Good morning, and welcome to Chatham Lodging Trust Second Quarter 2023 Financial Results Conference Call. All participants will be in listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Chris Daly, President of DG Public Relations. Please go ahead.

Thank you, Jerry. Good morning, everyone. Welcome to Chatham Lodging Trust Second Quarter 2023 Results Conference Call. Please note that many of our comments today are considered forward-looking statements as defined by federal Securities Laws. These statements are subject to risks and uncertainties, both known and unknown, as described in our most recent Form 10-K and other SEC filings. All information in this call is as of August 2, 2023, unless otherwise noted, and the company undertakes no obligation to update any forward-looking statement to conform the statement to actual results or changes in the company's expectations. 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, to the Chatham 2023 second quarter results, allow me to introduce Jeff Fisher, Chairman, President and Chief Executive Officer; Dennis Craven, Executive Vice President and Chief Operating Officer; and Jeremy Wegner, Senior Vice President and Chief Financial Officer. Let me turn the session over to Jeff Fisher. Jeff?

Thank you, Chris. Good morning, everyone. I appreciate you joining the call today. For the fifth consecutive quarter, we've outperformed the industry in RevPAR growth, achieving over 5% growth for the quarter, with occupancy and ADR both contributing to this increase. Compared to 2019, RevPAR is down slightly by just over 1% for the quarter. Throughout the first half of 2023, RevPAR has improved each month, with declines of 3%, 2%, and 1% compared to the same months in 2019, indicating a recovery in business travel nationwide. This is particularly noteworthy given the reduction in intern business in Silicon Valley, Bellevue, Washington, and Austin, Texas. The loss of intern business affected about one-third of the second quarter and is expected to impact two-thirds of this quarter, making comparisons to last year and 2019 more challenging. However, we expect a significant return of interns next year, which should drive strong growth for us moving forward. Portfolio occupancy increased to 79% in the quarter, up from 77% last year and approaching the 2019 occupancy rate of 83%. Weekday occupancy was 78% for the quarter, with June weekday occupancy reaching 81.3%, the highest since the pandemic. ADR rose by $3 compared to last year and by $6 compared to 2019. For business travelers, weekday ADR increased by $6 over last year, with June's weekday ADR at $186, the third highest since the pandemic, closely following the ADRs of June and July 2022 at $187. Our operators have successfully driven ADR growth across the week, with this past weekend's ADR exceeding $200. Excluding our tech-focused markets, we're seeing solid year-over-year growth in each of our top markets, especially in Washington DC, our coastal Northeastern hotels, and Los Angeles, which produced RevPAR growth of 11%, 10%, and 7% respectively. These areas contributed over 25% of our EBITDA. Leisure travel has remained robust, with strong RevPAR growth in our leisure markets this quarter, including Destin, Florida, up 8%; Portsmouth, New Hampshire, up 24%; Anaheim, up 2%; Fort Lauderdale, up 14%; and Savannah, up 4%; while Portland remained flat but shows promise ahead. Our 5% RevPAR growth has enabled us to generate year-over-year growth in EBITDA, FFO, and FFO per share. We've achieved a 5% increase in FFO per share over the past year, reaching $0.43 compared to $0.41 the previous year, exceeding consensus estimates of $0.40 per share. Operationally, we maintained operating margins of 49%, consistent with last year and the second quarter of 2019, while hotel EBITDA margins were at 41%, slightly below prior year and 2019 levels of 42%. A significant factor in controlling costs was keeping hourly wages stable year-over-year. Notably, if we exclude the five tech hotels, margins improved by 40 basis points compared to 2019 levels, demonstrating the potential for growth once performance improves at those locations. With favorable flow-through, we generated corporate cash flow before capital expenditures and common dividends of $22.25 million, an increase of about 10% from last year. This increase allowed us to repay a $20 million maturing mortgage. With only $70 million in maturing mortgages due between now and June 2024, we are well-positioned to manage our remaining maturities this year and next. We are actively pursuing external growth opportunities while carefully considering the cost of capital and the expected cash flow yield and growth from potential acquisitions. With the significant rise in interest rates and brands focusing more on renovation needs, along with increased maturing debt across the industry, we anticipate opportunities to acquire hotels that align with our high-quality portfolio later this year and into next year. With 39 hotels, acquiring just one or two properties can significantly impact our EBITDA and FFO growth. Fortunately, we have substantial internal growth potential inherent in our existing properties, particularly with the eventual recovery of Silicon Valley and Seattle and the return of the intern business in Austin. If those properties reach 2019 RevPAR in 2024, it would lead to an approximate 7% increase in portfolio RevPAR and an additional $0.32 in FFO per share. Including the Austin intern business could add another 50 basis points to RevPAR and another $0.02 in FFO per share. So, if we account for these seven hotels, using current consensus estimates, the adjusted FFO per share for 2023 could rise by nearly $0.34, representing almost a 30% increase. This indicates significant growth potential for our company moving forward. Before handing it over to Dennis, I want to provide a brief update on our observations in Silicon Valley and Seattle. The absence of the intern business negatively impacts our current results, especially this quarter. However, following last year's significant layoffs, big tech companies are now reporting strong profits. All major tech firms are discussing substantial investments in capital expenditures and product development. International travel continues to improve, with visits to San Francisco, San Jose, and Seattle at their highest since the pandemic, and Seattle's traffic is even surpassing 2019 levels. This is encouraging and reflects positive trends. Occupancy from international travelers at our Sunnyvale hotels was around 22% in the second quarter, primarily driven by demand from Korea, China, and India. General business travel demand in the valley is also looking up. We're seeing increased demand from TikTok, and there’s a growing need for lodging related to electric vehicles. Moreover, we've noticed an uptick in group requests, with sizes now reaching into the hundreds for late Q3 and early Q4, which is promising. While attendee numbers for Apple's fall programs are lower than in 2019, these events are still occurring, and we anticipate some demand from them. Part of this growth is tied to AI, a significant growth area across industries. Every tech company is integrating generative AI tools into their operations, exemplified by Accenture's recent partnership to boost AI development. Additionally, there’s a major push towards reshoring chip manufacturing, which will greatly benefit the tech sector. For instance, just two months ago, Applied Materials, one of our top five accounts in Sunnyvale, announced plans for a $4 billion R&D facility near our Residence Inns. This facility will serve as a state-of-the-art hub for innovation alongside chip manufacturers, universities, and partners like AMD, NVIDIA, and Western Digital, all of whom are also our customers. We have owned our hotels for a long time and understand that these companies are continuously evolving and investing in cutting-edge technology. As these developments unfold, we believe our hotels, like they always have during upturns, will recover, and our earnings will grow rapidly. With that, I'll hand it over to Dennis.

