Chatham Lodging Trust Q4 2023 Earnings Call Transcript

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February 27, 2024

There are 7 speakers on the call.

Operator

Greetings. Welcome to Chatham Lodging Trust 4th Quarter 2023 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. Please note this conference is being recorded.

Operator

I will now turn the call over to Chris Daly, Vice President of DG Public Relations. Thank you. You may begin.

Speaker 1

Thank you, Sherry. Good morning, everyone, and welcome to the Chatham Lodging Trust 4th 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 ks and other SEC filings. All information in this call is as of February 27, 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 contain 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 2023 Q4 results, Allow me to introduce Jeff Fisher, Chairman, President and Chief Executive Officer Dennis Craven, Executive Vice President and Chief Operating Officer Jeremy Wagner, Senior Vice President and Chief Financial Officer. Let me turn the session over to Jeff Fisher. Jeff?

Speaker 2

Thanks, Chris, and I certainly appreciate everyone joining us this morning for our call. Before talking about the Q4 in 2024, I like to spend just a few minutes highlighting some noteworthy accomplishments as we look back at last year. RevPAR growth of 6.1 percent with the growth split evenly between occupancy and ADR exceeded industry performance by 25%. This is considerable growth considering we lost $12,000,000 or 400 basis points of in lodging REITs demonstrating the high quality of our real estate portfolio. We had a 25% rise in other department profits as we continue to drive non room revenue profit.

Speaker 2

We reduced net debt by $26,000,000 and our leverage ratio down to 25%. During that time, we repaid $150,000,000 of maturing debt using available liquidity and successfully issued $83,000,000 of fixed rate debt. We participated in the GRESB for the 2nd time, increasing our overall score by 9% from 75% to 82 and received an overall score of 82 out of 1 100 ranking us 31 out of 1 100 and listed companies in the Americas region and 2nd in Chatham's peer group. We returned 22,000,000 dollars of dividends to our preferred and common shareholders out of excess cash flow and closing out the year sold to Hilton Garden Inn, Denver Tech for $18,000,000 which including deferred renovation costs, the hotel was sold for an approximate 4% cap on 2023 net operating income. So touching briefly on the 4th quarter, we were pleased to beat 4th quarter consensus estimates as we achieved better than expected top and bottom line performance.

Speaker 2

We were able to combine RevPAR growth of 2.5% with a 25% increase in our other operating profit, while holding down departmental expenses flat year over year on a cost per occupied room basis. The RevPAR increase was driven by a 2% increase in occupancy and less than 1% increase in ADR. Our RevPAR growth was almost double industry wide RevPAR growth. RevPAR at our 5 tech hotels grew 14%, leading the way for the company. All but one of our top markets produced quarter when taking out the impact of renovations.

Speaker 2

Excluding the 5 tech driven hotels, 4th quarter RevPAR was up 5%. For the full year, RevPAR for our entire portfolio was 98% of 2019 levels. And excluding the 5 tech driven hotels, 2023 RevPAR of $133 is actually up 6% over 2019 levels. I want to spend a few minutes talking about our outlook coming off of volatile 2023, in which our biggest corporate clients in the tech industry were cutting thousands of jobs, 12 months later, those same companies are hitting all time high share prices and of course everyone is talking about the next big tech expansion, AI. As they always do, Big Tech is constantly evolving and we are in the midst of that transformation.

Speaker 2

Finally, Big Tech is asking its employees to come back into their corporate office, another very important trend that certainly directly relates to our hotel performance in Silicon Valley. As we all know and we could see daily, the market cap of all public companies in San Francisco and Silicon Valley combined, tech companies reached an all time high of over $14,000,000,000,000 this month. Chatham has the highest exposure to Big Tech Hotel demand. As we've discussed, the recovery in these markets has been slower than we've hoped. However, we know from experience that demand will rebound to new peaks and as it does, no peer has the internal growth upside as we do.

Speaker 2

With AI driving a surge in tech investment, travel demand is building. Sunnyvale is becoming the epicenter of AI development. As previously disclosed, Applied Materials, which has forever been one of our top accounts in Sunnyvale, announced plan to build plans to build the EPIC Center, that's the equipment and process innovation and commercialization which is a $4,000,000,000 180,000 square foot R and D facility, only blocks away from our 2 Sunnyvale Residence Inns. The epicenter will be state of the art for collaborative innovation with chipmakers, universities and ecosystem partners. So some of those partners include AMD, NVIDIA, Western Digital, all customers of ours.

