Chatham Lodging Trust Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2024

There are 7 speakers on the call.

Operator

Greetings, and welcome to the Chatham Lodging Trust Second Quarter 2024 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. I would now like to turn the conference over to your host, Chris Daly, President of DG Public Relations.

Operator

Please go ahead.

Speaker 1

Thank you, Brock. Good morning, everyone, and welcome to the Chatham Lodging Trust Second 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 August 2, 2020 4, unless otherwise noted, and the company undertakes no obligation to update any forward looking statements to conform the statements 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 to Chatham's 2024 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 Wagner, Senior Vice President and Chief Financial Officer. Me turn the session over to Jeff Fisher. Jeff?

Speaker 2

Thanks, Chris, and I certainly appreciate everyone joining us this Friday morning for our call. I understand our time slot does conflict with one of our other peer lodging REITs. So for anyone who ends up listening to our replay, if you have any questions or follow-up items, of course, feel free to call me, Dennis or Jeremy. Before I get into our strong quarterly results, I want to provide an update on some key corporate initiatives that we have been undertaking. First, we've been quite active solidifying our balance sheet over course of maturing debt.

Speaker 2

In just the past 3 months, we've repaid approximately $280,000,000 of maturing debt. And as we sit here today, we've only got $30,000,000 of maturing debt over the next year. We have no liquidity issues whatsoever to be clear. We patiently addressed this large wall of maturities through the issuance of debt, asset sales and free cash flow. Additionally, through the refinancing, we've added exposure to floating rate debt and with rates expected to decline, we will be able to grow FFO.

Speaker 2

In fact, based on current borrowings outstanding, our FFO increases $2,600,000 or $0.05 per share for every 100 basis points decline in SOFR. With interest rates expected to decline as growth opportunities arise, we'll then be able to lock in longer term borrowings at more historically attractive rates. 2nd, as we disclosed last quarter, we're opportunistically marketing a handful of hotels for sale. We still expect to realize somewhere between $40,000,000 $80,000,000 of proceeds from the sale of a portion of them or all of them. Not sure if any of the deals will close in the Q3, but we are pleased with the progress made to date.

Speaker 2

We're also excited to announce earlier this quarter that for the first time in 2 years, we acquired a hotel, the brand new 148 Room Home 2 Suites by Hilton Phoenix Downtown for $43,300,000 or approximately $293,000 per room. We are really excited about the hotel. It sits in the heart of Downtown Phoenix, strategically located across the street from the footprint center, which of course is home to the NBA Phoenix Suns and the WNBA Phoenix Mercury, a block away from Chase Field, which is home to the Arizona Diamondbacks and mere blocks from the Phoenix Convention Center. Those three venues alone bring 5,000,000 annual attendees to Downtown Phoenix. Additionally, Downtown Phoenix is a vibrant growing 1.7 square miles that drives incredibly diverse demand for hotels into its urban core.

Speaker 2

In addition to the footprint center in Chase Field and the Convention Center, downtown includes 11,500,000 square feet of office space and a 28 acre bioscience core, which is currently comprised of 1,600,000 square feet of space occupied with plans because it is growing rapidly to essentially double that space in coming years. Also there's numerous museums, theaters and many wedding venues and other event facilities that immediately surround this hotel. We're in a great location. Switching gears back to our 2nd quarter operating results, it was a successful quarter by almost every metric for us with RevPAR, other operating profit and operating margins coming in at the top of our guidance range. RevPAR growth was a strong 4% in the quarter and that's despite a sluggish June due to the timing of the Juneteenth holiday.

Speaker 2

Our Q2 RevPAR of $151 exceeded 2019 Q2 RevPAR, the first time since the pandemic. And if you pull out the 5 tech driven hotels, RevPAR for us is up over 10% compared to 2019 levels. As we've said, business travel continues its steady growth across the country and that certainly was proven out this quarter for us. Occupancy was up every day over last year. And by that, I mean average Q2 2024 Sunday occupancy was higher than 2023.

Speaker 2

Again, each day of the week was higher. Additionally, our highest occupancy day of the week is now a midweek back to more of a normal pattern, a midweek Tuesday night. Our occupancy for the key weekday business travel days was 85% on Monday, 88% on Tuesday, 84% on Wednesday and 83% on Thursday. Sunday is now our lowest occupancy night again, but it was still running 76%. 2nd quarter occupancy at our tech hotels was 78%, only 300 basis points off 2019 levels and that gap compressed 100 basis points from the 1st quarter.

