Q3 2023 Chatham Lodging Trust Earnings Call
Good day and welcome to the China Lodging Trust third quarter 2023 financial results Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Chris Daly President of D. G. Public relations. Please go ahead.
Thank you Sarah.
Morning, everyone and welcome to the Chatham Chatham Lodging Trust third 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 November 2nd 2023, unless otherwise noted and the company undertakes no obligation to update any forward looking statements 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 excuse me on our website at Chatham lodging Trust's Darko.
Now to provide you with some insight in the Chatham in 2023 third 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, Let me turn the session over to Jeff Fisher Jeff.
Yeah, Thanks, Chris and good morning, everyone. I appreciate everyone being on the call. This morning with US we know it's a busy morning out there and earnings land. It was a successful quarter given our earnings beat but also an interesting quarter, given the unusual and difficult comp created by the substantial cancellation.
The 2023 check intern programs as we've talked about numerous times and Silicon Valley Bellevue, Washington in Austin, Texas, and the third quarter alone the loss of intern business meant we were missing approximately 8 million of room revenue and $5 million of operating profit as we all know.
Starting about this time last year Tech companies started announcing massive layoffs hiring freezes and cost cutting initiatives less than six months later those same companies weren't out significant investments in artificial intelligence chip manufacturing and re shoring of technology manufacturing back to the.
As previously noted applied materials, which has forever been one of our top five accounts and Sunny Vale announced plans to build a 4 billion dollar 180000 square foot R&D facility in Sunnyvale, just blocks from our two Sunnyvale residence Inn.
The facility will be a state of the art facility for collaborative innovation.
With chipmakers universities and ecosystem partners. Some of those partners include M D video and Western digital all customers of ours today.
Hey, General business travel demand trends remain encouraging in Silicon valley in Bellevue passenger traffic in the San Jose has leveled off versus last year, while domestic and international travel continues to improve at SFO in Seatac Seattle at SFO domestic deployments are down 17%.
2019 versus down 26% last year with international travel much improved only down 6% to 2019 versus down 26% last Q3 at Seatac domestic passengers are down only 1% to 29.
<unk> first is down 10% last year and international passengers are up 2% to 2019 versus down 15% last year.
When you look at international occupancy at our two Sunnyvale hotels. So those are the two big hotels was 25% in the third quarter versus 20% in 2019.
So good improvement there after getting through the year over year in turn tough comps demand has been encouraging as the five primarily tech driven hotels Revpar was up approximately 11% in October mostly due to demand or occupancy and we are forecasting revpar to grow.
About that same amount for the entirety of the fourth quarter market demand growth as pivotal a course for lodging owners and operators to be able to drive rate higher as we move into next year.
We have all these hotels as you know for many years and we know that the ear intern programs will come back and that these companies are continually evolving investing and developing the worlds greatest technologies that certainly isn't going to change at some point, we will get back to 29.
Teen levels and ultimately.
Exceed those levels and of course that just means our internal growth prospects continue to be very strong for 2023, we're projecting just over $19 million of hotel EBITDA from these five hotels and as a reminder, that $16 million short of 29.
Teen levels still.
That $16 million of incremental hotel EBITDA equates to 32 cents of F O per share a massive increase over our current F. F O per share run rate. So that shows you where the upside is switching gears back to our third quarter performance relative to 2019.
Revpar was down less than 2%, though ADR was up 5% to 2019 and occupancy was impacted of course down by the tech hotels, excluding those five hotels revpar would have been up 7% versus the 2019 third quarter Encouragingly. This <unk>.
7% increase accelerated from last quarter's growth.
5% versus 19.
Portfolio occupancy was a strong 80% in the quarter down from 81% last year, and 85% and 2019 and within the week weekday occupancy was 78% in the quarter and June weekday occupancy of 81, 3%, whereas the higher.
This level since the pandemic ADR was off $3 over last year, but up $9 or 5% over 2019.
