Q3 2024 Chatham Lodging Trust Earnings Call
Speaker Change: Greetings and welcome to the Chatham Lodging 3rd Quarter 2024 Financial Results Conference Call.
At this time, all participants are in a listen-only mode.
Speaker Change: The question-and-answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Chris Daly. Thank you. Chris, you may begin.
Thank you, Julian.
Chris Daly: Good morning, everyone, and welcome to the Chatham Lotting Chest 3rd Quarter 2024 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 7, 2024, 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.
Speaker Change: You can find copies of our SEC filings and earnings release, which contains reconciliations to non-GAAP financial measures referenced on this call, on our website at chathamlodgingtrust.com.
Speaker Change: Now, to provide you with some insight into the Chatham 2024 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? Thank you.
Jeff Fisher: All right, thanks Chris, and I certainly appreciate everyone joining us this morning for our call. We've got some good news here throughout. Before I get into our quarterly results...
Jeff Fisher: I'd like to provide an update on some key corporate initiatives that we've been undertaking. First, we've entered into separate contracts to sell five hotels and are hopeful that those transactions close in this fourth quarter.
When closed, we'll generate proceeds of approximately $80 million.
The five hotels slated for closing are, on average, 23 years old. Among the six lowest REVPAR hotels in our portfolio, they have forecasted 24 REVPAR of $101 and, importantly, are in need of renovations within the next 24 months.
We will use these proceeds to initially pay down debt, but ultimately make additional investments to accretively grow EBITDA and FFO. This recycling initiative will enable us to continue to add hotels in new markets or expand our presence in existing markets.
Jeff Fisher: We will continue to look at opportunities to sell assets and reinvest in hotels that enhance our portfolio quality and growth profile.
Jeff Fisher: We paid off another maturing mortgage in the quarter and have a mere $30 million of debt maturing over the next year.
Jeff Fisher: Additionally, we've added exposure to floating rate debt, and with rates expected to decline...
Jeff Fisher: will be able to grow FFO. In fact, based on current borrowings outstanding, our FFO increases $2.6 million or approximately 5 cents per share for every 100 basis points decline in SOFR.
Jeff Fisher: I'd like to spend a few minutes on our solid third quarter results, and you'll hear more detail from Dennis. We're quite pleased to report the EBITDA and FFO near the top of our guidance range.
Jeff Fisher: Importantly, our REVPAR growth continues to exceed industry and most peer performance. Our REVPAR growth of 2.1% when you take out the impact of renovations handily beat industry growth of 0.9%.
to only 40 basis points.
Jeff Fisher: And as we've said the last few quarters, employment and wage pressures are moderating with year-over-year wages up.
Jeff Fisher: Only 3%, well below what has been experienced over the last five years.
and our absolute GOP margins of 45% are strong.
Jeff Fisher: You will see those margins pop back up to some pretty strong levels.
Jeff Fisher: Third quarter REVPAR of $150 exceeded 2019 levels, marking the second consecutive quarter beating 2019 levels. And based on our current guidance...
Jeff Fisher: Since the pandemic, as most understand, the sluggish recovery in our five tech-driven hotels in Silicon Valley and Bellevue have caused us to lag 2019 levels up till now, but we are moving ahead. If you pull out the five tech-driven hotels,
Jeff Fisher: Repair of $148 is up 7% compared to 2019, with ADR up a strong 14%, and occupancy off 6%, of course, mostly attributable to Silicon Valley.
Jeff Fisher: and a whopping 14% in October. In the quarter, ADR rose 5% to almost $200, and occupancy rose 3% to almost 79%.
Jeff Fisher: We're really encouraged by the demand dynamics we're seeing in the markets.
Jeff Fisher: And, as we've spoken quite a bit over the last few quarters, a lot of good things are happening in the market related to AI, computer chip initiatives, and re-office efforts by most of the big tech companies announcing the return to office that we've been waiting for.
Jeff Fisher: To give you some additional color on what's happening, just a week ago in Sunnyvale, our largest individual market with just about 500 rooms there
Jeff Fisher: It was announced that Sunnyvale was selected as the site for the new CHIPS for America design and collaboration facility. The facility will be one of the flagship R&D facilities for the CHIPS for America initiative.
Jeff Fisher: Last month, Applied Materials acquired another site less than half a mile from our Sunnyvale to Residence Inn for about $100 million.
Speaker Change: The plans for that site have not been announced but certainly will be beneficial to our hotel and Applied Materials Forever has been one of our top five accounts.
Speaker Change: Applied Materials previously announced $4 billion, 180,000 square foot R&D facility is expected to break ground shortly, and I know we're already doing business with folks involved in that facility's construction, whether they're consultants, architects, or otherwise.
