Good morning, and welcome to the Chatham Lodging Trust Third Quarter 2022 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, Andrew. Good morning, everyone, and welcome to the Chatham Lodging Trust Third Quarter 2022 Results Conference Call. Please note that many of our Today are considered forward looking statements as defined by federal securities laws. These statements are subject to risks and uncertainties, both known and unknown, as described in our most recent Form 10 ks and other SEC filings. All information in this call is as of November 8, 2022, excuse me, 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 into Chatham's 2022 Q3 results, Allow me to introduce Jeff Fisher, Chairman, President and Chief Executive Officer Dennis Craven, Executive Vice President and Chief Operating Officer and Jeremy Wegner, Senior Vice President and Chief Financial Officer. Let me turn the session over to Jeff Fisher. Jeff?
Appreciate that. Thanks, Chris, and I certainly appreciate everyone joining us this morning for our call. Again, I'm real proud of our results for the quarter, Continuing the strong operating trends and certainly continuing the strong flow through to the bottom line of incremental RevPAR and ADR. RevPAR remained strong in the 3rd quarter, up 34% over the same quarter last year and importantly, up approximately 1% over the 2019 Q3, strengthened by strong ADR growth of 6% and offset by lower relative occupancy though quarterly occupancy of 80% is still an impressive achievement. Sequentially, 3rd quarter RevPAR of $150 was up a meaningful 9% over the 2nd quarter and finally the quarter finished Strong with September RevPAR up 6% over 2019, the highest monthly growth over 2019 this year.
October RevPAR looks strong also with excuse me, with RevPAR only down around 1% compared to 2019 and of course you start your seasonal downturn as you head into the fall as normally occurs. Next, our operating margins were strong again, as I said this quarter, with same store hotel margins of 50.5 for that kind of result, particularly as I indicated, with RevPAR up only 1%. Our Q3 adjusted EBITDA and FFO were up substantially. And as a result, we saw a healthy increase in free cash flow, which was almost $25,000,000 in the quarter, up almost 25% over our 2022 Q2 and up 150% over our Q3. Lastly, I'm very pleased with our financial condition, which is extremely healthy as we sit here at our lowest leverage levels in over a decade.
Since the start of the pandemic, we have reduced our net debt by approximately 40%, by far the highest reduction of any lodging REIT. We exited our credit facility covenant waiver period during the quarter and just recently we successfully refinanced Our senior unsecured credit facility had issued a new $90,000,000 term loan with both facilities now maturing in 2027. With no outstanding borrowings on either facility, we have the flexibility to acquire hotels and to our address or refinance maturing debt over the next couple of years and we have 24 unencumbered assets that could serve as additional sources of liquidity. Touching quickly on external growth, as I stated, We have the capacity and desire to acquire hotels, but as I'm sure you've heard, the transaction market is essentially dormant. Between the significant recent rise in interest rates combined with strong operating results for the industry, There really is a pretty wide bid ask spread between buyers and sellers.
We are looking at deals. We don't I'll say anything soon. However, we are certainly looking forward to 2023 Because I really do believe that that bid ask spread will narrow. I believe that there'll be So debt maturities that owners will have difficulty dealing with and refinancing in this market. And I also think some of the pressures from the brands should be significant relative to CapEx and deferred CapEx that certainly has occurred over the last few years and during the pandemic.
As we previously stated, we do have the ability also to develop another hotel on our parking lot in Portland, Maine, next to our Hampton Inn and Suites there. Certainly, as you'll hear from Dennis, continues to be an unbelievably strong market and we are working on a development plan that would work in a difficult environment and Citi to develop it. Turning back to our operations, our portfolio is still recovering due to our reliance on the higher rated business traveler in certain of our markets. Relative to 2019, September was our best month of the year and that is primarily due to the surge in business travel that has driven up performance during the week and we saw that continue into October. Since the week of Labor Day, Tuesday, Wednesday occupancy jumped to 87%, surpassing Friday, Saturday occupancy of 82% over that same period, marking the first time since before the pandemic where product weekday occupancy has consistently outperformed the weekend.
Although November to February begins our seasonally slower period, this trend of gaining weekday occupancies is a good indicator of what business travel might trend towards next year and we continue to push ADIs as much as possible. As a matter of fact, as we look ahead, particularly the next year, we do see and our operators We are seeing and budgeting for continued strong ADR growth. And we know that, as I stated earlier, The operator has always produced great flow through to the bottom line. We're seeing increased demand in many of our primary business Travel markets such as Silicon Valley, Seattle, Dallas and Austin and strong group demand also in Dallas, San Diego and San Antonio from their convention centers. Our macro view is that business travel, including groups, will Leisure markets of the past couple of years will give some RevPAR back like we saw with our Destin hotel, which saw RevPAR decline a small 3.7% compared to the 2021 Q3, but still a slight decline.
