Earnings Call Transcript - CLDT Q1 2023

Operator, Operator

Greetings, and welcome to the Chatham Lodging Trust First Quarter 2023 Financial Results. 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. I would now like to turn the conference over to your host, Mr. Chris Daly, President, DG Public Relations. Please go ahead, sir.

Chris Daly, President, DG Public Relations

Thank you, Melissa. Good morning, everyone, and welcome to the Chatham Lodging Trust first 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 May 4, 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 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 the Chatham 2023 first 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?

Jeff Fisher, Chairman, President and CEO

Thanks, Chris, and good afternoon everyone. I certainly appreciate being on the call this afternoon with us. Just before addressing our quarterly performance, I wanted to highlight that we were awarded the Hilton Brand Development Award for our Home2 Suites at Woodland Hills Warner Center, California, which we've spoken highly about, and give special recognition to the teams from Chatham, Island, Western International, and EPCO, who worked incredibly hard over several years to bring that project to fruition. Turning to our performance in the quarter, which was very strong, with higher than expected RevPAR growth driving EBITDA growth of 34% and more than doubling FFO per share to $0.16, exceeding consensus estimates of $0.13. This was driven by meaningful growth in some of our larger markets that are more reliant on the business traveler. RevPAR growth was over 25% in the quarter, the fourth best among all lodging companies. Our RevPAR growth was attributable to similar growth in both occupancy and ADR of approximately 14%. Relative to 2019, RevPAR was off about 6%, and that result was adversely impacted by approximately 700 basis points due to the performance at our four Silicon Valley hotels. So excluding those hotels, RevPAR was up almost 1% compared to 2019. RevPAR improved each of the first four months of 2023 with declines of 12%, 5%, 4%, and less than 2% respectively—a key indicator that business travel continues its recovery across the country, even in Silicon Valley. Leisure travel remains strong, with all of our leisure markets producing strong growth in the quarter. For example, Destin, Florida was up 13%, Portsmouth, New Hampshire was up 40%, Portland, Maine was up 16%, Anaheim was up 14%, Fort Lauderdale was up 9%, and Savannah was up 28%. Occupancy finished the quarter at 69%, up almost 14% and about 10% off pre-pandemic levels, evidenced by the year-over-year growth of 28%. We continue to see the return of the business traveler across our portfolio, as well as improved international travel due to loosening restrictions on entering the U.S. and obtaining work visas. Weekday occupancy, which is the best indicator of business travel, improved each month of 2023, reaching 69% for the entire first quarter. Weekday ADR was up approximately 17% versus last year and only down approximately 1% compared to 2019—an encouraging pattern, given that the first quarter historically is our slowest of the year. Weekend RevPAR remains strong, as it was up approximately 9% in the quarter compared to 2019. Moving into the second and third quarters, we are more confident in the outlook, as we see business travel demand continuing to build month by month. For the first time since the pandemic, we’re also starting to see meaningful demand pick up from Korea, Japan, Taiwan, and China in our Silicon Valley hotels, as well as our Bellevue, Washington Hotel. Offsetting some of this recovery is going to be the decline in intern programs for 2023. Many of the world's largest tech companies, such as Meta, Apple, Google, Microsoft, and T-Mobile, have significantly reduced their intern programs following corporate layoffs. Although these programs are expected to fully return in 2024, we anticipate a decline in intern revenue of approximately 80% to 90% across our four hotels in Silicon Valley and Bellevue, Washington—from about $12 million in revenue last year to between $1.5 million and $2.5 million this year. Thankfully, we expect to make up at least half to 75% of the intern-related EBITDA loss of $6 million. Work is ongoing, and recent occupancy trends in Silicon Valley are particularly stronger than expected on a week-by-week basis, so we feel very positive about this portion of the intern business and the associated EBITDA. Operationally, our margins grew by 200 basis points over last year to a post-pandemic first quarter high of 40%. Good flow-through and corporate expense controls allowed us to double free cash flow before CapEx and amortizing debt from about $5 million last year to $10 million this year. Lastly, I want to touch on our financial condition, which is extremely healthy as we sit here at our lowest leverage levels in over a decade. During the first quarter, we paid off loans amounting to $73 million, including the high-rated loan on our Woodland Hills Hotel, as well as two maturing loans. We replaced debt with an average interest rate of 8% with a term loan that is currently at 6.2%. Funded with our remaining borrowings and our term loan and free cash flow on May 5, we will repay another $16 million maturing mortgage. After that, we will only have 2023 maturing debt of about $60 million secured by two hotels later this year, and we have full capacity in our $260 million unsecured credit facility. Touching quickly on external growth, the transaction market has been dormant, but it does seem to be starting to ease up a bit. With the significant rise in interest rates and a number of maturing debts occurring throughout the industry, we believe there will be opportunities to acquire hotels that fit into our high-quality portfolio in the back half of the year. With 39 hotels, acquiring just one or two can significantly impact our EBITDA and FFO growth. Our continued focus will be on the extended stay segment. With that, I’d like to turn it over to Dennis for a little more insight. Dennis?