Given our reliance on the business traveler here I wanted to compare performance versus 2019, when we had a lower concentration of in turn business weekday occupancy was 78% in the quarter and weekend occupancy was 82, both measures down to 2019 wheat.
De ADR was $181 and weekend ADR was $192, which represented increases of 2% and 15% over 2019 levels and weekday Revpar was 142 and weekend Revpar was 158 dollar.
Versus 2019.
So weekday revpar was off about 5%, which is the lowest quarterly variance this year.
And Additionally, as we've noted October for US has been quite strong with portfolio revpar growth of 2% and about 1% over last year and 2019.
Operationally, we were able to generate margins of 45% down 50% from last year, but the brunt of that loss as we've discussed before was due to our five tech driven hotels, which again shows you the upside as those hotels recovered with the intern.
Specifically last year and the requirement to clean rooms was.
Once a week if that the margin differential should definitely abate as we move forward, we continue to generate significant cash flow over $20 million in the quarter and have been utilizing the excess cash flow after dividends and capex to repay a portion of our maturing debt.
During 2023, we've repaid $155 million of maturing our amortizing debt our balance sheet is strong and with approximately $332 million.
Liquidity, we're well positioned to address all remaining debt maturities next year and 2025.
We continue to pursue external growth opportunities, though of course, we must be mindful of our cost of capital while assessing in place cash flow yield and growth projections on potential acquisitions with a significant rise in interest rates brands, becoming more focused on in renovation requirements.
And a bunch of maturing debt occurring throughout the industry as we look forward, we believe there'll be some opportunities to acquire hotels.
Fit into our portfolio.
We will continue to seek investments that allow us to add some external growth to supplement the massive internal growth that will come from the continued recovery of our hotels in Silicon Valley in Bellevue.
As you know we don't provide forward looking guidance, but I do want to address our dividend. We currently pay seven cents a quarter and stated upon reinstatement of the dividend last year that we would make a fourth quarter true up dividend payment based on our operating results for 2023 and are expect.
Usage of our Nols based on our internal projections, we expect our fourth quarter dividend will remain at seven cents and we will continue to evaluate our dividend of course on a quarterly basis with that I'd like to turn it over to Dennis.
Thanks, Jeff and good morning, everyone outside of our Tech driven markets. We continue to see Revpar growth at four of our top six markets with those markets being Dallas, Washington D C. Los Angeles, and Greater New York. The other two markets the coastal northeast and San Diego markets were only down 1% after having big increases.
Last year and versus 2019.
Dallas is our top performing key market with Revpar growth of 16%. This year as it continues to benefit from stronger travel across all segments.
Continuing a positive trend.
Our second best key market was our Washington D C with Revpar growth of 8% in the quarter, we continue to see a healthy mix of business and government travelers in these markets. Although we did see a small number of cancellations the last week or so of September and the fees first week or so of October due to the potential Gov.
<unk> shut down at that time.
Taking a quick glimpse into some of our leisure market performance, we had an equal number of gainers as well as decliners, we saw revpar increase at our exit or Fort Smith, and Fort Lauderdale hotels with Revpar decreases at our Portland, Savannah, Destin, and Anaheim hotels of course, Revpar in our four Silicon Valley hotels.
It was down 25%.
Versus last year, and 33% versus the 2019 third quarter Silicon Valley EBITDA was $4 2 million down approximately three and a half million to last year and down approximately $4 4 million to 2019 levels.
We did manage to replace over 50% of the loss in turn revenue in.
As we sit here today occupancy levels are healthy, we just need a bit more demand in the in that market to be able to drive rate as we go into next year.
Aston Revpar was off 11% versus last year again related to the loss of the <unk> business, which is particularly impactful during the summer months, which often is a pretty seasonal market with the summer being the lowest month of the year.
Year to date Revpar at our two hotels in Austin is still up approximately 3% versus last year.