As this transition occurs over the balance of 20222023, we will derive the most benefit in changing demand trends as compared to many of our peers who really have become more dependent and Reliant on Leisure and Resort Business. Although still down 11% to 2019 levels, Silicon Valley RevPAR has had a good quarter as we benefited from 2 months of interim demand in the quarter. October RevPAR trended backwards a little bit versus 2019 with RevPAR off about 30%, better than what we experienced before the summer, but still down from September. Air travel into both SFO and San Jose remain well below 2019 levels. At FFO, domestic deployments were down about 25% in the quarter, slightly below the 23% miss in the 2nd quarter, While international deployments improved from down almost 40% to now down about 25% And similar in San Jose, deployments were up 23% in the 3rd quarter versus down 25% in the 2nd quarter.
So a slight improvement, but still a lot of room for more improvement going forward. If you look at our Residence Inn in Bellevue, Washington, It's October was up 15% to 2019 as its business travel was a bit stronger than the Valley. If you look at deployments there, domestic deployments improved from off 11% in the 2nd quarter to off about 9% in the 3rd quarter. International deployments were up 16% to 2019 in the quarter, which has improved from down 24% in the 2nd quarter. Given its reliance on the return to office international travelers in the longer term consultant and training business, As we've said, Silicon Valley and Seattle will be a little slower to recover than the rest of the markets, But we could say that our top clients are continuing to travel, were in discussions with us on 2023 travel expectations, including the return of the 2023 intern programs, which at this point Initial indicators seem to be bigger and certainly at higher rates than this year.
So we're encouraged By the trajectory of these markets and the emergence of the digital nomads that we've talked about traveling back to the valley, We think we'll generate incremental new demand over the long term. Our other tech related market all of these trends with our power up 9% versus 2019 at our Residence Inn. Our top place suites was not open In 2019, it's new. Versus last year, and this is relevant since Austin was an open market relative to COVID, RevPAR at both hotels was up almost 25 percent to $150 This market is benefited by strong So we've got the flexibility, of course, to do that since we are over 60% Extended Stay Hotel and we think those hotels certainly will be the primary beneficiary of this new added demand. Adding to great top line performance, of course, is our ability to generate very strong operating margins Our balance sheet, as I said, is in great shape.
I think we're poised to outperform, continue to outperform and start We are returning cash to our common shareholders in the near future through the reinstatement of a quarterly dividend. We'll be talking more about that in the ensuing month or so. With that, I'd like to turn it over to Dennis for a little more color. Thanks, Jeff. Compared to 2019, our monthly RevPAR was essentially flat in July August before accelerating in September.
As we talked about on our last earnings call, this quarter marked the return of in person internships and significant room demand from high-tech such as Meta, Apple, eBay and T Mobile. It bled off and those programs bled off in early September, Having wrapped up our interim programs, our revenue was approximately $13,000,000 in 2022 and that's almost double from our 2019 levels. Taking more of this business was definitely the right decision as proved to now by pretty big RevPAR index gains at our 2 Sunnyvale hotels. An added benefit is that our operating margin on this business is very high as limited room servicing is part of the arrangement. Our operating margin At those 5 tech driven hotels in September was over 60%.
As Jeff mentioned in his prepared comments, Our 5 tech driven hotels, the 4 in Silicon Valley and the 1 in Seattle are still well off of 2019 results. We do expect that they will ultimately recover and surpass those levels. They're just going to be a bit slower. As a reminder, 2019, these 5 hotels did about $35,000,000 in hotel EBITDA and are expected to do around $23,000,000 to $24,000,000 in 20 So still about 30% off of 2019 with some good internal growth to come. If you look at our portfolio for the quarter excluding Silicon Valley or excluding Silicon Valley and our Residence Inn in Bellevue, Our Q3 RevPAR was up 4% versus 2019 with ADR growth of 11% offset by a decline in occupancy of about 7%.