Dennis Craven, Executive Vice President and COO

Thanks, Jeff. Our portfolio performed significantly better than the industry, with first quarter RevPAR growth of 28%, exceeding industry performance by approximately 50%, again for the second consecutive quarter. Excluding the impact of the intern business, this serves as a relative indicator of potential performance moving forward in 2023. If you look at our portfolio for the quarter, excluding Silicon Valley, our first quarter RevPAR was slightly up versus 2019 on ADR growth of almost 10%, offset by a decline in occupancy of 9%. Silicon Valley, our largest market, continues to grow meaningfully over the prior year, with first quarter RevPAR growth of 59%, which is significantly higher than our fourth quarter 2022 RevPAR growth of 45%. However, that market remains well below 2019 levels, still down 36%. The occupancy in the quarter for those four hotels was 64%, up 20% over last year, but still below 2019 levels by approximately 16 percentage points. Silicon Valley EBITDA was $3 million in the first quarter, reflecting a 150% increase over last year; however, it remains below first quarter 2019 EBITDA levels. In the first quarter, international air travel into both San Francisco and San Jose airports reached their best levels since the pandemic, though still off approximately 16% compared to 2019. Again, this is an encouraging trend. In other key tech markets, Seattle's RevPAR grew by 17% in the quarter, although it still remains about 35% below 2019 levels. EBITDA at that hotel grew over 30% in the quarter. First quarter international air travel in Seattle was only off 2% compared to 2019, and for the first time since the pandemic, March international deployments exceeded 2019 levels. Despite this slower recovery in our Silicon Valley and Seattle markets, Austin continues to perform exceptionally well, and our Residence Inn in Austin saw RevPAR increase by 13% compared to 2019, with gains in both occupancy and ADR. Our Towneplace Suites was not open in 2019, but its RevPAR was up almost 40% year-over-year. Our five hotels with the highest absolute RevPAR in the quarter were our Residence Inn in Fort Lauderdale with RevPAR over $273 on occupancy of 93%, followed by the Hilton Garden in Marina del Rey with RevPAR of $147, then our Spring Hill Suites in Savannah, Home2 Suites in Woodland Hills, with both also achieving RevPAR over $150. Twenty-seven of our 36 comparable hotels achieved first quarter ADR higher than 2019, and 14 of those 36 achieved RevPAR higher than 2019. We continued to see an average length of stay approximately 10% longer than our historical levels. While this has come down from pandemic-related stays, it should remain longer on a long-term basis due to the flexible work arrangements prevalent in today’s work environment. For the quarter, total hotel revenue reached $67 million, up 23% compared to last year’s revenue of $54 million, matching the growth percentage of the last quarter. We generated an incremental GOP flow-through of almost $6 million for a flow-through of approximately 50%, significantly better than our fourth-quarter flow-through of 35%. We continue to control operating expenses and headcounts; our employee headcount remains approximately 20% below pre-pandemic levels. Since 2019, our hourly wages have increased by about 25% over that same four-year period, while hourly wages at our hotels are essentially flat compared to last year through the first quarter. Our top five producers of GOP in the quarter were our Gaslamp Residence Inn, which has led the portfolio for the fifth straight quarter, followed by the Residence Inn in Fort Lauderdale, Courtyard in Dallas downtown, Residence Inn in Silicon Valley 2, and Spring Hill Suites in Savannah. In terms of capital expenditures, we spent approximately $8 million in the quarter and expect to spend about $30 million total in 2023, which includes $22 million for renovation costs at five hotels. During the quarter, we completed renovations at our Residence Inn in White Plains and Holtsville, New York, as well as our Residence Inn in Foggy Bottom. Interestingly, RevPAR at our Residence Inn in Foggy Bottom was still up approximately 60% year-over-year, despite being under renovation for most of the quarter—indicative of another business travel market that has been dormant for the last couple of years and is starting to come back to life. A reminder, we are hosting in-person meetings in early June, so please email directly if we haven’t already locked up a meeting yet. With that, I’ll turn it over to Jeremy.

