Q2 2023 Chatham Lodging Trust Earnings Call
Good morning, and welcome to the Chatham Lodging Trust second quarter 2023 financial results Conference call.
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I would now like to turn the conference over to Chris Daly President of D. G. Public relations. Please go ahead.
Thank you Gary Good morning, everyone and welcome to the Chatham lodging Trust's second quarter 2023 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 August 2023, 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.
Find copies of our SEC filings and earnings release, which contain reconciliations to non-GAAP financial measures restaurants on this call on our website at.
Chatham lodging Trust's dot com now.
Now I'll provide you with some insights into chat on the 2023 second quarter results allow me to introduce Jeff Fisher, Chairman, President and Chief Executive Officer, Dennis Craven Executive Vice President and Chief operating Officer, and Jeremy Wegner, Senior Vice President and Chief Financial Officer, when certain session over to Jeff Fisher Jeff.
Hey, Thanks, Chris and good morning, everyone I certainly appreciate everyone being on the call. This morning with us for the fifth consecutive quarter, we've outperformed the industry revpar growth with Revpar growth over 5% for the quarter driven by pretty equal increases in both occupancy and ADR realm.
2019, Revpar was down.
Lately, just a little more than 1% for the quarter in fact versus 2019 Revpar has sequentially improved each month of 2023 through June relative to 19, Revpar improved each month of the quarter with Revpar down, 3%, 2% and 1% a key indicator that business travel.
<unk> continues its recovery across the country.
This is particularly impressive given the loss of most of the insurance business and Silicon Valley Bellevue, Washington, and also in Austin, Texas, a loss of inter business impacted performance for about one third of the second quarter and will impact two thirds of this quarter and we'll make a third quarter comparison.
So last year in 2019 tougher having.
Having said that in terms of a return in much larger numbers next year for tech companies, which should provide outsize growth next year and beyond for us ports.
Portfolio occupancy rose to 79% in the quarter. Despite the in turn loss, which is up from 77% last year and not far off the 2019 occupancy of 83% within the week weekday occupancy reached 78% in the quarter and June weekday occupancy of 81, 3%.
Where's the highest level since the pandemic.
ADR was up $3 over last year and up $6 over 2019 again looking at the weekday business traveller weekday ADR was up $6 over last year and the June weekday ADR was $186. That's the third highest since the pandemic can only.
Slightly behind June and July 2022, ADR of $187.
<unk> continued to be pushed by our operators all days of the week interesting point.
It is at last weekend's ADR for the company was over $200.
Outside of our Tech driven markets, we really are seeing nice growth year over year with each of our top markets other than of course, the three Ted Czech markets led by Washington D. C. Our coastal north eastern hotels in Los Angeles, producing revpar growth of 11%, 10% and.
7% respectively.
Those three markets account for over 25% of our EBITDA leisure travel remains strong with our leisure markets producing strong revpar growth in the quarter, we could look at Destin, Florida up 8%, Portsmouth, New Hampshire up 24% and Anaheim up 2%.
Fort Lauderdale up 14% in Savannah up 4% with Portland flat, but opportunities are strong going forward.
And by our 5% Revpar growth, we were able to generate year over year, EBITDA, <unk> and <unk> per share growth.
We delivered 5% <unk> per share growth over last year, producing <unk> per share of 43 cents.
Compared to 41 cents last year, our <unk> per share a 43 cents exceeded consensus estimates of 40 cents per share operationally, we were able to generate operating margins of 49% flat to last year and the <unk>.
29, 2019 second quarter and hotel EBITDA margins of 41%.
Just below the prior year in 2019 levels of 42%.
The key driver on the expense side was holding hourly wages flat year over year.
Interestingly when you exclude the five tech hotels margins were up 40 basis points to 2019 levels again shows you the inherent upside once those hotels start performing.
With good flow through we were able to generate corporate level cash flow before capex and common dividends of $22 million in the quarter up approximately 10% over last year with the excess cash flow, we were able to repay a $20 million maturing mortgage.
With only 70 million of maturing mortgages between now and June 2024 were in an excellent position to address all remaining maturities this year and next year.