So again, taking out those 5 pretty significant hotels, the portfolio performed really well relative 2019. Large group and convention business continues its surge and we posted games in all of our convention related markets Dallas and San Diego posting RevPAR gains of 43% 20% respectively versus 2019 and San Antonio posting a RevPAR gain of approximately 4% versus 2019. So far the schedules are setting up for a pretty good 2023 And at least there are continued to be talks in Dallas about the expansion of its Kay Bailey Convention center in the future without closing any of the convention space, it's merely going to be expansion of that space. So that's going to do nothing but attract larger conventions and we're given our close proximity to convention center should set us up pretty well. During the Q3, 2019 of our comparable hotels generated RevPAR greater than 2019 compared to 17 of our hotels last quarter.
So again, a gradual improvement. Weekend Travel, which for us averaged just over 85% occupancy in the quarter, Continued to outperform our weekday travel, but the gap has continued to compress, due in most part again to the business traveler coming back. Weekday occupancy, which is the best indicator of the business traveler, rose to 79% in the quarter compared to 76% in the 2nd quarter. October weekday occupancy was still healthy at 77%. As Jeff talked about, Pretty interesting for us that since that week of Labor Day, our Tuesday, Wednesday occupancy of 87% beat our Friday, Saturday occupancy of 82%.
Coinciding with the rising demand, we continue to push our rates in our ADRs throughout the week. 3rd quarter weekday ADR was $184 versus $175 in the 2nd quarter and weekend ADR was $193 versus $186 last quarter. October ADR was slightly higher than our September ADR. Our 5 highest hotels with absolute RevPAR in the quarter We're at the top, our Hampton Inn Portland at $2.85 and then our Hilton Garden Inn in Portsmouth at $2.21 followed by Foggy Bottom Residence Inn at 206 and then our Residence Inn Gas Lamp and Hilton Garden in Marina del Rey with RevPAR of approximately $200 Our portfolio is significantly better than the industry with 3rd quarter RevPAR growth more than double the industry performance with Outperformance in both occupancy and ADR, occupancy reached 80% compared to industry wide occupancy of 67%. Additionally, our growth relative to 2021 versus the industry clearly shows that our portfolio is growing more rapidly than the industry as a whole with our occupancy ADR and RevPAR growth of 10%, 22% and 34%, respectively compared to industry growth of 5%, 11% and 16%.
Our top 5 absolute occupancy hotels in the quarter were Hampton Inn, Portland with occupancy of 98%, followed by our Residence Inn New Rochelle, our Hampton Inn Exeter, our Residence Inn White Plains, New York and then our Homewood suites in Bloomington making its first appearance, but all 5 hotels had occupancy exceeding 90%. And our top 5 hotels with highest ADR were led again by in Portland with an ADR of $350, dollars 50 higher than our 2nd ranked hotel in Portsmouth HGI. And then the remainder of our top 5 were our Hilton Garden Inn and Marina del Rey, our San Diego Gas Lamp Residence Inn and then our Residence Inn Mountain View, all three with ADRs over $2.35 We continue to see an average length of stay longer than our historical levels, which is consistent with Jeff's comments regarding today's traveler staying longer in our hotels. Our average length of stay at both the Residence Inn and Homewood Suites brand still remains about 20% higher than pre pandemic levels. For the quarter, total hotel revenue of 88,000,000 It was up 37% compared to last year's revenue of $64,000,000 and we were able to generate incremental GOP of almost 19,000,000 for flow through a very strong 65% on that increased top line.
Certainly, revenue growth doesn't mean nearly as much Our margin growth is based on our entire comparable portfolio and our same store 3rd quarter operating margins surpassed 50% We're up 160 basis points over the 2019 Q3. It's pretty impressive to be able to achieve that kind of margin growth on a 1% Pretty high margins given kind of where we are in our RevPAR recovery. A good bit of this increase is attributable to a more efficient operating structure, Especially with respect to labor, our employee headcount remains down about 20% compared to pre pandemic levels. Certainly, like many, we're a little bit understaffed out there and we're making up for it in terms of with the casual labor inefficiencies. But we certainly believe at least on a permanent on a long term basis, there will be a permanent headcount reduction.
But obviously, everybody knows the pressures we've seen with labor rates over the last few years. On a per occupied room basis at our comparable hotels, Our costs were approximately $33 a decline of about $2 for about 5% relative to 2019. During the quarter, all our hotels generated positive hotel EBITDA and GOP. Our top product producers of GOP in the quarter were GasLink Residence Inn, which was also the highest producing GOP Hotel in the 1st and second quarter, followed by our Silicon Valley 2 Residence Inn and then our Residence Inn Bellevue, Washington. And lastly and 5th was our Hampton Inn Portland in terms of gross GOP production.