Jeremy Wegner, Senior Vice President and CFO

Thanks, Dennis. Good afternoon, everyone. Our Q1 2023 hotel EBITDA was $20.7 million, adjusted EBITDA was $17.8 million, adjusted FFO per share was $0.16, and cash flow before capital expenditures was $7.6 million. While we have seen cost increases due to the reinstatement of certain brand standards and the impacts of inflation on several key line items, we managed to generate a solid GOP margin of 39.8% and hotel EBITDA margin of 30.7% in Q1. Our Q1 GOP margin of 39.8% was essentially equal to our Q4 2022 GOP margin of 39.9%, and it was 150 basis points higher than our Q1 2022 GOP margin of 38.3%. Over the past several years, Chatham has taken numerous steps to strengthen its balance sheet, resulting in our current low leverage and high liquidity. As of March 31, Chatham’s net debt-to-LTM EBITDA was 4.3x, significantly below our pre-pandemic leverage, generally in the range of 5.5x to 6x, despite EBITDA not fully recovering to pre-pandemic levels. In Q1, we utilized $75 million of the delayed draw term loan availability to repay two maturing mortgage loans and a construction loan for our Home2 in Warner Center. We plan to use the remaining availability under our delayed draw term loan to repay a $16 million mortgage maturing in May 2023 and utilize available cash to repay a $20 million mortgage due in July 2023. Throughout 2023, we’ll continue to closely monitor debt markets to consider opportunities to refinance a $40 million mortgage due in December and potentially address a portion of our 2024 debt maturities. Our undrawn $260 million revolving credit facility provides a valuable source of liquidity that enhances our flexibility in addressing remaining debt maturities. With our reasonable leverage, solid liquidity, strong operating performance, sizable portfolio of unencumbered hotels, and meaningful free cash flow, we are well-positioned to refinance our remaining debt maturities as needed. As a reminder, our reported 2022 RevPAR figures did not include results for the Home2, Warner Center, as it had been in operation for less than a year, and our reported 2023 RevPAR figures include Warner Center’s results starting on January 24, 2023—the one-year anniversary of its opening date. 2022 RevPAR, including Warner Center, was $90 in Q1, $138 in Q2, $151 in Q3, $118 in Q4, and $124 for the full year. This concludes my portion of the call. Operator, please open the line for questions.

Operator, Operator

Thank you. Our first question comes from Ari Klein with BMO Capital Markets. Please go ahead with your question.

Ari Klein, Analyst

Thanks, and good afternoon. Maybe you can talk a little bit about the Silicon Valley market? It looks like RevPAR versus 2019 maybe took a little bit of a step back in the first quarter relative to the fourth quarter. It’s obviously a market that has a lot of challenges. To what extent, if any, have they maybe gotten somewhat worse recently with the layoffs and banking? And then I think you mentioned potentially backfilling the intern business. Can you just talk about that a little bit and add some color and context there?

Dennis Craven, Executive Vice President and COO

Yes. I mean, I’ll start and Jeff can chime in, Ari. This is Dennis. I think if you look at the sequential movement from the fourth quarter to the first quarter, the only difference has been more than 100,000 announced job cuts. So, in the short term, it's not all that surprising given just the quarter-to-quarter shift. The important thing, which I think Jeff mentioned, is that we are really starting to see some trickling of international travel, which has only continued to improve. If you look at the four hotels in Silicon Valley, just as recently as the last couple of weeks, you’re looking at 82% occupancy in Mountain View, 82% in San Mateo, 80% at our Sili 1, and 79% to 80% at Sili 2. So, the market is continuing to perform. As Jeff mentioned, demand from both international and broadening corporate sources in the market has improved. To sit here in April with 75% to 80% occupancy at those four hotels is encouraging. Rates, on average, at those four hotels are up approximately $10 to $15 from just seven or eight weeks ago. So, it's a positive trend. Our operators there are optimistic about what they’re seeing from a demand perspective and they believe that, as we’ve worked through the last three months, we’re encouraged by that trend. While we lost a significant amount of intern business last year, we feel confident we can offset a good chunk, if not most, of that lost EBITDA.