We continue to pursue external growth opportunities, though we must of course be mindful of our cost of capital while assessing in place cash flow yield and growth projections on potential acquisitions.
With the significant rise in interest rates brands, becoming more focused on renovation requirements and a bunch of maturing debt occurring throughout the industry. We believe there'll be some opportunities to acquire hotels that fit into our high quality portfolio in the back half of this year and certainly.
Into next year.
With 39 hotels, we can acquire one or two hotels and a significantly moves the needle with respect to EBITDA and <unk> growth.
The good news is we have substantial internal growth upside as I said inherent in our existing portfolio with the ultimate recovery of Silicon Valley, and Seattle as well as the return of the insurance business in Austin.
If those hotels reached 2019 revpar in 2024 that would generate incremental portfolio revpar growth of approximately 7% and incremental <unk> per share growth of 32 cents. If you include the Austin and turn business that will add another.
50 basis points to Revpar and <unk> per share of another two sets so including all those hotels so seven.
If you use current consensus estimates for 2023.
Adjusted <unk> per share would increase almost 34 cents per share, which alone would represent an almost 30% increase.
That certainly has substantial upside as you look at our company and look forward.
Before I turn it over to Dennis I want to spend a few minutes updating everyone on what we're seeing currently in Silicon Valley and Seattle.
Obviously, the loss of the intern business hurts, our current year results, especially this quarter, but coming off the massive layoffs last year and early this year Big Tech is now posting big profit numbers all of the Big Jack is talking about investing significant dollars into capex.
And product development.
International travel continues to improve with deployments in San Francisco's.
San Jose and Seattle at their highest level since the pandemic Seattle deployments are actually up over 2019 levels.
Again, encouraging news and a good data point to show underlying trends are getting better and better.
International occupancy at our two Sunnyvale hotels was approximately 22% in the second quarter with most of the demand coming from Korea, China and India.
General business travel demand trends are encouraging and the valley, we're experiencing an uptick in demand from tick Tock electric vehicle related lodging demand continues to grow of course, and we've recently seen group requests with an increase on size now hitting into the hundreds for late.
Q3, and early in the fourth quarter, though the absolute attendee numbers for apples fall programs are down to 2019, they are occurring and we should hopefully see some demand out of that of course part of this development relates to AI, which will remain a significant growth.
Opportunity across all the industries every tech company is assessing and developing generative AI tools into their operations. The video service now in Accenture, just announced a partnership to accelerate AI development further.
And Additionally, reassuring chip manufacturing and semi conductor tech investment is going to be a huge tailwind for tax and in support of this movement. Just two months ago applied materials, which has forever been one of our top five accounts in Sunnyvale announced plans to build a 4 billion.
<unk> hundred 80000 square foot R&D facility in Sunnyvale, just blocks from our two sunnyvale residence inns.
<unk> will be a state of the art facility for collaborative innovation with chipmakers universities and ecosystem partners. Some of those partners include a M D into video and Western digital all customers of ours.
We've owned these hotels for many years and we know that these companies are continually evolving investing and developing the world's greatest technologies.
As these technologies evolve and these companies continue to grow our hotels as they always have in the up cycle will recover and our earnings will accelerate rapidly with that I'd like to turn it over to Dennis.
Thanks, Jeff.
<unk> performed significantly better than the industry with first with second quarter Revpar growth of 5% again exceeding industry performance by approximately 85%.
This trend of beating the industry will be challenged in the third quarter due to the interim loss for two thirds of the quarter, but certainly will continue into 2024.
Silicon Valley, our largest market comprising 15% of EBITDA, so occupancy grow slightly year over year. Despite the loss of most in term business and still down a little bit to 81% occupancy in 2019, ADR is where the most opportunity is and we need to see continuing demand growth to be able to dry.
Ive ADR ADR was $184 down 3% versus last year and off 23% versus the 2019 second quarter ADR of $240 Revpar was off 28% versus 2019 levels weekday occupancy in the valley was 77% in the quarter.