Thanks, Jeff. Our portfolio performed significantly better than the industry with second quarter RevPAR growth of 5%, again exceeding industry performance by approximately 85%. This trend of beating the industry will be challenged in the third quarter due to the intern loss for two-thirds of the quarter but certainly will continue into 2024. Silicon Valley, our largest market comprising 15% of EBITDA saw occupancy growth slightly, year-over-year despite the loss of most intern business and still down a little bit to 81% occupancy in 2019. ADR is where the most opportunity is and we need to see continuing demand growth to drive ADR. ADR was $184, down 3% versus last year and off 23% versus the 2019 second quarter ADR of $240. RevPAR was off 28% versus 2019 levels. Weekday occupancy in the valley was 77% in the quarter. Silicon Valley EBITDA was $4.6 million, which was down about $600,000 from last year and down about $3 million versus 2019 levels. In other key tech markets, Seattle RevPAR was off 9%, which hides a favorable underlying trend. Occupancy was actually up 1% year-over-year to 73% but still down to 84% occupancy in 2019. Second quarter ADR of $187 was off 5% versus 2019. EBITDA was $1.3 million in the quarter, down from 2022 second quarter EBITDA of $1.8 million and $2 million in the 2019 second quarter. And Austin RevPAR was off 5% versus last year, again due to the loss of the intern business. The summer in Austin is the seasonally slower months, so it's certainly more difficult to replace that lost intern revenue there. Excluding the interns, RevPAR would have been up approximately 3% to 4%. In other top markets, our coastal hotels in New Hampshire and Maine continue to outperform with RevPAR up 10% in the quarter, driven by 24% growth at our Hilton Garden in Portsmouth, and 11% in Exeter. From a leisure standpoint, Portsmouth certainly reminds us of kind of where Portland was five or so years ago. Los Angeles with three hotels represents 9% of our EBITDA and we saw RevPAR grow 7% in the quarter. All three LA area hotels grew RevPAR in the second quarter. Washington DC, which comprises 8% of our EBITDA, we were able to generate meaningful RevPAR growth of 11% in the quarter. Again, all three DC Hotels grew RevPAR. Our Embassy Suites in Springfield saw RevPAR grow 17%, as we are finally seeing some return to office and business travel back in the market. As a reminder in Springfield, TSA moved its headquarters there in the early stages of the pandemic and is just really starting to return to office. Our Residence Inn, Foggy Bottom produced RevPAR growth of 8%. Interestingly enough, for the second quarter, RevPAR was $212, the highest of all hotels in our portfolio in the quarter. Last of our top markets, the greater New York and Dallas markets continued to edge higher with both seeing RevPAR growth in the low single digits. Our five highest hotels with absolute RevPAR were again, top of the list, was our Residence Inn, Foggy Bottom, which had ADR $267 in the quarter, followed by our Marina del Rey Hilton Garden Inn with RevPAR of $202. And then our Residence Inn, Fort Lauderdale, Hampton and Portland, and Residence Inn, San Diego Gaslamp all with RevPAR over $190. A post-pandemic high of 21 of our 36 comparable hotels achieved RevPAR higher than the 2019 second quarter. Additionally, 27 of our 36 comparable hotels or approximately three-fourths of the portfolio achieved ADRs higher than 2019 levels. We continue to see an average length of stay approximately 10% longer than our historical levels. It's come down certainly from pandemic related stays, but on a long-term basis should remain a bit longer due to the more flexible work arrangements that exist in today's business climate. For the quarter, total hotel revenue of $84 million was up 3% to last year. We generated incremental GOP flow-through of approximately 30%. In a challenging operating environment, we were able to maintain margins essentially flat year-over-year, primarily by holding hourly wages flat. This was offset by approximately 150 more hotel employees compared to last year. At this point, we're pretty close to being fully staffed at most of our hotels. And that would represent, if we kind of stabilized at these levels, about a 17% headcount reduction over pre-pandemic levels. If you look at our five hotels in Silicon Valley and Seattle, our operating margins were over 51% in the quarter versus 58% last year. Operating margins on that business, very profitable, given the lesser amount of services required. Our top five producers of GOP in the quarter were our Gaslamp Residence Inn, the sixth straight quarter its lead the portfolio, followed by our Embassy Suites Springfield, and then notably our two Sunnyvale Hotels, and then fifth, our Spring Hill Suites in Savannah. What's missing out was our Residence Inn, Bellevue. So despite a huge gap to make up with the loss of the intern business, three of our top six GOP producing hotels in the quarter were our tech-driven hotels. With respect to CapEx, we spent approximately $8 million in the quarter and expect to spend about $30 million total in 2023. That includes $22 million of renovation costs at five hotels. During the third quarter, we have commenced the renovation of the Courtyard, Charleston, Summerville, which is expected to be done by the end of the third quarter. With that, I'll turn it over to Jeremy.