Speaker 2

And I think because of the collaborative effort, we are hearing that there ought to be plenty of travel once that is open and of course we're already having discussions relative to the many contractors, architects, engineers, etcetera, that will start traveling to build that huge center. So again, as a reminder, the 2 largest hotels, roughly 2 50 rooms each, are right in the heart of Sunnyvale. And it's not just AMD the video expanding in the Valley. There are other large scale developments occurring right in Sunnyvale. When I was there last, I took a look at the Intuitive Surgical new buildings going up.

Speaker 2

1 of our already one of our largest corporate clients, they're expanding their footprint, building another 1,000,000 square feet of office space, again, down the road from us about half a mile. Google's expansion into San Jose downtown was delayed, but we're benefiting as they continue to expand their Caribbean campus, as they call it, in Sunnyvale. Since the summer, we've seen growing demand in our primarily tech driven hotels. Occupancy growth in Silicon Valley and Bellevue range from 13% to 30 5% from October to January. Year over year January 2024 versus 23, production from 3 comparable companies in our top 10 accounts across our 4 hotels was up over 50%.

Speaker 2

February RevPAR is up slightly at those hotels as well. If we just get back to 2019 levels, again, an important reminder to everybody, that would add $16,000,000 of EBITDA, 0.32 dollars of FFO. We expect to see continued improvement in these markets this year. Over the past few years, we prudently positioned our balance sheet and as we sit here today, we are at the lowest leverage levels in over a decade with a leverage ratio of approximately 25%. By the way, since the pandemic in early 2020, we've sold assets with an average age of 26 years for 165,000,000 dollars and at the same time avoided $18,000,000 in near term renovations that we determined would have no ROI.

Speaker 2

Of course, also investing in new hotels with an average age of approximately 2 years old. We're fully capable of repaying all our remaining maturing debt without doing anything else with available cash after the sale of the Denver Hotel. In early January, we have approximately $350,000,000 of liquidity plus 24 hotels that are currently unencumbered as well as 8 hotels with maturing debt this year. Although any new debt issuance will be at rates higher than our maturing debt, using our term loan and credit facility to address a portion of the maturing debt, which are floating, will allow us to benefit from what should be a declining interest rate environment this year. With so much flexibility in unencumbered assets, we have the ability to accretively acquire hotels.

Speaker 2

We to commence the development of a second hotel in Portland, Maine, one of our top performing hotels on the site of our existing surface parking lot. We're still, as we've said before, working through city approvals. It does take a while in the city of Portland, Maine to get things done. But we expect some pretty large returns when finally open. With respect to external growth, we looked at a lot of deals last year, but the bid ask spread was too wide as many have commented and the financing market was still not conducive to making good deals.

Speaker 2

Over the last couple of months, we have started to see more deal volume. It seems to really be picking up by the month and pricing seems to have adjusted by at least 100 basis points, which had to occur to make deals make sense. Combined with lower financing costs compared to 6 months ago, as well as an interest rate curve that is trending down, we certainly are hopeful to be able to execute some deals this year. And that's, of course, with the backdrop of a lot of CMBS debt maturing in 20 24. For the first time since the pandemic, For the first time since the pandemic, we are providing guidance on a quarterly basis.

Speaker 2

The main reason for that is, of course, the short booking window for the Silicon Valley hotels. And again, the disproportionate impact those hotels have on our overall performance and the degree to which the intern business returns, which really won't become known until you're pretty much on top of the time that they enter the market. We do know talking to our customers and our big tech companies that there will be interns this year. In conclusion, I'm confident in the state of the U. S.

Speaker 2

Lodging industry and its future. Fundamentals are solid as the supply demand equation should benefit owners overall in the next couple of years. At Chatham, new supply on our hotel submarkets is less than 1% and is only more than 3% in 3 of our markets. With construction costs elevated and lending restricted, supply should remain muted for the foreseeable years ahead. That bodes well for us.

Speaker 2

And of course, we have the most internal growth upside than any other lodging company within our Big Tech Hotels in Silicon Valley and Bellevue. With that, I'd like to turn it over to Dennis.

Speaker 3

Thanks, Jeff. Good morning. Before getting into some specific markets, just a bit more on top line RevPAR statistics. Year over year RevPAR was not meaningfully impacted due to renovations as we completed renovations at 3 hotels in last year's Q4 as well as this year. Weekday and weekend occupancy was up about 100 basis points in the quarter versus last year and is down approximately 9% 7% versus 2019, respectively.

