Chatham Lodging Trust Q3 2024 Earnings Call Transcript

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November 7, 2024

There are 6 speakers on the call.

Operator

Greetings, and welcome to the Chatham Lodging Third Quarter 20 24 Financial Results Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Chris Daley.

Operator

Thank you. Chris, you may begin.

Speaker 1

Thank you, Julian. Good morning, everyone, and welcome to the Chatham Lotting Trust Third 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 ks 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 1

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. Now to provide you with some insight into Chatham's 2024 Q3 results, allow me to introduce Jeff Fisher, Chairman, President and Chief Executive Officer Dennis Craven, Executive Vice President and Chief Operating Officer and Jeremy Wagner, Senior Vice President and Chief Financial Officer. Let me turn the session over to Jeff Fisher. Jeff?

Speaker 2

All right. Thanks, Chris, and I certainly appreciate everyone joining us this morning for our call. Got good news here throughout. Before I get into our quarterly results, 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 5 hotels and are hopeful that those transactions close in this Q4.

Speaker 2

When closed, we'll generate proceeds of approximately $80,000,000 The 5 hotels slated for closing are on average 23 years old, Among the 6 lowest RevPAR hotels in our portfolio, they have forecasted 2024 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. We will continue to look at opportunities to sell assets and reinvest in hotels that enhance our portfolio quality and growth profile. Secondly, our liquidity is strong.

Speaker 2

We are at the lowest leverage levels in over a decade. We paid off another maturing mortgage in the quarter and have a mere $30,000,000 of debt maturing over the next year. Additionally, we've added exposure to floating rate debt and with rates expected to decline, we will be able to grow FFO. In fact, based on current borrowings outstanding, our FFO increase is $2,600,000 or approximately $0.05 per share for every 100 basis points decline in SOFR. I'd like to spend a few minutes on our solid third quarter results and you'll hear more detail from Dennis.

Speaker 2

We're quite pleased to report the EBITDA and FFO near the top of our guidance range. Importantly, our RevPAR growth continues to exceed industry and most peer performance. Our RevPAR growth of 2.1% when take out the impact of renovations handily beat industry growth of 0.9%. We were able to deliver EBITDA and FFO at the upper end of our guidance range because our operating expenses were at the lower end of our expectations. We were able to limit our same store GOP margin decline to only 40 basis points.

Speaker 2

And as we've said the last few quarters, employment and wage pressures are moderating with year over year wages up only 3%, well below what has been experienced over the last 5 years and our absolute GOP margins of 45% are strong. I think if you step back, what you really see here is the complete cycle change from the post COVID environment. And I believe as you look forward for the industry and specifically for us, you will see those margins pop back up to some pretty strong levels. 3rd quarter RevPAR of $150 exceeded 2019 levels, marking the 2nd consecutive quarter beating 2019 levels. And based on our current guidance, full year 2024 RevPAR should exceed 2019 levels for the first time since the pandemic.

Speaker 2

As most understand, the sluggish recovery in our 5 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 5 tech driven hotels, RevPAR of $148 is up 7% compared to 20 19 with ADR up a strong 14% and occupancy up 6%, of course, mostly attributable to Silicon Valley. Let's talk about our 5 tech driven hotels in Silicon Valley and Bellevue, which achieved 3rd quarter RevPAR growth of 8% in the quarter and a whopping 14% in October. In the quarter, ADR rose 5% to almost $200 and occupancy rose 3% to almost 79%. We're really encouraged by the demand dynamics we're seeing in the markets.

Speaker 2

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. 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, 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 and D facilities for the CHiPS for America initiative. Last month, Applied Materials acquired another site less than half a mile from our Sunnyvale to Residence Inn for about $100,000,000 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. Applied Materials previously announced $4,000,000,000 180,000 Square Foot R and 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.

Speaker 2

As a reminder, this facility sits about a mile from our 2 hotels. Within the last quarter, General Motors opened in Mountain View, a technical center to be a focal point for software development and innovation. It's located right in Silicon Valley and of course we do have a Residence Inn right in Mountain View. And it's certainly going to be beneficial overall to our hotel and the market. As previously mentioned, Intuitive Surgical, another one of our largest corporate clients in Sunnyvale is also expanding its footprint, building another 1,000,000 square feet of office and R and D.

Speaker 2

Industrial construction obviously has resumed and we are pleased with what we see going forward. 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 7 of our largest 9 markets delivering RevPAR growth in the quarter. Our occupancy for the key weekday business travel days was 79% on Monday, 84% on Tuesday Wednesday 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%. Just to finish up here in conclusion, we remain encouraged by the fact that our RevPAR growth continues to outperform the industry and most peers, and we still have the most internal growth upside as we look forward of other lodging REITs given the recovery still available in those 5 tech hotels.