Thanks, Dennis. Good morning, everyone. Our Q2 2023 hotel EBITDA was $34.7 million, adjusted EBITDA was $31.9 million, adjusted FFO per share was $0.43, and cash flow before capital was $22 million. While we've seen cost increases due to the reinstatement of certain brand standards and the impacts of inflation on a number of key line items, we were able to generate a solid GOP margin of 48.5% and hotel EBITDA margin of 41.3% in Q2, which were only down 60 and 70 basis points respectively from our margins in Q2 '22. Our balance sheet remains in excellent condition, and we are continuing to execute on our plan to address debt maturities. As of June 30, Chatham’s net debt-to-LTM EBITDA was 4.1 times, which is significantly lower than our pre-pandemic leverage, which is generally in the 5.5 to 6 times area, despite the fact that EBITDA is not fully recovered to pre-pandemic levels. In Q2, we used the final $15 million of availability under our delayed draw term loan to repay the maturing loan on the Courtyard Houston. Subsequent to the end of Q2, we repaid the $19.7 million loan on the Hyatt Place, Pittsburgh with available cash. Year-to-date through July, we have refinanced or repaid $109 million of debt, which leaves us with only $40 million of remaining debt maturing in 2023. We expect to access the CMBS market over the course of Q3 to raise approximately $50 million to $100 million of proceeds, which would address our $40 million of remaining 2023 maturities and a portion of our 2024 maturities. The cost of this financing is likely to be in the mid 7% area. We expect the total proceeds from our planned Q3 financing activity together with our undrawn $260 million revolving credit facility will provide enough liquidity to cover all of our 2024 debt maturities. While we're not going to provide guidance at this point, I would like to provide some color around how one could think about potential performance in Q3. Quarter-over-quarter comparisons have been pretty noisy over the last few years on both revenue and expenses due to the pandemic and the recovery from it, as well as different demand drivers staffing levels, franchisor requirements and volatile utility pricing. If you look back to both 2018 and 2019, in each of those years our Q3 RevPAR was approximately $3 higher than our Q2 RevPAR. So that may provide some general context for how to think about what we might expect for Q3 RevPAR versus our Q2 RevPAR of $144. On the expense side, with the loss of the interns in Silicon Valley, Seattle and Austin for two-thirds of the quarter, third quarter margins will be pressured as we benefited from higher RevPAR and minimal housekeeping requirements for that business in Q3 '22. Additionally, incremental headcount year-over-year to fully staff our hotels going into the summer will impact Q3 more than Q2. In Q3, interest expense, net of interest income, is also likely to increase by about $500,000 versus Q2 due to both our planned financing activity and the impact of increasing SOFR on our term loan interest expense. Although the exact amount of any increase in interest expense will depend on the ultimate amount of financing we complete, rates at the time of execution and transaction timing. This concludes my portion of the call. Operator, please open the line for questions.