Speaker 3

Conversely, weekday ADR was up over 4% versus 2019 and weekend ADR was up approximately 20% over 2019 levels. We continue to monitor deployments into our tech driven markets. Deployments in the San Francisco were up 12% over the 2022 Q4 and only down 8% to 2019. At FFO, international deployments were only off 3% versus 2019 levels, again, a positive attribute when looking at international inbound travel into that market in Silicon Valley. San Jose deployments remain off about 27% to 2019 levels, a market that's really coming on quite strongly over the last few months.

Speaker 3

Seattle deployments are off 2% versus 2019 levels. Again, encouraging activity in San Fran and Seattle. Outside of our tech driven markets, we continue to see RevPAR growth at 6 of our top 7 markets with those markets being Dallas, Washington, D. C, L. A, Greater New York, Austin and San Diego.

Speaker 3

The coastal northeastern market highly dependent on leisure travel was really the only market where RevPAR was down in the quarter, but I will say that it is still meaningfully up compared to 2019 levels. Continuing the trend from last quarter, Dallas and Washington DC produced RevPAR growth of 8% 5% respectively with both markets benefiting from increased business and government travel. Greater New York had an easy comp due to renovations last year at 2 hotels in the 4th quarter, But we do see outside of that, there's a lot of activity happening in the urban cores of both White Plains and New Rochelle with respect to multifamily office retail development that bodes well for the future. Taking a quick glimpse into our leisure market performance, which is essentially 7 of our 38 hotels, RevPAR was only down 1.5% in the quarter, again, fairly encouraging given some of the drastic leisure market corrections other owners have experienced and talked about. Let's see here.

Speaker 3

Hold on one second. Our top 5 RevPAR hotels were led by our 2 New York Residence Inn with RevPAR of $196 at White Plains and $186 at New Rochelle. Coming in third was our Residence Inn, Residence Inn, Fort Lauderdale, Lugano at $183 after that was our Residence Inn, Washington D. C. At $171 and tied for 5th, coming in with $164 RevPAR where our hotels in Portland and San Diego.

Speaker 3

Our top 5 producers of GOP in the quarter were led by our Gaslamp Residence Inn with $2,000,000 the 8th straight quarter it has led our portfolio, followed by a tech hotel, our Residence Inn, Silicon Valley 2 and then our Residence Inn Anaheim, a good market showing good growth as we head into 2024. Rounding out the top 5 are the Courtyard Dallas Downtown and our Residence Inn in New Rochelle, New York. Importantly, looking into Hotel GOP at our 5 tech driven hotels, GOP was about $5,000,000 in the quarter, which is up almost $1,000,000 or essentially 25% year over year. Hotel EBITDA at our Bellevue Residence Inn was actually 99% of 2019 Q4 hotel EBITDA. At our 39 comparable hotels, GOP margins were down approximately 90 basis points with the majority of that or 70 basis points attributable to increased labor and benefits cost.

Speaker 3

On a CPOR basis, these costs were up approximately 4% year over year. As noted in our press release, our average hourly wages in December were essentially unchanged from July levels, which we believe is indicative of a stabilized workforce environment in our markets. In fact, our employee count was 1397 at the end of the year, which is up only 8 employees from September and down approximately 20% from pre pandemic levels. Other operating department profits jumped 25% in the quarter due primarily to focused efforts in our parking and retail market operations within our hotels and that alone increased margins by approximately 80 basis points. Offsetting these gains were the higher labor and benefits cost, maintenance cost of approximately 30 basis points and utility cost of essentially 20 basis points in the quarter.

Speaker 3

With respect to capital expenditures, we spent approximately $7,000,000 in the quarter and approximately $25,000,000 in 2023. As a reminder, we did not do any capital expenditures at our Hilton Garden Inn, Denver, due to this impending sale. During the quarter, we commenced renovations at our Hilton Garden Inn Marina del Rey, our Homewood Suites in San Antonio and our Hyatt Place Cherry Creek, all of which are substantially finished. We started the renovation of our Embassy Suites Springfield, Virginia, which is a 2024 project in the Q4 as we accelerated the start date into December. Looking forward to 2024, in addition to the Springfield Embassy, we will renovate the Courtyard Dallas Addison in the Q3 and the Residence Inn in Austin and San Diego as well as the Savannah Springfield in the 4th quarter.

Speaker 3

With that, I'll turn it over to Jeremy.