Speaker 2

Additionally, expense pressures, as I've said, have certainly lessened. 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 5 years. And we're hopeful that enables us to drive margins higher.

Operator

Finally, on the balance sheet side, we

Speaker 2

are in excellent financial condition. Capital, acquire hotels where they can really be accretive to FFO, our earnings and NAV. With that, I'd like to turn it over to Dennis.

Speaker 3

Thanks, Jeff. Good morning, everyone. RevPAR in our 7 predominantly leisure hotels, which comprises approximately 20% of our 3rd quarter room revenue, saw RevPAR rise 0.7% and that does exclude the impact of the Savannah Hotel that was under renovation for August September. And within our leisure hotels, our best performer was the Hampton Inn Portland, Maine with RevPAR growth of 8% in the quarter. Our top 5 RevPAR hotels in the quarter were dominated by our 3 Northeastern assets led by our Hampton Inn Portland, Maine with RevPAR of $3.47 our Hilton Garden Inn in Portsmouth of $2.73 that RevPAR was down 1% year over year followed by our Residence Inn, San Diego Gaslamp at $2.16 then our Hilton Garden Inn and Marina del Rey with RevPAR of $2.15 and lastly, our Hampton Inn and Suites, Exeter, New Hampshire with RevPAR of $201 Post quarter end October RevPAR grew 6% with occupancy up 5% to 83% and ADR up 1% to 191.

Speaker 3

Interestingly, 30 of our 38 comparable hotels produced positive RevPAR in the month of October. So again, just really broad overall strong trends in the portfolio in October. RevPAR the 1st week of November, not surprisingly is down about 4% due to the impact obviously of the midweek election. Breaking down our Silicon Valley hotels, within Silicon Valley RevPAR, our 2 Sunnyvale hotels gained 13% in the quarter, driven by a 5% gain in occupancy to 80% and a 7% gain in ADR to $195 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 versus 2019 these two hotels are covered slower than the other 2, but the good news obviously is that they are growing faster than the rest of the portfolio. 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 $2.30 and a decline in occupancy of 4% to 76%.

Speaker 3

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. In San Mateo RevPAR rose 2% to $149 with gains evenly attributable to ADR and occupancy. For the 2nd consecutive quarter RevPAR exceeded 2019 levels. At our other CAC driven hotel, the Residence Inn Bellevue, introduced strong RevPAR growth of 8% in the quarter to $184 again with an even split in ADR and occupancy. Occupancy at that hotel was 85% versus 2019 Q3 RevPAR is approximately 2% shy of 2019 levels.

Speaker 3

At our 38 comparable hotels, hotel EBITDA margins were only down 40 basis points, a pretty good result given low single digit RevPAR growth. Moderating labor costs were the primary driver, wages per occupied room were only up 0.9% within our rooms department and those were actually down 1.8% in the quarter. That decline is partly driven by increased productivity given the fact that occupancy rose while labor headcount declined by 1%. 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. 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.

Speaker 3

Other key items that impacted our Q3 'twenty four margins, complimentary 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. 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. Utility costs were up and that adversely impacted 20 basis points and offsetting some of those increases were lower guest acquisition costs primarily related to Lloyd program reimbursements that improved margins by approximately 80 bps in the quarter. During the Q3, our other operating departments profits were flat year over year.

Speaker 3

Our top 5 producers of GOP in the quarter were led by our Gaslamp Residence Inn with $2,900,000 the 11th straight quarter it's led our portfolio, followed by our incredible Hampton Inn Portland with GOP of $2,500,000 which was up approximately 10% year over year and followed by another great quarter at our Residence Inn Bellevue with GOP increasing 15 percent to $2,400,000 And then rounding out the top 5 are our Sunnyvale 2 Residence Inn and our seasonally strong Hilton Garden Inn Portsmouth with approximately $1,600,000 of GOP each. At our 5 tech driven hotels, we generated really strong hotel GOP margins of 50% in the quarter and with GOP up approximately 6% over last year. With respect to capital expenditures, we spent $6,000,000 in the quarter, dollars 25,000,000 year to date. Our budget for 2024 is $37,000,000 We do expect we're going to come in under that at about $34,000,000 for the year. A renovation of the Courtyard Addison commenced in July and was completed in the Q3.

Speaker 3

A renovation of the Spring Hill Suites Savannah commenced in August and will be completed in the Q4. A renovation of the residence in Bellevue, Washington will commence in the Q4 and be completed in the 2025 Q1. And additionally, the renovation in Hilton Garden in Portsmouth, New Hampshire scheduled for early 2025. 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.

Speaker 4

Thanks, Dennis. Good morning, everyone. Chatham's Q3 2024 Hotel EBITDA was $32,200,000 adjusted EBITDA was $29,600,000 and adjusted FFO was $0.35 per share. We were able to generate a GOP margin of 44.5 percent and hotel EBITDA margin of 37.1 percent in Q3. GOP margins for the quarter were only down 40 basis points from Q3 2024 2023 which is strong given our Q3 RevPAR growth of 1.3%.