Some other markets I want to briefly mentioned as they support our underlying thesis, which is that business travel is steadily improving around the country. We saw double digit revpar growth at both of our Denver hotels on average about 15% in both of our Houston hotels with an average of about 23%. We also saw double digit revpar growth in <unk>.
Some of our suburban business markets, such as Billerica mass Brentwood, Tennessee in Farmington, Connecticut.
Lastly, a hotel, we really Havent mentioned much this year after a great first year, but our home to woodland Hills Hotel produced revpar of $180 in the quarter, which is up 11% over last year, particularly impressive given the lackluster economy in that market with all of the labor strikes that have been occurring this year.
Our top five Revpar hotels for the quarter was led by our Hampton Inn in Portland, with a revpar of $322 coming in second was another northeastern hotel, our Hilton Garden Inn Portsmith, followed by our Hilton Garden Inn Marina del Rey at $210, a residence Inn, San Diego Gaslamp had.
Revpar of $205 in the quarter and coming in fifth was our residence in white plains as well as of our last north Eastern hotels, the Hampton and editor, which had revpar of $191 in the quarter.
Just the same as the second quarter at post pandemic Hy 'twenty, one of our 36 comparable hotels achieved revpar higher than the 2019 third quarter and 27 of our 36 comparable hotels or approximately three fourths of the portfolio achieved ADR is higher than 2019 levels market's not hitting.
2000, 1980, our levels are certainly our silicon valley in Bellevue hotels, as well as our two Houston, our Bloomington, Minnesota Hotel in our residence Inn Tysons corner.
We continue to see an average length of stay approximately 10% longer than our pre pandemic levels.
Our top five producers of G O P in the quarter.
Were led by our Gaslamp residence Inn with $2 7 million the seventh straight quarter. It has allowed our portfolio followed by our Hampton Inn in Portland than our Bellevue residence in Tech driven market, which is encouraging and then rounding out our top five or a Hilton Garden Inn Fort Smith, and our Hyatt place Pittsburgh, which is I think the first time.
That hotel has made this list and it benefited from a little bit of Taylor Swift phenomenon around the country.
Just missing out of the top five where one of our Sunnyvale residence Inns and the recently mentioned and recently built home to woodland Hills.
With the loss of the interim programs that was a tough quarter year over year in terms of operating margins, which were down approximately 500 basis points. The five primarily tech driven hotels accounted for 270 basis points of the decline as those hotels generated operating margins of approximately 64% last year versus 50% this year.
Year to date for the portfolio, our operating margins are off approximately 180 basis points to the prior year. So again, some one time items in the third quarter that adversely impacted our margins a little bit worse than other quarters at 34 comparable hotels, excluding silicon valley in Bellevue.
<unk> and benefit related costs adversely impacted margins by approximately 140 basis points. Other adverse impacts of margins were caused by increased maintenance expenses of 0.3 million. They were up 19% year over year and impacted margins by 40 basis points, we had about $200000 of unplanned expenses.
<unk>, primarily related to water damage and a couple of our hotels.
Commissions were up zero point $3 million or 21% year over year and impacted margins by 40 basis points as the business mix shifted with transient revenue up approximately 15% at our Marriott hotels, a portion of that due to interim related business outside of the five tech driven hotels.
On a cost per occupied room basis commissions were up 8%.
Complementary food and beverage costs rose, 18%, bringing down margins by 20 basis points.
Pretty much CPL or cost per occupied room also up that same amount.
As seasonality and the rollout of complementary F&B last summer wasn't fully baked into our operating results.
And lastly, as I think most have heard insurance cost.
Due to escalate year over year and that impacted our margins 20 basis points. Our employee head count was 1389 at the end of the third quarter up about 50 employees over September of 'twenty, two but down about 100 employees from the end of June this year as we reduced head count.
For seasonality and a bit of Overstaffing. Our current employee head count is still down approximately 20% over pre pandemic levels with respect to capital expenditures, we spent approximately $6 million in the quarter and expect to spend approximately $30 million for the year that includes $22 million of renovation costs at five hotels.