Speaker 2

Importantly, occupancy in our competitive set at these same hotels was up 8% to approximately 70% in the quarter, underpinning stronger fundamentals occurring in those markets, which we've always said is necessary for us to drive ADR growth in our hotels. Our 2nd quarter RevPAR gains were broad based across most of our largest markets, another encouraging sign, with our tech focused hotels in Silicon Valley and Bellevue leading the charge with a RevPAR gain of 10% in the quarter. Tech companies are doing some intern programs this year. We expect to derive about $500,000 of intern related revenue this year, not at the level as pre pandemic or 2022, but with the intern programs active, the market is compressing as evidenced by the continued growth in RevPAR. Market demand is starting to feel like it did before the pandemic in the Valley.

Speaker 2

Bellevue produced the strongest growth for us with RevPAR up 14 percent over last year and now sits less than 6% below 2019 levels. Special corporate production there was up 27% and all the companies that we're all familiar with like Amazon, Microsoft, TikTok, etcetera have been putting business in the hotels. Additionally, we've got a nice group of eBay interns at the hotel this summer. Bellevue produced RevPAR gains of 13% in the quarter, driven by top account production from the likes of Google, Broadcom and Sure Fox. 2nd quarter RevPAR of $183 is starting to get closer to 2019 levels, roughly 18% short of that number.

Speaker 2

RevPAR at our 2 Sunnyvale hotels gained 8% in the quarter and this market too is showing good underlying fundamentals with occupancy of 77% for our 2 large hotels there with the competitive set occupancy at 67%. So still room for growth in the set in Silicon Valley and certainly room for growth, I mean, in Sunnyvale for those 2 big hotels. And the normal accounts in the area are producing good midweek corporate demand. Sunnyvale RevPAR of 100 and $44 is still, however, 28% below 2019 levels. So that is the market that suffered the most from the pandemic and has the delayed return to office policies, etcetera, certainly has cut the RevPAR, but shows the kind of growth that we're having and good prospects going forward in Sunnyvale for us.

Speaker 2

San Mateo RevPAR growth was 4% in the quarter and less than 6 percent shy of 2019 levels, so gaining back strong there as well. Operationally, GOP margins of 46% finished at the top of our guidance range. And I will add, we absorbed approximately $700,000 of one time non recurring expenses that brought down our margins by 85 basis points. So just to finish up here before I turn it over to Dennis in conclusion, we're essentially in great financial shape having successfully recast the balance sheet and refinanced all that debt. I think we still have the most internal growth upside of other lodging REITs considering the tech hotels and the double digit RevPAR gains we're experiencing there together with very little new supply coming in our markets.

Speaker 2

We're positioned to benefit from declining interest rates because now we've reset the debt as I said with floating rate debt for the most part and do have the capacity and flexibility to acquire hotels if they can be accretive to our FFO and cash flow. So with that, I'd like to turn it over to Dennis.

Speaker 3

Thanks, Jeff. Good morning, everyone. June RevPAR growth of 1% was impacted by the timing of the Juneteenth holiday. RevPAR for that week was down 2% for the industry and was down 5% for our portfolio. Our July RevPAR growth of approximately 1% also saw us get hit by travel the week following the holiday where industry RevPAR growth was off 5%, while we were down 8%.

Speaker 3

Generally speaking, because of our reliance on the business traveler, especially given that our guests average a longer Having said that, we've still outperformed the industry meaningfully in 2024. Some additional RevPAR statistics from the quarter. Markets representing over half of our trailing 12 month EBITDA generated RevPAR growth between 5% 10%, proving again some encouraging business travel demand underpinnings. Our 2nd quarter RevPAR was not impacted by any renovations as we had 3 hotels whereas we had 3 hotels under renovation in the Q1. And as we look forward, we'll have 1 hotel under renovation for most of the 3rd quarter being our Courtyard Addison, Texas and then we'll start the renovation of our SpringHill Suites Savannah in September.

Speaker 3

Weekday occupancy was the highest since 2019 and RevPAR in our 7 predominantly leisure hotels, which comprises approximately 20% of our 2nd quarter room revenue saw RevPAR decline 2% in the quarter. Other than our Residence Inn in Fort Lauderdale, the other 6 hotels had RevPAR gains or declines ranging from down 5% to up 5%. Our Fort Lauderdale Residence Inn RevPAR was off 13% in the quarter. Sunday to Thursday weekday occupancy was 81% in the quarter with Friday I'm sorry, Monday to Thursday and then Friday to Sunday occupancy of 86%, all metrics over 2023 levels. Both weekday and weekend ADRs were $183 in the quarter.