Speaker 4

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. We ended the quarter on a strong note with RevPAR up 3.4% in September and the strong top line performance has continued into the start of Q4 with October RevPAR up 6%. Over the past couple of years, we have taken significant steps to reduce leverage and address debt maturities. We now have only $30,000,000 of debt maturing over the next 12 months and have $135,000,000 of availability under our revolving credit facility. $265,000,000 or 60 percent of our debt is floating rate, so we stand to benefit significantly as rates come down.

Speaker 4

As Jeff mentioned, we are pursuing several potential asset sales and if any of these are completed, the proceeds would likely be used to repay credit facility borrowings in the near term and reinvested into hotel investments in the medium to longer term. As of September 30, 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. Our leverage ratios should continue to improve with the continuing performance recovery of our Silicon Valley hotels. Turning to our Q4 guidance, we expect RevPAR growth of 1% to 3%, adjusted EBITDA of $19,000,000 to $21,000,000 and adjusted FFO per share of $0.15 to $0.18 This guidance reflects the renovations of 3 hotels during the quarter. So you should note that we also renovated 3 hotels in Q4 2023, so there is no net impact on year over year RevPAR growth.

Speaker 4

Our guidance also reflects the repayment of a $14,000,000 mortgage loan maturing in December with available cash and credit facility borrowings and does not reflect any acquisitions, dispositions or other capital markets activity. This concludes my portion of the call. Operator, please open the line for questions.

Operator

Thank you. We will now be conducting a question and answer And it looks like our first question is from Jonathan Jenkins, Oppenheimer and Company.

Speaker 5

Good morning. Thank you for taking my questions and congrats on the quarter. First one for me for Jeff. RevPAR 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?

Speaker 5

Or is it more a continuation of the steady improvement that you've seen over the course of the year?

Speaker 2

Yes. 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 is business travel seems to be a lot more slack in and around holidays, in and around the summertime anyway generally. So what I like to say in the office is where Europe or almost Europe and they all think I'm a little bit of a right winger. But anyway, that's what happens when you live in Palm Beach.

Speaker 2

So I think that's really what you've got going on with September October really being time to get back to work and business. And so therefore, I think what we've seen is just some corporate demand pickup.

Speaker 5

Okay, that's great. I appreciate the color there. And then maybe switching gears, can you remind us what your target leverage is? Is that historical level 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?

Speaker 5

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 4

Addressing the first part of your question with respect to leverage targets, I'd say, we don't necessarily want to be all the way to where we were historically, but we're probably a little below where we would feel comfortable in now. So for a 4.25 times or so now, probably 4.75 to 5.25 would be a reasonable range for us.

Speaker 2

And I think with regard to recycling capital, I will tell you that it is around here anyway, a very much of a renewed focus. You can tell because if you look at our history, we've sold assets on a onesie twosie basis, on a limited basis for us to aggressively market and be successful in listing and signing PSAs on 5 different hotels, I think certainly shows our desire to move some things along here a little bit. And I do believe that opportunities are out there. We're looking at a few now. I think that in 2025, there'll be more just because the overall environment in capital markets, I think, will be more favorable in that regard, which might also cause some owners to just look at selling.

Speaker 2

I'm not going to talk about distress because that never seems to come to fruition. But I think our relationships are solid enough with folks that we bought from before. I just had a call from 1. We bought 2 from actually about 3 or 4 years ago with an opportunity just 2 days ago. So yes, I think that we can enhance our internal growth by newer assets, lessen our ongoing capital requirements and CapEx spend.

Speaker 2

That's the plan. Create more free cash flow to distribute to shareholders and lower the average age of the portfolio. Those are really, I think, doable objectives.

Speaker 5

Okay. That's great. And maybe a follow on to that commentary. Given you guys have been out in the market lately, can you maybe talk about what you're seeing real time in terms of volume and pricing? Has there been any closing of the gap between buyer and seller expectations?

Speaker 5

Or any other moves as of late given the interest rates movement since September?

Speaker 2

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 certainly from some broker friends, etcetera, they're just doing a lot more BOVs and activity in their shop for things that folks are looking to perhaps test the market with.

Speaker 5

Okay, great. Very helpful. Thank you for all the color. That's all for me.

Speaker 3

Thanks, Jonathan.

Speaker 5

Thank you. Okay. It looks like

Operator

there's no further questions at this time. I would like to turn the floor back to Jeff Fisher for closing remarks.

Speaker 2

Well, thank you all for being here once again. I think we clearly enunciated where we intend to go, and we're looking forward to posting some more good results going forward. Thank you.

Operator

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.

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Chatham Lodging Trust Q3 2024
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