During the quarter, we completed the renovation of the courtyard Charleston, and during the fourth quarter, we have or will commence renovations at our Hilton Garden Inn in Marina del Rey, our Homewood suites in San Antonio and our Hyatt place Cherry Creek and we also are expected to accelerate the start date, the embassy suites Springfield to this quarter from starting out.
The first of the year, so with that I'll turn it over to Jeremy Thanks, Dennis Good morning, everyone.
Our Q3 23 hotel EBITDA was $32 8 million adjusted EBITDA was $30 6 million adjusted <unk> was <unk> 40 per share and cash flow before capital was $24 million, while we have seen cost increase due to a reinstatement of brand certain brand standards and the impact of inflation on a number of key.
Your line items.
Well to generate a GOP margin of 44, 9% and hotel EBITDA margin of 37, 9% in Q3, despite the significant impact on margins from the loss of the interim related business in our Silicon Valley in Bellevue hotels in Q3.
Our balance sheet remains in excellent condition, and we have made significant progress on our plan to address debt maturities as of September 30th Chatham is net debt to LTM EBITDA was $4, one times, which is significantly below our pre pandemic leverage which is generally in the five five to six times area. Despite the fact that EBITDA is not fully.
Recovered to pre pandemic levels.
In Q3, we issued $83 million of fixed rate debt with a weighted average cost of seven 5% through loans on five properties with a mix of five year and 10 year maturities and used a portion of the proceeds to repay the $19 7 million loan on the Hyatt place in Pittsburgh and the $45 million alone on the residents in Bellevue.
We now have no remaining 2023 debt maturities.
And our quarter end cash balance of $71 6 million and $260 million of Undrawn revolving credit facility capacity.
Provide us with approximately $332 million of liquidity to address the $298 million of debt that matures in 2024.
We are likely to consider accessing the MBS market again in the first half of 2024 to raise additional proceeds to refinance a portion of our 2024 debt maturities, which would enable us to preserve a material amount of undrawn revolving credit facility availability.
While we're not going to provide guidance at this time I do want to remind you that because of the debt issuance that occurred in mid to late August interest expense should be approximately $600000 higher in Q4 than it was in Q3.
This concludes my portion of the call operator, please open the line for questions.
Thank you.
We'll now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
Yeah.
Our first question comes from Tyler battery win.
Please go ahead.
Thank you. Good morning first question for me to start on the five tech focused hotels.
Are you talking about $19 million of EBITDA coming from those hotels. This year $16 million short of 2019 bubbles. The commentary on Q4 October Revpar, some sounds encouraging any early.
Thoughts on 2024, you think you can grow year over year those hotels, how much about $16 million shortfall do you think you can make up next year.
Yeah, I mean listen Tyler good to hear from you. This morning.
Certainly we expect topline revpar growth at those five hotels last year, it's certainly way too preliminary at this point to know and to really be able to estimate whether thats.
25%, 50% of the recovery from where we are now to where we are peak. So we're certainly not going to go out there I think you know the.
The preliminary news is encouraging about 2024, but as we saw last year I mean as you know in February of this year the.
The internal programs, we are still on and at full steam so.
It's a pretty volatile market I think the underlying trends as Jeff talked about in his prepared remarks are good I think September and October for those five hotels coming out of the interim program we're encouraging.
November once you get into the middle of November to towards the end of December you certainly see a drop off in seasonality at those hotels as long term guest in business travel starts to slowdown to Silicon Valley and Bellevue.
But at this point you know for the last as we sit here seven weeks. The general trend is certainly that weekday business travel is getting healthier.
Okay. Thank you thank you for that.
We think about Q4 overall.
For your portfolio you know first I know you have a number of renovations.
That are going to be ongoing how disruptive are those going to be poor results and then just remind us the normal seasonal progression.
What November it looks like versus October and December looks like versus November.
Okay.
Yes, Tyler this is Dennis again.
As analogy wise I think as you look at kind of October and November then November and December.