Speaker 4

Thanks, Dennis. Good morning, everyone. Our Q4 hotel EBITDA was $22,800,000 adjusted EBITDA was $20,800,000 dollars and adjusted FFO per share was $0.19 Our Q4 results benefited from approximately $1,000,000 of property tax refunds. While we have seen costs increase due to the reinstatement of certain brand standards and the impacts of inflation on a number of key line items, were able to generate a GOP margin of 39% and hotel EBITDA margin of 31.6% in Q4. Importantly, we are starting to see a stabilization of some key expense line items including wages.

Speaker 4

Our balance sheet remains in excellent condition and we have made significant progress on our plan to address debt maturities. In 2023, we borrowed $90,000,000 under our term loan and issued $83,000,000 of CMBS at a weighted average cost of 7.5 percent, which together provided $173,000,000 of proceeds to address debt maturities. In January 2024, we completed the sale of the Hilton Garden in Denver Tech for approximately $18,000,000 which including expected renovation costs of approximately $6,000,000 represents a 2023 EBITDA multiple of 20.5 times and cap rate of 3.8 percent. Our year end cash balance of $68,100,000 $18,000,000 of proceeds from the January sale of the HGI Denver Tech and $260,000,000 of undrawn revolving credit facility capacity provide us with approximately dollars 1,000,000 of liquidity to address the $297,000,000 of debt that matures in 2024. We are planning to access the CMBS market again in the first half of twenty twenty four to raise approximately $100,000,000 of 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.

Speaker 4

Based on recent feedback from lenders, we expect this new debt will likely have a rate in the low to mid 7% area. As of December 31, Chatham's net debt to LTM EBITDA was 4.1 times, which is significantly below our pre pandemic leverage, which was generally in the 5.5 to 6 times area, despite the fact that EBITDA has not fully recovered to pre pandemic levels. As RevPAR trends have started to stabilize following the exit from pandemic and visibility around expense levels has increased, we feel that it makes sense to reinstate quarterly guidance at this time. As a reminder, pro form a for the sale of the HGI Denver Tech, we now have a total of 5,735 rooms and our 2023 RevPAR would have been $11784 in Q1, dollars 14540 in Q2, $147.90 in Q3, $122.88 in Q4 and $13,356 for the full year. In Q1 2024, we expect RevPAR growth of 0% to 3%, adjusted EBITDA of $16,200,000 to 18,200,000 dollars and adjusted FFO per share of $0.10 to 0 point represents an increase of $900,000 from Q1 2023.

Speaker 4

And based on our current plan to issue approximately $100,000,000 of CMBS in early Q2 and the current SOFR forward curve, full year cash interest is likely to be approximately $3,500,000 higher than our full year cash interest expense in 2023. Our Q1 2024 RevPAR guidance of 0% to 3% reflects renovation impacts at our HGI Marina del Rey, Homewood San Antonio, Hyatt Place Cherry Creek and Embassy Suites Springfield properties, along with the impacts of bad weather at a number of our properties in February. I think it's fair to say that we expect RevPAR growth for the rest of the year to be higher than Q1, given these impacts in Q1 and that we believe our RevPAR growth should outpace the overall lodging industry in 2024 with the continuing recovery of our tech focused markets. With respect to hotel EBITDA margins, in general, we expect year over year margin comparisons to be easier in the second half of twenty twenty four as we begin to lap the fuller staffing levels and other costs that were not completely reflected until the second half of twenty twenty three. This concludes my portion of the call.

Speaker 4

Operator, please open the line for questions.

Operator

Thank Our first question is from Anthony Powell with Barclays. Please proceed.

Speaker 5

Hi, good morning. I guess a question on your expense growth assumed in your guidance for the Q1 and maybe for the full year. It seems like margins are down 200 basis points in the Q1 on RevPAR growth of 1.5%. So should we expect that kind of cadence for the rest of the year as you can get RevPAR higher maybe by a few percentage points that should lead to better margin growth?

Speaker 3

Yes, I think Anthony yes. Sorry, Anthony, sorry to cut you off. Yes, I think as Jeremy talked about, we expect after we get through kind of what's a choppy February and obviously you got Easter comp in March, the RevPAR growth is going to be higher for the balance of the year as opposed to the 0% to 3% growth in the Q1. So as you look at margins coming out of the of the 200 basis points or so that you're seeing in the 4th quarter. It's just of the 200 basis points or so that you're seeing in the Q4.

Speaker 3

It should be in that kind of mid-fifty ish to 80 ish basis points for the balance of the

Speaker 4

year. Okay.

Speaker 5

And then maybe just one more on the intern business. I guess you should know about that by the end of the second quarter, right? And if you don't get business this year, what's your ability to replace it with corporate transient and other kinds of business in those hotels?