Speaker 3

Our June ADR of $191 matches our June July 2022 portfolio ADR of 191, which are the highest since 20 19. And our June weekday ADR of 191 was in fact the highest monthly weekday ADR since 2019 as well. June RevPAR of $157 matches the 3rd highest monthly RevPAR since 2019. July RevPAR was up 8% in Silicon Valley and 6% across our 5 tech driven hotels. Our top 5 RevPAR hotels were led by the Residence Inn Washington D.

Speaker 3

C. With RevPAR of $2.35 up 11% over last year followed by our Residence Inn San Diego Gas Lamp at $209 up 10% followed by our Hampton Inn Portland Maine with RevPAR of $202 also up 5% then followed by our Residence Inn, White Plains with RevPAR of $197 again up 11% and then our Hilton Garden Inn Marina Delray with RevPAR of $194 We continue to monitor deployments into San Francisco and Seattle, 2 major gateway airports that do again provide some correlation to hotel demand, especially in our tech hotels. San Francisco's airport saw international passenger traffic surpass 2019 levels in April May and total passenger traffic is only off 10% versus 2019 levels, the lowest April May variance since 2019. Versus last year, April May passenger traffic is up 3% at SFO. At SeaTac, April May and May total passenger traffic is up 3% over last year and importantly international deployments are up approximately 15% for both of those months.

Speaker 3

Most of that inbound travel is generally coming from the Asia region. As a reminder, Amazon opened a portion of the Sonic building in Bellevue, which welcomed more than 1,000 employees and intends to double its Bellevue workforce from 10,000 to 20,000 employees over the next several years. TikTok continues to expand its office presence in the Bellevue market as well. At our 38 comparable hotels, hotel EBITDA margins were down 2.30 basis points in the quarter. We are as always focused on managing our operating expenses, quite difficult over the last 5 or so years having absorbed significant inflation across all expense categories including labor and benefits.

Speaker 3

Key expenses adversely impacting our margins in the quarter, payroll related expenses and I want to emphasize not necessarily wages, 130 basis points. Complimentary breakfast was up 21% and hit margins by approximately 30 basis points. And then insurance was up almost 20% and again hitting margins by about 20 bps. The 130 basis point impact from payroll related expenses includes some one time items that adversely impacted our margins. And if you actually look at just pure labor costs, our average hourly wages are only up 1% from December.

Speaker 3

And on a CPOR basis wages were up only 0.1% versus the 2023 second quarter, essentially flat as our productivity has improved. Even more encouraging, our rooms' labor costs on a CPR basis were actually down 1% year over year. Our headcount is up about 1% from the last quarter, but still remains 19% below pre pandemic levels. On the positive side and this is something completely in our control, we continue to push our other operating revenue and profits across all of our hotels with special emphasis on parking and our retail market revenue. During the Q2, our other operating department profits accelerated 16% or 0 $400,000 again basically adding a $0.01 of FFO per share to our results.

Speaker 3

We're on track to add approximately $0.04 of FFO this year in our other operating department. Our top 5 producers of GOP in the quarter were led by our GasLink Residence Inn with $2,800,000 the 10th straight quarter it's led our portfolio followed by our Embassy Suites Springfield with government related business gaining traction. And for the first time since 2019, 3 of our 5 tech hotels round out the top 5 with Bellevue and then our 2 Sunnyvale Residence Zins coming in our rankings. At our 5 tech driven hotels, hotel EBITDA and GOP are up approximately 12% over last year. And as we've previously disclosed, if we get back to 2019 EBITDA levels, we would add approximately $0.30 of FFO.

Speaker 3

With respect to capital expenditures, we spent $8,000,000 in the quarter, dollars 19,000,000 year to date and still expect to spend approximately $37,000,000 in 2024. No renovations during the Q2 and we've talked about our renovations that will be occurring in the Q3. Last year, we did have a renovation at our Courtyard Charleston Somerville during the Q3. So, there will be a little bit of adverse impact on RevPAR in the quarter. And I think with that, I'll turn it over to Jeremy.