We will now begin the question-and-answer session. Our first question is from Ari Klein with BMO. Please go ahead.

Thanks, and good morning. On the expense side, it appears that your hourly wages remained stable year-over-year, which I view as a positive. Can you discuss the sustainability of that or your expectations for growth in that area moving forward? It seems like your headcount is almost fully staffed.

Hey Ari, this is Dennis. I think the wage pressures from recent years have decreased, and you're likely hearing that from various sources regarding hourly wages. The labor market is still competitive, but since last summer, as we increased occupancy levels, we were able to retain many employees and provide them with full schedules, which has helped stabilize our workforce. Overall, we feel good about this situation. While we do anticipate inflation-related wage increases, we have already absorbed over a 25% rise in the last three years. As the labor pool continues to return to work, we hope to see the significant wage increases moderate.

Thanks. And then, Jeremy, just maybe on the balance sheet, you mentioned tapping the CMBS market later this year, which will address the maturities this year and a portion next year, but there's still a significant amount out there for next year. How should we think about the timing of addressing some of those?

I believe that once we complete our plans for the remainder of this year, all outstanding maturities will be supported by the revolving credit facility. Therefore, we are not pressured to refinance the remaining amounts immediately, replacing 4.5% debt with 7.5% debt. It's likely we will look into more CMBS in the first quarter of next year, and hopefully, interest rates will be lower by that time. Regardless, we prefer not to incur the higher rates any sooner than necessary.

I understand. Just to clarify, not specifically about Silicon Valley, I believe you recovered around 63% of the lost intern business during the quarter. Jeff, you mentioned some encouraging tech trends you're noticing. Do you think that figure will increase in the third quarter? Also, I recall you expecting the intern business to rebound next year. Is that based on discussions with certain companies, or what is your perspective on that?

Yeah, I mean, listen, this is Dennis. I'll answer and Jeff can chime in, I think the 63% replacement, we'll be in the range of that, whether it's 60% or 65%. But can't say, but certainly, we're pleased with basically coming right in the middle of that 50% to 75% range that we provided last quarter. So that's all a good sign. I think with respect to intern programs, they are, there are intern programs happening this year. It's just significantly down from prior years. So to be able to be absorbed by other housing or especially in the Seattle and Sunnyvale market. So any discussions we've had, there's been nothing concrete for next year. But we've owned these hotels for a long time, and the intern business has been part of that. And we know they're going to come back; it's just a matter of the magnitude of it.

Appreciate the color. Thanks.

The next question is from Anthony Powell with Barclays. Please go ahead.

Hi, good morning, everyone. I guess, another question on the intern business. I was surprised about Austin being a big contributor there. I mean, I should have expected that. But what percent of total EBITDA on an annual basis or total revenues comes from the intern business on a statewide basis? Just to understand the magnitude of the business throughout the portfolio.

If you look back at pre-pandemic levels, total internal revenue for the five hotels, excluding Austin, was about $6 million. The EBITDA margin was approximately 60%, resulting in around $3.5 million. Additionally, Austin contributed around $1 million in revenue. Therefore, we had roughly $7 million in revenue on $300 million pre-pandemic, which reflects the scale we aim for on a stabilized basis, rather than the nearly $12 million we achieved last year.