Speaker 3

Yes. No, thanks for the question. Yes, I mean, I think one thing that's a little bit different this year from all prior years in terms of intern programs is a lot of the companies are taking a little bit of a different approach. As of today, we're hearing that interns are still coming to the market. The thing that's a little bit different this year is a lot of the bigger intern a lot of the bigger companies are going to have intern programs or in essence giving a stipend to their interns and essentially allowing them to go and choose from a menu of hotels or other types of housing if it's available.

Speaker 3

So I think that's going to listen, regardless if you have those intern programs participating as opposed to what happened last year, you're going to see whether it's in our hotels or other types of properties that demand and that occupancy is going to be a lot better. So that should turn into an overall positive for the market itself. I think I will say just kind of continuing and I think Jeff talked about in his prepared remarks, January was really strong for us out in Silicon Valley. If you look at kind of increases for the month, Mountain View was up 23%, Silly 1 and Silly 2 were up about 50%. Our Residence Inn in Bellevue was up about 33%.

Speaker 3

San Mateo, which is a little bit of a different market, was down, I think 4% or 5% in January. But again, kind of a lot of good things happening there. February, those hotels, at least as of a few nights ago, were still up year over year in February despite a lot of the bad weather that we saw elsewhere. It didn't really hit Silicon Valley as much, but generally encouraged by what's going on there. So to get back to one of your second points of the question is, listen, outside of interns and I think Jeff spent a lot of time in his prepared remarks talking about the things that are going on out there, the feel, the news that you're getting out of the Silicon Valley newspapers every day is all kind of pointing towards continued investment and spend, which I think, listen, that's what everybody that's what we expect to see, as we continue to move through 2024.

Speaker 3

So we should be able to continue to replace whatever if you go back to or even pre pandemic levels to the intern contributions to our hotels.

Speaker 5

Okay. Thanks for all the detail.

Operator

Our next question is from Tyler Batory with Oppenheimer. Please proceed.

Speaker 6

Good morning. This is Jonathan on for Tyler. Thanks for taking our questions. First one for me is maybe a clarification question on the occupancy recovery. Any color you can provide on what needs to happen to close that gap to 2019 levels?

Speaker 6

Is it just Silicon Valley coming back this year with the intern business? And kind of how are you thinking about the cadence of that recovery this year?

Speaker 2

Yes, I think this is Jeff. Are you talking about the overall portfolio relative to 2019 number?

Speaker 6

Yes, correct.

Speaker 2

Right. Well, we already told you that when you took out the Silicon Valley hotels for 6% above 2019. So yes, the money is in Silicon Valley. And there's a combination of things that need to occur because first, occupancy needs to get back to a level that will allow everybody in the market to push ADR. So even though we may get occupancies approaching 2019 numbers, ADRs are still going to be down, I would say, for at least the better part of this year, because some of those corporate negotiated rates are what they are and they're coming off of obviously weak numbers in 2023.

Speaker 2

So the practical side of it is as with any market, you need some compression to build ADR. And I think that's what you'll start seeing as you move through the year in Silicon Valley, which will propel the company's numbers as you get closer to 2019 numbers.

Speaker 6

Okay, very helpful. And then last one for me is just on expense growth, helpful commentary on the wage piece. But is there any other color you can provide there in terms of what you're seeing on other line items like property taxes, insurance, other expense line items?

Speaker 3

Yes. I mean, listen, I think you've heard from others, for us, it's not a huge number. But the impact from $0.01 a share on a full annualized premium basis. Property taxes, we saw some refunds in 2023 that who knows what will happen in 2024. So yes, I think if you're looking to kind of above inflationary increases, you'll see those in those two line items.

Speaker 3

And again, with property taxes, who knows whether that how much that comes to fruition. But I think outside of labor, which labor and benefits are a little over a third of our overall operating cost. I think in general, there isn't a whole lot of pressure on other types of expenses throughout the P and L. So, listen, I think we have a lot of focus on the labor side as we get into as we move through 2024. And that's where I think when you're looking at total dollars and upside opportunities, it's all going to be generally labor and wage and benefit related.

Speaker 6

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

Operator

We have reached the end of our question and answer session. I would like to turn the conference back over to management for closing remarks.

Speaker 2

Well, again, I just want to thank everybody for being on today's call. And as you know, we will continue to update the guidance on a quarterly basis until we have more visibility. But as Dennis walked you through some of the January numbers, I think we're being pretty conservative here. I think there's good things to come in 2024 for us and for our shareholders. Thank you all for joining.

Operator

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.

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Chatham Lodging Trust Q4 2023
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