Silicon Valley, EBITDA was $4 6 million, which.
Which was down about $600000 from last year and down about $3 million versus 2019 levels.
And other key check market, Seattle Revpar was off 9%.
Which is a favorable underlying trend occupancy was actually up 1% year over year to 73%, but still down to 84% occupancy in 2019.
Second quarter ADR of $187 was up 5% versus 2019.
EBITDA was $1 3 million in the quarter down from 2022 second quarter EBITDA of $1 8 million and $2 million in the 2019 second quarter and.
In Austin, Revpar was up 5% versus last year again due to the loss of the interim business. This summer in Austin is the seasonally slower months. So it's certainly more difficult to replace that lost in turn revenue there.
Excluding the <unk> turns revpar would've been up approximately 3% to 4%.
And our other top market top markets, our coastal hotels in New Hampshire, and Maine continue to outperform with Revpar up 10% in the quarter driven by 24% growth at our Hilton Garden Inn, Fort Smith, and 11% and exit or.
From a leisure standpoint, Fort Smith, certainly reminds us of kind of where Portland was five or so years ago.
Los Angeles with three hotels represents 9% of our EBITDA and we saw Revpar grow 7% in the quarter all three L. A area hotels grew revpar in the second quarter.
Washington D C, which comprises 8% of our EBITDA, we were able to generate meaningful revpar growth of 11% in the quarter again, all three D. C hotels grew revpar, our embassy suites in Springfield saw Revpar grow 17% because we are finally seeing some return to office and business travel back in the market as a reminder in.
Springfield TSA moved its headquarters there.
The early stages of the pandemic and is just really starting to return to office.
Our residence Inn foggy bottom produced revpar growth of 8% and interestingly enough for.
For the second quarter Revpar was $212 the highest of all hotels in our portfolio in the quarter.
Last of our top markets, the greater New York, and Dallas markets continue to edge higher with both seeing revpar growth in the low single digits.
Our five highest hotels with absolutely Revpar, where again top of the list was our residence Inn foggy bottom.
Chad ADR of $267 in the quarter, followed by our Marina del Rey Hilton Garden Inn.
With Revpar of $202 and then our residence Inn Fort Lauderdale, Hampton Inn in Portland, and residence Inn, San Diego Gaslamp, all with Revpar over $190.
A post pandemic high of 21 of our 36 comparable hotels achieved revpar higher than the 2019 second quarter. Additionally, 27 of our 36 comparable hotels or approximately three fourths of the portfolio cheat achieved <unk> higher than 2019 levels.
We continue to see an average length of stay approximately 10% longer than our historical levels.
Come down certainly from pandemic related stays but on a long term basis should remain a bit longer due to the more flexible work arrangements that exist in today's business climate.
For the quarter total hotel revenue of $84 million was up 3% to last year, we generated incremental GOP flow through of approximately 30% and a challenging operating environment, we were able to maintain margins essentially flat year over year.
Primarily by holding hourly wages flat.
This was offset by approximately 150 more hotel employees compared to last year.
At this point, we're pretty close to being fully staffed at most of our hotels and that would represent.
Kind of stabilize at these levels would represent about 17% head count reduction over pre pandemic levels.
Look at our five hotels in Silicon Valley, and Seattle operating margins were over 51% in the quarter versus 58% last year.
Operating margins on that business very profitable given the less amount of services required.
Our top five producers of G O P in the quarter, where our Gaslamp residence Inn, the sixth straight quarter. It's led the portfolio followed by our embassy suites, Springfield, and then notably our two Sunnyvale hotels and fifth our Springhill suites in Savannah.
Missing out was our residence Inn Bellevue, so despite a huge gap to make up with the loss of the interim business three of our top six GOP producing hotels in the quarter, where our tech driven hotels.
With respect to Capex, we spent approximately $8 million in the quarter and expect to spend about $30 million total in 2023 that includes $22 million of renovation costs at five hotels.
During the third quarter, we have commenced.
The renovation of the courtyard, Charleston, Summerville, which is expected to be done by the end of the third quarter with that I'll turn it over to Jeremy Thanks, Dennis Good morning, everyone.