Got it, understood. Okay. And just going to acquisitions, I think you talked about maybe doing some deals in the back half of this year, early next year. Your cost of debt is about 7%, it seems like on your line, close to that in line and 7.5% in CMBS. Are you seeing yield on acquisitions that are above that? Just curious how you're underwriting the cash on cash when you account for cost of capital when doing acquisitions?

Hi, Anthony. There are very few deals happening right now, and seller expectations have shifted somewhat. We are currently exploring an opportunity that offers a yield greater than 7%, specifically over 8%. However, such opportunities are rare, and part of that yield comes from our improved management of complex hotel positions in the area. We are leveraging this unique situation to maximize cash flow and returns for Island Hospitality. As Dennis mentioned, we are mindful of the cost of capital and are focused on pursuing only those opportunities that provide at least a marginal benefit. This could involve reinvesting capital from hotel sales while aligning acquisition funds with an existing return exceeding 8%.

Got it. Thank you. Maybe one more on Los Angeles, any impact of the writer strike and the actor strike that you've seen in recent weeks?

Yeah, we haven't really seen any real material impact, Anthony. We are in the Valley so a little bit on the edge there and hotel has been performing very strong.

All right. Thank you.

I would add that in Marina Del Rey, one of our largest business segments is airline-related and FedEx-related rather than entertainment-related, so that business continues.

Thank you. The next question is from Tyler Batory with Oppenheimer. Please go ahead.

Thank you. Good morning. Just want to unpack some of your commentary a little bit more here. When we look at RevPAR on a year-over-year basis, it looks like a deceleration in June and into July. I know the intern business is impacting that. If you kind of exclude that, just talk a little bit more about performance in the portfolio, and maybe it's helpful, if you can quantify just how much of a drag this lost intern business is going to be on Q3 RevPAR overall?

Yeah, I'll start, and if anyone to add, but yeah, Tyler, this is Dennis. I mean generally those five hotels are impacting our RevPAR by about 700 basis points. So it's a significant impact. I think it will be a little more difficult in the third quarter to replace that lost business, just given kind of the amount that we took last year. But having said that, like 63% recovery, at least through June. So all-in-all, I think it's pretty noteworthy to be able to be where we are as a portfolio.

Okay, some of the leisure numbers you provided indicate that some of our competitors are experiencing a slowdown in business and facing challenges with pricing power. Can you share more about what you're observing in your leisure markets? Additionally, could you elaborate on the commentary regarding some of the weekend average daily rates? You appear to have a positive outlook in that area.

In Jeff's prepared comments, he mentioned our primary leisure markets, noting that Portland was the only one that didn't perform well, and we effectively missed some opportunities there. However, other markets, such as Destin, Florida, which was up 8%, and Fort Lauderdale, which increased by 14%, showed strong results despite what some of our competitors have reported with significant declines in RevPAR. This highlights the strength of our locations and assets, which are situated in different markets compared to some previously thriving areas.

These locations were specifically chosen for their unique characteristics, and the results reflect that, especially during a general decline in leisure travel compared to 2022. Other full-service hotel REITs might not report similar numbers, and we are truly satisfied with the strength of our business model and the cash flow from these hotels.

That's helpful. Regarding business travel, if we exclude the Silicon Valley hotels, some of your peers have mentioned that the recovery in corporate travel might be a bit slower. What are you observing, and what is your perspective on the future trajectory of business travel?

I think our weekday occupancies in the second quarter, even including Silicon Valley, averaged 76% to 77% across the entire portfolio, which is quite similar to our weekend occupancies for the quarter. Overall, our markets and customers have shown stability and are improving gradually. Notably, it was previously the case that Monday, Tuesday, and Wednesday were the lowest RevPAR nights of the week, but they are now becoming our highest RevPAR nights. Therefore, for our overall portfolio, including Silicon Valley, the strength and growth in occupancy, even from 75% to 78% or 78% to 80%, is encouraging.

Okay, great. I am going to leave it there. Appreciate the detail.

Thanks, Tyler.

This concludes our question-and-answer session. I would like to turn the conference back over to Jeff Fisher for any closing remarks.

Well, again, thank you all for being on the call. We've kind of set the table a little bit for Q3 that, perhaps certainly won't be as good as last year. That does not indicate any kind of go forward trend at all other than what we focused on relative to that specific business. As we move out of that quarter, and especially into next year, as I commented, we really do see some pretty substantial upside here and growth in earnings. So appreciate that, and we will look forward to talking to you again soon.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.