Jeff Fisher: As a reminder, this facility sits about a mile from our two hotels. Within the last quarter, General Motors opened in Mountain View, a technical center to be a focal point for software development and innovation.
Jeff Fisher: It's located right in Silicon Valley, and of course, we do have a residence in right in Mountain View. And it's certainly going to be beneficial overall to our hotel and the market. As previously mentioned,
Jeff Fisher: Intuitive Surgical, another one of our largest corporate clients in Sunnyvale, is also expanding its footprint, building another 1 million square feet of office and R&D.
Jeff Fisher: Industrial construction obviously has resumed and we are pleased with what we see going forward.
Jeff Fisher: Looking across the remainder of the portfolio, business travel continues its steady growth across the country. And that certainly was proven out again this quarter for us with seven of our largest nine markets delivering rare part growth in the quarter. Our occupancy for the key weekday business travel days.
was 79% on Monday, 84% on Tuesday and Wednesday.
Jeff Fisher: and 79% on Thursday, all but Thursday up over last year. Weekday ADR was up 2% in the quarter to $186 and weekend ADR was down 1%.
Jeff Fisher: Just to finish up here in conclusion, we remain encouraged by the fact that our red car growth continues to outperform the industry and most peers.
Jeff Fisher: And we still have the most internal growth upside as we look forward of other lodging REITs.
given the recovery still available in those five tech hotels.
Additionally, expense pressures, as I've said, have certainly lessened.
Jeff Fisher: Labor and benefit wages costs seem to be under control, and by that I mean reverting back to more historical, normal increases that we've experienced over the last five years, and we're hopeful that enables us to drive margins higher. Finally, on the balance sheet side, we are in excellent financial condition.
and we're positioned to meaningfully benefit.
Jeff Fisher: from Declining Interest Rates, and we've got the capacity and flexibility to continue to recycle capital, acquire hotels where they can really be accretive to FFO, our earnings, and NAB. With that, I'd like to turn it over to Dennis.
Thanks, Jeff. Good morning, everyone.
Dennis Craven: RevPAR in our seven predominantly leisure hotels, which comprises approximately 20% of our third-quarter room revenue, saw RevPAR rise 0.7%.
Dennis Craven: And that does exclude the impact of the Savannah Hotel that was under renovation for August and September. And within our leisure hotels, our best performer was the Hampton Inn Portland, Maine, with REVFAR growth of 8% in the quarter.
Dennis Craven: Our top five Revpar hotels in the quarter were dominated by our three northeastern assets led by our Hampton Inn Portland, Maine
with RevPAR for $347.
are Hilton Garden and Portsmouth of $273.
Dennis Craven: That REVPAR was down 1% year over year, followed by our residents in San Diego Gaslamp at $216, then our Hilton Garden Inn in Marina Del Rey with REVPAR of $215, and lastly, our Hampton Inn & Suites Exeter, New Hampshire with REVPAR of $201.
Dennis Craven: Post-quarter end, October roof par grew 6%, with occupancy up 5% to 83%, and ADR up 1% to 191.
Interestingly, 30 of our 38 Copper Bow hotels produced
Dennis Craven: positive REVPAR in the month of October. So again, just really broad overall strong trends in the portfolio in October. REVPAR the first week of November not surprisingly is down about 4% due to the impact obviously of the midweek election.
Dennis Craven: Breaking down our Silicon Valley hotels. Within Silicon Valley, Revpart, our two Sunnyvale hotels, gained 13% in the quarter, driven by a 5% gain in occupancy to 80% and a 7% gain in ADR to $195.
Speaker Change: As Jeff discussed, a lot of good things happening in the Sunnyvale market with our key corporate clients, like Applied Materials and Intuit, Apple, TikTok.
Dennis Craven: Versus 2019, these two hotels are covered slower than the other two, but the good news obviously is that they are growing faster than the rest of the portfolio.
Dennis Craven: At our Mountain View Residence Inn, REVPAR was up 3% in the quarter to $174. That's driven by a 7% increase in ADR to $230 and a decline in occupancy of 4% to 76%.
Dennis Craven: We made the decision earlier this quarter and this summer to not take certain intern business at that hotel because they were looking at lower rated business in the market, lower rated hotel business in the market to stay at.
Dennis Craven: In San Mateo, REVPAR rose 2% to $149, with gains evenly attributable to ADR and occupancy.
For the second consecutive quarter, REVPAR exceeded 2019 levels.