Ari Klein, Analyst

Thanks. And then just maybe Jeremy on the balance sheet. You mentioned some of the things that you’re doing this year. There’s a lot of debt that’s coming due next year, some of it in the Silicon Valley challenged market. What’s the plan there? How difficult do you think it’ll be to refinance those? Could you look at the delayed term loan as an option? I guess how are you approaching it?

Jeremy Wegner, Senior Vice President and CFO

Yes. Look, I mean, we have overall very low leverage and a lot of unencumbered properties that can serve as collateral for the credit facility, much more than we need. I think we are likely to avoid putting in longer-term fixed-rate debt on many of the Silicon Valley properties, given their current performance levels. Instead, we’ll likely put debt on other assets. Rates have been coming down slightly. In today’s market, new debt probably has a six handle on it. So there will be some increase in costs unless rates decrease, which certainly could, depending on the global situation. Overall, we’re probably less inclined to place more debt on the Silicon Valley assets, which will not impact our refinancing plans.

Dennis Craven, Executive Vice President and COO

Ari, this is Dennis. Just one additional point on Silicon Valley: Between the layoffs across tech companies since late 2022, employment numbers are still well above where they were four years ago. Looking forward, in a market where we’re seeing 75% to 80% occupancy, having managed through tech layoffs similar in scale to those seen during the financial crisis, while we would love RevPAR to be higher, it's not the end of the world either. The hotels are doing well; rates will continue to rise, and demand will return. We’ve owned these hotels, whether through Chatham or Innkeepers, since the late 90s. Each cycle has been better than the previous one, and we believe growth is coming; it’s just a matter of timing.

Ari Klein, Analyst

Thanks. I appreciate the color.

Operator, Operator

Thank you. Our next question comes from the line of Bryan Maher with B. Riley Securities. Please proceed with your question.

Bryan Maher, Analyst

Thanks, and good afternoon. You mentioned in your prepared comments, and we’ve been hearing on other calls, the international travel starting to come back, and I think the numbers you mentioned in San Francisco and Seattle were encouraging. For your markets out on the West Coast, does that include or how should we think about international travel into those markets or kind of rest of world versus inbound from Asia, which we’re hearing is just now really starting to ramp?

Jeff Fisher, Chairman, President and CEO

Most of our Silicon Valley business is from Asia, specifically engineers staying at our hotels. I was there two weeks ago, and we are still providing the appropriate breakfast for that clientele in our Residence Inn. That business, for us, appears to be quite strong.

Bryan Maher, Analyst

Okay. And then on the acquisition front, how would you characterize your segment of the market as it relates to opportunities? I know you say that one or two hotel acquisitions could move the needle, but do you think we'll see a barrage of low-end extended-stay hotels emerge, or are they simply easier to refinance and that’s not likely?

Jeff Fisher, Chairman, President and CEO

It’s hard to predict. Every time we speculate about potential market distress, it never quite unfolds as we expect. My hypothesis is that there will be select service hotels across the board. There's a lot of debt maturing. Extended stay hotels are likely closer to—or even surpassing—2019 EBITDA numbers. As a group, they might face fewer challenges. However, there should still be acquisition opportunities available due to the sheer amount of inventory that exists. Ultimately, it depends on the individual circumstances of each owner, including balance sheet status, FF&E reserve accounts, and past capital calls during the pandemic. We remain cautiously optimistic about future opportunities.

Bryan Maher, Analyst

All right, thanks Jeff, and thanks for making me feel old. Appreciate it.

Jeff Fisher, Chairman, President and CEO

It wasn't intended that way.

Operator, Operator

Thank you. Our next question comes from the line of Tyler Batory with Oppenheimer. Please proceed with your question.

Jonathan Jenkins, Analyst

Thank you. Good afternoon, this is Jonathan on behalf of Tyler. Thanks for taking my questions. First one for me—any additional color on more recent demand trends outside of the Silicon Valley market? Are there any pockets of weakness or flowing that are worth mentioning given some of the macro volatility we've observed?