Our Q2 2023 hotel EBITDA was $34 $7 million adjusted EBITDA was $31 9 million adjusted <unk> per share was <unk> 43.
Cash flow before capital was $22 million, while we've seen cost increase due to the reinstatement of certain brand standards and the impacts of inflation on a number of key line items, we were able to generate a solid GOP margin of 48, 5% and hotel EBITDA margin of 41, 3% in Q2, which were only down <unk>.
50, and 70 basis points, respectively from our margins in Q2 'twenty two.
Our balance sheet remains in excellent condition, and we are continuing to execute on our plan to address debt maturities as of June 30th Chatham is net debt to LTM EBITDA was $4, one times, which is significantly lower than our pre pandemic leverage which is generally in the five five to six times area. Despite the fact that EBITDA has not fully recovered yet.
Pre pandemic levels.
In Q2, we use the final $15 million of availability under our delayed draw term loan to repay the maturing loan on the courtyard Houston and subsequent to the end of Q2, we repaid the $19 7 million dollar loan on the Hyatt place Pittsburgh with available cash year to date through July we have refinanced or repaid 100.
$9 million of debt, which leaves us with only $40 million remaining debt maturing in 2023.
We expect to access the MBS market over the course of Q3 to raise approximately $50 million to $100 million of proceeds which would address our $40 million of remaining 2023 maturities and a portion of our 2024 maturities.
Cost of this financing is likely to be in the mid 7% area.
We expect the total proceeds from our planned Q3 financing activity together with our Undrawn $260 million revolving credit facility will provide enough liquidity to cover all of our 2024 debt maturities.
Well, we're not going to provide guidance at this point I would look like to provide some color around how one could think about potential performance in Q3.
Order over quarter comparisons have been pretty noisy over the last few years on both revenue and expenses due to the pandemic and the recovery from it as well as different demand driver staffing levels franchise, a requirement and volatile volatile utility pricing.
If you look back to both 2018 in 2019 and each of those years. Our Q3 Revpar was approximately $3 higher than our Q2 revpar. So that may provide some general context for how to think about what we might expect for Q3 revpar versus our Q2 revpar of $144.
On the expense side with the loss of the interns and Silicon Valley, Seattle, and Austin for two thirds of the quarter third quarter margins will be pressured as we benefited from higher revpar and minimal housekeeping requirement for that business in Q3, 22. Additionally, incremental head count year over year to fully staff, our hotels going into the summer will impact Q3 more than Q2.
In Q3 interest expense net of interest income is also likely to increase by about $500000 versus Q2 due to both our planned financing activity and the impact of increasing so for on our term loan interest expense.
The exact amount of any increase in interest expense will depend on the ultimate amount of financing, we complete rates at the time of execution and transaction timing.
This concludes my portion of the call operator, please open the line for questions.
We will now begin the question and answer session too.
To ask a question you May press Star then one on your telephone keypad.
If you were using a speakerphone please pick up your handset before pressing the keys to.
To withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question is from Ari Klein with BMO. Please go ahead.
Thanks, and good morning.
On the expense side, you know it looks like hourly wages were flat year over year, which followed the positive can you just talk about the sustainability of that or how you're expecting that maybe if the world moving forward.
Has I guess head count overall, maybe as that.
It sounds like you're almost fully staffed there.
Hey, Ari this is Dennis Yeah, I think listen certainly the wage pressures of.
The last several years have come down.
He probably hearing that and a lot of people just from an hourly wage perspective, it's still a tight labor market, but I think even going back to last summer.
As occupancy levels ramped up.
We were because we run a higher occupancy we were able to.
Retain as many people as possible and provide them full schedule. So that certainly helped in terms of stabilizing the workforce and yeah, we feel pretty good there I mean listen there's certainly going to be inflationary increases on wages, but we've absorbed over a 25% increase in the last three plus years. So.
It is expected as the labor pool continues to come back to work that hopefully the the significant increases moderate here.
Yes.
Thanks, and then Jeremy you, maybe not on the balance sheet and you mentioned tapping at the MBS market later, this year, which will address.