Dennis Craven: At our other cap-driven hotel, The Residence in Bellevue, it produced strong rep-par growth of 8% in the quarter to $184, again with an even split in ADR and occupancy. Occupancy at that hotel is 85%.
Dennis Craven: versus 2019 third quarter REPAR is approximately 2% shy of 2019 levels.
Dennis Craven: At our 38 comparable hotels, hotel EBITDA margins were only down 40 basis points, a pretty good result given low single-digit REVPAR growth.
Dennis Craven: Moderating labor costs were the primary driver. Wages for occupied room were only up 0.9% within our rooms department, and those were actually down 1.8% in the quarter.
Dennis Craven: That decline is partly driven by increased productivity, given the fact that occupancy rose while labor headcount declined by 1%.
Dennis Craven: Benefit costs were up 18% in the quarter and that's been a message obviously all year long and that adversely impacted margins by approximately 60 basis points.
Dennis Craven: As I mentioned in our release, at least based on preliminary estimates, for the first time in what seems like a really long time, we are hopeful that our benefit costs are going to be essentially flat year over year in 2025.
Other key items that impacted our third quarter, 24 margins.
Dennis Craven: Complementary breakfast costs were up 14% and that impacted margins by approximately 20 basis points. Insurance has been up again kind of a consistent theme obviously with renewals on a calendar year basis 20% year-over-year and that also impacted margins by 20 basis points.
Dennis Craven: And the good news, again, kind of on the renewal front is based on preliminary expectations is that that increase is going to be kind of in the mid-single-digit range across both forms of our insurance policies for our properties.
Dennis Craven: Utility costs were up, had adversely impacted 20 basis points, and offsetting some of those increases were lower guest acquisition costs, primarily related to LOIDA program reimbursements that improved margins by approximately 80 BPS in the quarter.
Dennis Craven: During the third quarter, our other operating department's profits were flat year over year.
Dennis Craven: Our top five producers of GOP in the quarter were led by our Gaslamp Residence Inn with $2.9 million, the 11th straight quarter it's led our portfolio.
Dennis Craven: followed by our incredible Hampton Inn Portland with GOP of 2.5 million which was up approximately 10% year over year and followed by another great quarter at our residence in Bellevue with GOP increasing 15% to 2.4 million.
Dennis Craven: And then rounding out the top five were our Sunnyvale 2 Residence Inn and our seasonally strong Hilton Garden Inn Portsmouth with approximately 1.6 million dollars of GOP each.
Dennis Craven: At our five tech-driven hotels, we generated really strong hotel GOP margins of 50% in the quarter, with GOP up approximately 6% over last year.
Dennis Craven: With respect to capital expenditures, we spent $6 million in the quarter, $25 million year-to-date.
Dennis Craven: We're going to come in under that at about $34 million.
Dennis Craven: $34 million for the year, a renovation of the courtyard Dallas Addison commenced in July and was completed in the third quarter, a renovation of the Spring Hill Suite Savanna commenced in August and will be completed in the fourth quarter.
Dennis Craven: A renovation of the residence in Bellevue, Washington will commence in the fourth quarter and be completed in the 2025 first quarter.
Dennis Craven: and additionally the renovation of the Hilton Garden in Portsmouth, New Hampshire.
Scheduled for early 2025
Dennis Craven: We are commencing that this month to get into some slow periods, and that will commence here shortly. So, with that, I'll turn it over to Jeremy. Thanks, Dennis. Good morning, everyone.
Speaker Change: Chatham's Q3 2024 hotel EBITDA was $32.2 million, adjusted EBITDA was $29.6 million, and adjusted FFO was $0.35 per share. We were able to generate a GOP margin of 44.5% and hotel EBITDA margin of 37.1% in Q3.
Dennis Craven: GOP margins for the quarter were only down 40 basis points from Q3 2023, which is strong given our Q3 REF PAR growth of 1.3%.
Dennis Craven: This improvement in margin trends relative to prior quarters reflects continuing stabilization of key expenses such as labor and the fact that expense comparisons to Q3 last year were clean unlike Q2 where expense comps were impacted by some one-time benefits in Q2 of 2023.
Dennis Craven: Over the past couple years, we have taken significant steps to reduce leverage and address debt maturities. We now have only $30 million of debt maturing over the next 12 months and have $135 million of availability under our revolving credit facility.
Dennis Craven: $265 million, or 60% of our debt is floating rate, so we stand to benefit significantly as rates come down.
Dennis Craven: As of September 30th, Chatham's net debt to LTM-EBITDA was 4.2 times, which is significantly below our pre-pandemic leverage, which is generally in the 5.5 to 6 times area.