Dennis Craven, Executive Vice President and COO

Hey, Jonathan, this is Dennis. Outside of Silicon Valley and Seattle, throughout our main markets, performance appears strong. I mentioned how Washington, D.C., is coming back to life. Dallas, Texas, is performing very well. Los Angeles, especially in Marina del Rey, looks strong, and San Diego is thriving. Initially more leisure-driven during the pandemic, it has now returned to a solid convention calendar with business travel. In Austin, quite encouragingly, both of our hotels at the domain are experiencing good growth not just year-over-year, but versus 2019, operating with high 80s to 90% occupancies. So, overall, everything else performing well.

Jonathan Jenkins, Analyst

That's great. I appreciate that color. And then, Jeremy, you highlighted the strong leverage profile in your prepared remarks. Can you provide any updated insight on how you're thinking about the leverage profile moving forward?

Jeremy Wegner, Senior Vice President and CFO

I believe we have capacity to add slightly more leverage over time, even at current EBITDA levels. We would be comfortable taking leverage up to around four and three quarters, or five times, which could enhance our buying capacity, especially as EBITDA recovers, particularly in Silicon Valley.

Jonathan Jenkins, Analyst

Okay. Excellent. Thank you very much, guys. That's all for me.

Dennis Craven, Executive Vice President and COO

Thanks.

Operator, Operator

Thank you. Our next question comes from Anthony Powell with Barclays. Please proceed with your question.

Anthony Powell, Analyst

Hi, good afternoon. Thanks. I have a question regarding the extended-stay brands. Many major brands are focusing on new mid-scale brands in the extended-stay segment. Is this something you would consider long-term, or are you still concentrating on the upscale extended-stay market?

Jeff Fisher, Chairman, President and CEO

Hi, Anthony, it's Jeff. It will be interesting to see how this shakes out. I believe Marriott will announce theirs at the upcoming NYU conference, providing a comprehensive overview of all brands in the business. We aren't ruling out any opportunities in extended stay, as we're pleased with our Home2 performance, which sits at the mid-upper mid-scale brand level, similar to Residence Inn or Homewood Suites. We're continuously evaluating other brands. While it's a proven business model, it could potentially become over-saturated. Also, there aren't many developers with the financial means to construct these properties, contrary to what the brands might suggest, so we’ll be observing closely.

Anthony Powell, Analyst

So, you're not concerned that these brands will offer too low of an ADR, or do you feel the business model remains attractive, even at lower price points?

Jeff Fisher, Chairman, President and CEO

It really depends on the service model. We will not engage with a $40 or $50 RevPAR deal, but if the RevPAR is comparable to that of Home2, Residence Inn, or Homewood, and if the margins exceed 50% at the GOP line, those numbers can work well, depending on construction costs.

Anthony Powell, Analyst

Got it. And regarding the Silicon Valley intern business, can you remind us when that started last year? Was it in June, meaning a Q2 impact, or was it more significant in Q3 in terms of year-over-year comparison?

Dennis Craven, Executive Vice President and COO

It's a bit of both, Anthony. Interns typically start trickling in at the end of May, mainly arriving in June, which spans into July and August. So it’s essentially a third in June and two-thirds in July and August.

Anthony Powell, Analyst

So we'll start seeing that impact on the comparison in this quarter. I know you anticipate recouping some of it, but I suppose…

Dennis Craven, Executive Vice President and COO

Yes.

Operator, Operator

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I will turn the floor back to Mr. Fisher for any final comments.

Jeff Fisher, Chairman, President and CEO

Well, as always, we certainly appreciate everybody being on this call. Normally, I just say we’ll see you next time, but I would like to conclude with good news in Silicon Valley. I was there, as I mentioned, a couple of weeks ago, spending extensive time in every hotel, meeting with the teams, particularly our sales team. There’s a lot of excitement surrounding AI and business generated by the major companies that we already partner with, anticipated for this year and definitely into 2024. Interestingly, I read in the Silicon Valley Business Journal that recently they reported the lowest number of startups funded in three or four years—just eight or nine for that week. Normally, it’s around 30 to 40. There is still business in Silicon Valley. There will be plenty of opportunities ahead as the year progresses and in the years to come, which is why we value our exposure there. Throughout good and challenging times, as Dennis pointed out, we’ve weathered many cycles in the past and remain optimistic given the exciting developments in many sectors. We have further funding coming in for companies involved with vertical helicopters, with significant financing expected for approval and flight in 2024. So, all is not lost. We will be more than fine. And with that, we’ll talk to you next time. Thanks.

Operator, Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.