Maturing debts during the course of next year.
There's still a significant amount out there for next year, how should we think about the timing.
Yes.
Yeah, I think after we do what we're planning on doing in the balance of this year.
Sort of all of the remaining maturities will be backstopped by the revolving credit facility. So.
I think we'll probably theres no kind of a gun to our head to take out the rest of it and replaced four 5% money with seven 5% money right away. So I think we'll probably be you know Q1 ish next year before we start start doing more see MBS and hopefully rates are lower by then but in any case don't Wanna.
To pay the higher rate sooner than we need to on that.
Got it.
Last one just on Silicon Valley, Yeah, I think he made up about 53% of law and term business in the quarter, Jeff you talked about some of the positive trends Youre seeing do you think that number goes higher.
In the third quarter and then I think you also mentioned expecting the interim business to come back next year.
Is that based on conversations you've had with some of the companies or how should how are you thinking about that.
Yes, I mean listen this is Dennis I'll answer and Jeff can chime in I think the 63% replacement.
We will be in the range of that whether it's <unk>.
60, or 65, I cant say, but certainly.
We're pleased with basically coming right in the middle of that 50% to 75% range that we provided last quarter. So that's all a good sign I think with respect to intern programs.
They are there are in term programs happening. This year is just significantly down from prior year. So.
As you know, it's able to be absorbed by other housing.
Or you know, especially in the Seattle.
Sunnyvale market so.
Any discussions we've had there's been nothing concrete for next year, but the.
We've owned these hotels for a long time and the interim business has been part of that and.
And we know where theyre going to come back it's just a matter of the magnitude of it too.
Appreciate the color. Thanks.
The next question.
<unk> is from Anthony Powell with Barclays. Please go ahead.
Hi, Good morning, everyone I guess another question on the interim business.
Surprised about often being a big contributor there I mean, I should've expected that but.
What percent of total EBITDA on an annual basis. Our total revenues is coming from the interim business on a stabilized basis had some understand just the magnitude of the business throughout the portfolio.
If you go back to pre pandemic levels, Anthony total in turn EBITDA.
Was around I guess total total internal revenue sorry.
It was around $6 million for the five hotels not including Austin.
So EBITDA at a kind of a 60% margin was around $3 5 million you add another couple of million dollars or.
There are about $1 million of revenue sorry for Austin So.
$7 million of revenue on 300 million pre pandemic.
Was kind of the the order of magnitude and where I think on a stabilized basis, we would want to play as opposed to taking almost $12 million of it last year.
Okay got it understood, Okay, and just are going.
I'm going to acquisitions I think I think you talked about maybe doing some deals in the back half of this year early next year.
Cost of debt is about 7% it seems like on your wine closer to that on the line and didn't haven't seem yes.
Are you seeing yields on acquisitions that are above that I'm, just curious how you're underwriting.
The cash on cash when you account for cost of capital than doing acquisitions.
Yeah, Hi, Anthony yet look there's very few deals being done as you know and you know expectations have certainly changed a little bit on the part of sellers.
We're working on one thing now that certainly has a yield in excess of 7% is in excess of 8%, but they are far and few between and some of that yield frankly comes from our ability to just manage better and complex positions.
Cluster.
Of other hotels that we've got in the neighborhood. So it's kind of that special opportunity.
We were able to use island hospitality for to really maximize.
Cash flow and the return but.
As Dennis said and as I said.
We're looking at cost of capital don't worry yet and you know, we're certainly not interested in doing anything.
Not at least marginally accretive.
And that May come from.
Recycling of capital from the sale of a hotel and simply matching almost matching.
Bonds on an acquisition with an in place return that is in excess of 8%.
Got it thanks, and maybe one more on Los Angeles any impact of the writer's strike and the actress strike that you've seen in.
In recent weeks.
Yes, we haven't really seen any any real material impact Anthony.
We're in the valley, so a little bit on the edge there in the hotel has been performing very strong.
Alright, Yes, I think the only thing I will say I would add to that Anthony is Marina del Rey.