Speaker 4

Thanks, Dennis. Good morning, everyone. Our Q2 twenty 24 hotel EBITDA was $33,700,000 adjusted EBITDA was $31,400,000 and adjusted FFO was $0.39 per share. We were able to generate a GOP margin of 46% and hotel EBITDA margin of 39% in Q2. While our Q2 hotel EBITDA margin was down 2 30 basis points from our Q2 2023 margin, much of this was due to a $1,200,000 workers' comp refund recognized in Q2 2023.

Speaker 4

Importantly, we are seeing a stabilization of some of our key expense line items such as rooms, labor and utilities. Our balance sheet remains in excellent condition. And in Q2, we took significant steps to address our near term debt maturity. In Q2, Chatham completed a $50,000,000 increase in its unsecured term loan and enclosed 3 single asset CMBS financings that generated $60,000,000 of proceeds. We used the proceeds from these financings together with excess cash and $120,000,000 of under our revolving credit facility to repay $261,000,000 of maturing CMBS and acquire the Home2 Phoenix for $43,300,000 in Q2.

Speaker 4

In July, we borrowed an additional $15,000,000 under our credit facility and used the proceeds to repay an 18 point $8,000,000 mortgage loan, which was our last piece of debt maturing in July. As of today, we have only $30,000,000 of debt maturing over the next 12 months and have $125,000,000 of availability under our revolving credit facility. As Jeff mentioned, we are exploring 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 June 30, Chatham's net debt to LTM EBITDA was 4.3 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.

Speaker 4

In Q3 2024, we expect RevPAR growth of 0% to 2.5%, adjusted EBITDA of $28,200,000 to $30,600,000 adjusted FFO per share of $0.31 to 0 point 3 $6 Our Q3 cash interest expense guidance of $8,000,000 reflects the financings completed in Q2 and the incremental debt associated with the acquisition of the Home2 Phoenix. Our results over the last few quarters have included a material amount of interest income given the large cash balances that we held during these periods. Now that we have used our excess cash to address debt maturities, we expect interest income to be essentially 0 for the balance

Speaker 2

of the year. This

Speaker 5

concludes

Speaker 4

my portion of the call. Operator, please open the line for questions.

Operator

Thank you. At this time, we'll be conducting a question and answer Our first question today comes from Ari Klein of BMO Capital Markets. Please proceed with your question.

Speaker 6

Thanks and good morning. Can you elaborate maybe a little bit on the trends you've been seeing in recent weeks? It seems like the comparisons are relatively easy in the tech market, in particular in the Q3. What are you seeing from a leisure standpoint, I guess? And how much is that weighing on the Q3 outlook?

Speaker 3

Hey, Ari. I mean, listen, I think we disclosed what our leisure hotel performance was in the 2nd quarter, which was down 2%. We don't expect that to move a whole lot from there if it goes from down 2% to down 3% or something, but that's essentially 20% of our portfolio. I think you see a little bit there. Obviously, the week after the July 4 holiday, I think, caught a lot of people by surprise with the industry off 5% in RevPAR for a Thursday holiday and it was really the week after that really hit the industry.

Speaker 3

So that alone brings down July RevPAR. For us, we were off 8 percent by about a point or so. So I think not a ton of difference, I think, between what we had pre what we had expected for the Q3 versus our 0% to 2.5% range. But I think it's just a combination of a couple of those things really. I think we do expect as we kind of get out of the summer and into some of the heavier business travel reliant months that we should and I think expect to be able to hopefully outperform a little bit.

Speaker 6

Thanks for that. And I guess from a RevPAR cadence for the second half of the year, would you expect 4th quarter to be softer than the Q3? And I know you're not yet providing guidance, but just from a directional standpoint.

Speaker 3

I mean, listen, generally October is a pretty strong BT month, especially when you're looking at our tech hotels as you get towards the end of the year. I think for now, I'd say we our viewpoint is the range is going to be similar to our Q3. We have yes, I think it will be similar.

Speaker 6

All right. Thanks for that. And then maybe on the Home2 Phoenix acquisition, are you seeing other similar types of opportunity to merge that you're looking to transact on? Then from a disposition standpoint, you highlighted $40,000,000 to $80,000,000 in potential sales. Curious what types of assets or markets you're looking to sell in and just the level of interest you're seeing on those?

Speaker 6

Thank you.

Speaker 2

Thanks, Harry. It's Jeff. I'll take that question. On the acquisition side, I've kind of, I think on the last call, called Phoenix a needle in a haystack. Not a lot of deals like that being brand new, being in a market that we really wanted some exposure to and being the right brand for us, which is home to our kind of our second favorite brand to Residence Inn for the most part, and all extended stay as we continue to increase that percentage of our room count.

