating.
Significant significant payment.
Yeah, I mean, we are going to reinstate clearly.
The level of the dividend, probably given our conservative nature should ramp up yes visibility right half shop into next year on earnings right.
Yeah.
Okay.
Just to check that there had been another question.
So I'll just ask if anyone has a question. Please press star then one.
Well again I just want to thank everybody for being on the call are following the company as we move forward here.
Sure, it's continuing cotter ourselves, we've been able to post and look forward to.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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