Our largest pieces of business there as is airline Fedex related as opposed to entertainment related to it.
That business continues.
Got it thanks.
Thank you.
Again, if you have a question. Please press Star then one.
The next question is from Tyler Batori with Oppenheimer. Please go ahead.
Thank you. Good morning, just wanted to unpack some of your commentary a little bit more here.
When we look at Revpar on a year over year basis. It looks like a deceleration in June and into July and I know Doug in term business is impacting that.
You kind of ex that out just talk a little bit more about performance in the portfolio and maybe it's helpful to know if you can kind of quantify just how much of a drag with Boston interim business is going to be on Q3 Revpar overall.
Yeah, I'll start and if anybody wants to add but yes. Tyler. This is Dennis I mean generally those five hotels are impacting our revpar by about 700 basis points.
So it's a it's a it's a significant impact I think it will be a little more difficult in the third quarter to replace that lost business.
Just given kind of.
The amount that we took last year, but having said that like I said, 63% recovery at least through June two.
All in all I think it's.
Pretty pretty noteworthy to be able to be where we are as a portfolio.
Yeah.
Okay.
Leisure numbers that you provided.
And some of your peers talking about that business slowing a little bit more.
Some issues in terms of.
You're not being turned on heidrick as much pricing power.
Talk a little bit more about.
What youre seeing in some of your leisure markets.
Commentary on some of the weekend.
<unk>.
I'm pretty optimistic there.
Yeah, I mean, I think Jeff's prepared comments he talked about I think you listed out separately each of our what we would kind of.
Characterize as primary lesion markets with the only one that wasn't up was was Portland and quite honestly, we left some money on the table. There. So it really would have been but.
The other ones, including even Destin, Florida up 8% in Fort Lauderdale up 14% I think is noteworthy given I think what <unk> seen probably from some of the other Reits that have already reported with pretty significant revpar decline. So.
I think again, it just kind of a testament to the not only the locations, but also just the assets or are in slightly different markets compared to some of those white hot markets previously.
Look at look another advertisement frankly for being in the select service business.
Yes.
These are not resort four and five star or even three star resorts that are fly to markets. These locations were specifically handpicked for.
What they are and these kind of numbers prove it out, especially in a general leisure pullback certainly compared to 2022 some of the other full service hotel Reits are probably got a report or already have reported so you know we.
We are definitely pleased with the resiliency of the model and.
And the cash flow that we get on these hotels.
Okay. Okay. That's helpful. And then in terms of business travel I mean, if we exclude the Silicon Valley hotels. Some of your peers have talked about corporate travel that recovery kind of maybe being a little bit more a little bit more slow.
Kind of what are what are you what are you seeing what's your what's your opinion on the future trajectory.
In terms of in terms of business travel.
I mean listen I think our you know our weekday occupancies in the second quarter, even even including Silicon Valley as a portfolio of weekday Occupancies were 70, 677%.
For the entire portfolio.
<unk>.
Fairly comparable to weekend occupancies for the quarter. So.
I think in terms of our markets and our customers its been pretty stable, so and it continues to edge higher Sue.
I think for us and for our markets that we're in.
That continuing it used to be a year ago that Monday, Tuesday, Wednesday, where the lowest revpar nights of the week and for our portfolio. They are now becoming our highest revpar nights of the week. So.
I think for our general overall portfolio, and even including Silicon Valley that occupancy.
Underlying occupancy strength is and continued growth even if it's from $75 to 78 or 78% to 80% is encouraging.
Okay great.
I'll leave it there I appreciate the detail.
Thanks Todd.
This concludes our question and answer session I would like to turn the conference back over to Jeff Fisher for any closing remarks.
Well again, thank you all for being on the call.
We've kind of set the table a little bit for a Q3 that you know perhaps.
Certainly won't be as good as last year that does not indicate any kind of go forward trend at all other than what we've focused on relative to that specific business and as we move out of that quarter and especially into next year. As I commented, we really do see some pretty substantial upside.
Here and growth in earnings so I appreciate that and we will look forward to talking to you again soon.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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