Speaker 2

So we're pretty excited about the deal. Look, I think and we still expect that there'll be a little more deal flow as the year progresses, but and we are talking to a few of our friends that actually do have some maturities for the remainder of this year. And I think most either special servicers or lenders are extremely patient with their borrower. But in an effort to recycle capital, if nothing else, not necessarily facing foreclosure per se, There could be a few opportunities out there as the year goes on. But we'll be real careful about what we do.

Speaker 2

We understand our share price, our multiple and what we need to be accretive or non accretive. So I wouldn't expect to see too much on that front. And then on the disposition side, it's just again characterized by some lower RevPAR hotels for us that we don't see a lot of upside in the market and a common denominator would be that they're facing a renovation, a normal cycle renovation in either 2025 or 2026. And we see that money as probably kind of a no ROI investment. So looking to see if we can recycle that capital into something that's newer and more attractive with a lot more upside.

Speaker 6

Thanks. Appreciate all the color.

Operator

Our next question comes from Tyler Batory of Oppenheimer and Company. Please proceed with your question.

Speaker 5

Good morning. This is Jonathan on for Tyler. Thanks for taking our questions. First one for me, maybe just expand on that demand commentary, which so far sounds healthy. Is that a fair characterization of how you're seeing things?

Speaker 5

And is there anything out there that maybe gives you pause from a demand perspective or concerns you?

Speaker 2

I mean, I don't think that and you read the journal today, for example, all of a sudden the R word, the nasty old R word popped up for the first time in a while, whether it's a soft landing or otherwise. I don't think there's anything at this point for us to be nervous about in terms of a real economic slowdown and or demand slowdown because we read you in the prepared remarks the occupancy levels, I mean, pretty strong in the 80s. I think everybody's challenge has been the ability to get an ADR increase commensurate perhaps with where they thought they might go and the leisure pullback depending upon what company you are and what level of exposure you have. We got 6 hotels really only that expose us to that. So we feel pretty insulated.

Speaker 2

And that's not a matter of consumers necessarily buttoning up their pocketbooks and saying I'm not doing anything or going anywhere. It's just a pullback from obviously the COVID revenge travel and otherwise as they used to call it. So I think you're into a normalization phase more than anything else here.

Speaker 5

Okay, very helpful. Thank you for that commentary, Jeff. Maybe switching gears, the margin came in stronger than we were expecting and above the guidance range by about 150 basis points, if I'm doing my math correctly. Can you talk about the delta there between the quarter and your original expectations and what drove that outperformance?

Speaker 3

Yes. I mean, I think there's a couple of things. One, I think, ultimately our property taxes were a little bit better than we thought for the quarter. But as we one of the main things was especially on the rooms labor side are essentially on a CPR basis basically flat year over year. And I think that's really the main difference.

Speaker 3

A little bit on the property tax side, but primarily some excellent productivity on rooms labor.

Speaker 5

Okay. Very helpful color there. And then last one from me if I could. Jeff, on the hotel sales, any early feedback in terms of the transaction market right now? And maybe how it compares to your original expectations when you went out with those assets?

Speaker 5

What you're hearing in terms of bid ask spreads or any other high level comp here, I think would be helpful? Thank you.

Speaker 2

Yes. I think we're going to get on a couple of hotels pretty close to where we had targeted the range towards the high end higher end of the range, let's say. So I'm pretty pleased about that. I mean, there are these one off buyers out there that are smaller regional players that will stretch a little bit to get an asset and to grow, notwithstanding the overall environment that and or the way public companies may look at the environment and so far as evaluating whether they should buy a deal or not. So I think there are some opportunities for us to recycle continue to recycle some capital the way we've been doing just periodically over the last few years for this year.

Speaker 5

Okay. Very helpful. I appreciate all the color. That's all for me.

Speaker 2

Thanks for the questions.

Operator

There are no additional questions at this time. I'd like to turn the call back over to management for closing remarks.

Speaker 2

Well, I appreciate everybody being on the call this morning and we certainly look forward to continue to put up some good numbers here and getting some of these dispositions done, which only further solidifies our already strong balance sheet and puts us in a great position to take advantage perhaps of some opportunities on the acquisition side down the road. Thank you.

Remove Ads
Powered by Quartr
Earnings Conference Call
Chatham Lodging Trust Q2 2024
00:00 / 00:00
Remove Ads