Dennis Craven: Our leverage ratios should continue to improve with the continuing performance recovery of our Silicon Valley hotels.
Dennis Craven: Turning to our Q4 guidance, we expect REVPAR growth of 1-3%, adjusted EBITDA of $19-21 million, and adjusted FFO per share of $0.15-0.18.
Dennis Craven: This guidance reflects the renovations of three hotels during the quarter, though you should note that we also renovated three hotels in Q4 2023, so there is no net impact on year-over-year REVFAR growth.
Dennis Craven: Our guidance also reflects the repayment of a $14 million mortgage loan maturing in December with available cash and credit facility borrowings and does not reflect any acquisitions, dispositions, or other capital markets activity.
Speaker Change: This concludes my portion of the call. Operator, please open the line for questions.
Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up a handset before pressing the star keys.
One moment while we poll for questions.
Speaker Change: And it looks like our first question is from Jonathan Jenkins, Oppenheimer & Company.
Speaker Change: Good morning. Thank you for taking my questions and congrats on the quarter. First one for me, for Jeff, REVFAR sequentially improved in September and into October relative to earlier in the quarter and I'm curious if you think that's kind of a shift in demand and inflection higher in corporate demand post-Labor Day or is it more a continuation of the study improvement that you've seen over the course of the year?
Speaker Change: Yeah, I think what you've got is just more or less the end of the leisure summer component that's out there. And I think what you've seen over time, post-COVID,
Business travel seems to be a lot more slack.
in and around holidays, in and around the summertime.
Speaker Change: Anyway, generally, so what I like to say in the office is, we're Europe, or almost Europe, and they all...
Speaker Change: I think I'm a little bit of a right-winger, but anyway, that's what happens when you live in Palm Beach. So, I think that's really what you've got going on with September and October, really being time to get back to work and business. And so, therefore, I think what we've seen...
It's just some corporate demand pick-up.
Speaker Change: kind of a good expectation going forward. And maybe, can you provide some additional color on how you're thinking about the asset sales in light of a seemingly good and improving demand environment above industry trends and then your solid balance sheet position? I mean, is there anything in particular you would need to see to maybe step on the gas on acquisitions in the near term a little quicker?
Speaker Change: Addressing the first part of your question with respect to leverage targets,
Speaker Change: All the way to where we were historically, but we're probably a little below where we'd feel comfortable being now. So if we're at four and a quarter times or so now, probably, you know, four and three quarters to five and a quarter would be a reasonable range for us.
And I think with regard to...
Speaker Change: Recycling capital, I will tell you that it is, around here anyway, very much of a renewed focus. You can tell because if you look at our history, we've sold assets.
Speaker Change: on a 1Z, 2Z basis, on a limited basis, for us to aggressively, you know, market and be successful in, you know, listing and signing PSAs on five different hotels, I think.
certainly shows our desire to
move some things along here a little bit.
Speaker Change: and I do believe that opportunities are out there. We're looking at a few.
Speaker Change: Now, I think that in 2025, there'll be more just because the overall environment and capital markets I think will be more favorable in that regard, which might also cause some owners to just look at selling. I'm not going to talk about distress because that never seems to come to fruition, but I think our relationships are solid enough.
Speaker Change: with folks that we bought from before. I just had a call from one that we bought two from actually about three or four years ago with an opportunity just two days ago. So, yes, I think that we can enhance our internal growth.
Speaker Change: Lower the average age of the portfolio. Those are really, I think, doable objectives.
Thank you.
Speaker Change: Okay that's great and maybe a follow-on to that commentary given you guys have been out in the market lately.
Speaker Change: Can you maybe talk about what you're seeing in real time in terms of volume and pricing? Has there been any closing of the gap between buyer and seller expectations or any other moves as of late given the interest rates movement since September?
Speaker Change: Look, there really hadn't been much dramatic. This stuff seems to have a lag time historically to it anyway, so. But yes, there's been, I know, you know, certainly from some broker friends, etc., they're just doing a lot more, you know, BOVs and activity in their shop for things that folks, you know, are looking to perhaps.
test the market with.
Speaker Change: Okay, great. Very helpful. Thank you for all the color. That's all for me.
Thanks, Jonathan.
Thank you.
Speaker Change: Once again, if you'd like to ask a question, please press star 1 on your telephone keypad, star 2 to remove yourself from the queue.
[inaudible]
Speaker Change: Okay, looks like there's no further questions at this time. I would like to turn the floor back to Jeff Fisher for closing remarks.
Jeff Fisher: Well, thank you all for being here once again. I think we've clearly enunciated where we intend to go, and we're looking forward to posting some more good results going forward. Thank you.
Speaker Change: Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.