If you look at about a 20%.
Almost 20% drop off from October to November and then kind of another 10% drop off from November December just in terms of Revpar. So that gives you a kind of a guesstimate of what that might look like on a on a normal month. So from it from a renovation perspective, it's going to have a little bit of an impact.
But for the most part the hotels are at their lowest level. So you know hopefully minimize the displacement.
But you know it will certainly have some impact it just won't be material.
Yeah.
Okay.
And then last question for me, there's a lot of focus from investors on expense growth.
Origin.
Some moving pieces in your portfolio, but talk about expense growth, what's your what youre seeing and whats your kind of expectation for if you were going to maintain margin and keep margins flat what sort of what sort of revpar growth you would need to see to achieve that.
I mean listen I think as a portfolio you'd have to see.
Middle mid to upper single digits.
To increase your operating margins.
Certainly I think the wage pressures of the last few years are coming down so youre not having it.
Double digit Rev. Our wage increases.
Year in and year out so.
And it's it's all related to that wage number so I think thankfully it seems as if that's easing a little bit.
We do have jurisdictions that have.
Federally statewide mandated wage.
Minimum wage adjustments, but generally speaking we're above those already anyways.
And therefore really don't have to make much it in terms of an adjustment there, but I mean listen it's an inflationary environment. It's not just wages, obviously, everybody you've heard I think throughout the entire year about property insurance liability insurance has been a tough Ah.
Tough hard market so.
There are certainly challenges out there and I think if youre getting low single digit revpar growth.
It's going to be really challenging to keep keep margins up so.
Okay.
Okay. That's all from me I appreciate the detail. Thank you. Thanks.
Thanks Tyler.
Again, if you'd like to ask a question. Please press Star then one our next question comes from Bryan Maher with B Riley Securities. Please go ahead.
Hi, This is Brandon in for for Brian Just two quick things from me.
Just two.
To reiterate as far as the secured yet it sounds like you're taking a more holistic view on that even though you also have enough.
Cash flow.
Correct.
I'm not sure I follow the question.
Just as far as the secured yet.
Just wanted to confirm.
How you're how you're thinking about that.
Mentioned earlier.
In the call.
So we issued $83 million in the quarter really.
To address the debt maturing in 2024, and then with that cash and Undrawn revolver balance we have capacity to really address everything that matures in 2024, but we definitely don't want to be in a spot where we're using our whole.
Revolving credit facility to take down those maturities. So we'll probably do some more secured debt issuance again in the in the first half of next year I mean, I think Directionally you know.
5100, and $125 million could depend on whether we deploy any capital with acquisitions or developments or things like that but bar, but barring any of that you know I would assume it's kind of you know $50 million to $100 million of secured debt in the in the first half of next year.
Got it Thats helpful.
And then just as far as well.
You've talked about that we're seeing stronger revpar growth in Dallas and D.
And in New York.
I just wanted to confirm.
And have a spillover youre seeing.
For the fourth quarter and I believe you've already touched on kind of the momentum markets. So I cannot leave it at that.
Yeah, I think listen I think September was certainly and.
And I think you've probably a couple of other of our peers talked about the July.
July and August were a little sluggish, but September was a little stronger I mean, if you look at our our non tech driven hotels.
Revpar was up compared to 2019, essentially for almost 5% or 5%, excluding the tech driven hotels, 4% for the entire portfolio and then for October we had revpar growth over 2019 as well so.
Certainly encouraging I think obviously as I talked about with with Tyler November and December start to see some.
Obviously, our revpar drops off but I think going into the end of the year and going into the start of next year that pattern for September and October.
Certainly is encouraging at this point.
Okay.
Alright, thank you.
This concludes our question and answer session I would like to turn the conference back over to Jeff Fisher for any closing remarks.
We thank you and appreciate everybody being on the call. This morning.
And looking forward to our continued progress and improvement as we move into the end of the year into next year and we'll speak to you soon thanks.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.