The fact that 3 of our top 5 hotels are tech driven hotels serves as a reminder of the upside that is underpinning those hotels as the markets recover. All 5 of our tech driven hotels were in the top 9 producers of GOP in the quarter. And if you actually look at the 36 Hotels compared to 2019, our 3rd quarter hotel EBITDA was about 105% of the Q3 of 2019, a great result. Looking at the recent acquisitions and our development, all 4 hotels were in the top 20 producers of GOP and as a group generated RevPAR of 153 in the quarter, Above our portfolio average of 150 and margins at the 4 hotels were encouraging with Austin generating mark with our Austin Hotels generating operating margins of 54% and our Home2 in Woodland Hills up 44% followed by our HGI Destin at 39 On the CapEx front, the company incurred capital expenditures of $3,000,000 in the quarter. And during the Q4, we are going to commence renovations at 3 hotels, Our residence ends in Washington DC, White Plains, New York and Holtzville, New York with total spend for those 3 renovations $11,000,000 and we've already incurred about half of that in advance of commencement of the renovations.
With that, I'll turn it over to Jeremy. Thanks, and good morning, everyone. Chatham's Q3 2022 RevPAR of $150 represents a 34% increase versus our Q3 2021 RevPAR of $112 and was up 1% from our Q3 2019 RevPAR of $149 This top line performance was driven by exceptionally strong leisure demand, unprecedented levels of summer intern business at our Silicon Valley and Bellevue Hotels and the continuing recovery of business transient demand, which really picked up after Labor Day. While we expect business the seasonality of the leisure travel in our portfolio. In addition to the exceptional top line results, Chatham was also able to generate outstanding margins in Q3.
Chatham's Q3 hotel EBITDA margins of 43.6 percent are among the highest in the sector and were 2 40 basis points higher than our margins in Q3 2019. We were able to achieve this significant increase in margins despite RevPAR only being $1 higher than in While we're starting to see cost increase, we believe continued growth in RevPAR should help offset the potential impact on margins. Our Q3 2022 hotel EBITDA was $38,200,000 adjusted EBITDA was 35,100,000 Adjusted FFO was $0.50 per share and cash flow before capital, which represents hotel EBITDA less corporate G and A, Cash interest and $2,200,000 of principal amortization was positive $24,600,000 Over the last 2 years, Chatham has taken a number of steps to facility that was scheduled to mature in 2023 with a $305,000,000 credit facility that consists of a $215,000,000 revolving line of in October of 2027. The revolver and term loan are both currently completely undrawn and we intend to draw the $90,000,000 term loan in the first half of twenty 23 and use the proceeds to repay the majority of the $112,000,000 of debt we have maturing in 2023. With our reasonable leverage, solid liquidity, strong operating performance, sizable portfolio of unencumbered hotels and meaningful free cash flow, we are well positioned
We will now begin the question and answer The first question comes from Ari Klein with BMO. Please go ahead.
Thanks and good morning. Can you talk a little bit about the trends you're seeing in Silicon Valley post And what you're seeing from a demand standpoint from the larger tech companies out there, given some of their challenges and what some of them said to be clamping down on non
Yes, Ari, this is Dennis. I'll start and anybody else can chime in. But I think as we talked about October RevPAR was Off about 30% compared to 2019. So certainly down from the 2,000 from the 3rd quarter levels. We do know that our tech driven clients out there that we do most of our business with are still doing business and are still generating room demand in our hotels and in the market.
It's just not at a level compared to what it was from Memorial Day to Labor Day. So It's still out there. It's not as intense. ADRs are still doing pretty well So relative to 2019 2021, obviously still down, but there isn't like a major drop off compared to what we were getting. So I'd say it's there.
It's just not as intense. I think kind of we're in as normal, we're about to hit the slow season in both Silicon Valley and Bellevue from kind of really the 2nd week of November through kind of the middle of February. So not expecting a ton between now and then in terms of relative to what we Saw pre pandemic.
Thanks. And then maybe on the margin front, there was some good progress there. Are there any Significant incremental costs that you still expect to bring back and provide some color on what you're seeing from a labor cost standpoint?
Yes, I mean there's not a ton. We've kind of been operating at this minus 20% headcount reduction for the better part of the last 6 months. As I said in my prepared comments, I still think we're a little understaffed out there. You do have Marriott came out with kind of Updating their cleaning standards from an auction standpoint. So we'll need to bring a little bit back for that.
But we're entering the slower months of the season as well. So we're not in a rush to bring back headcount in that respect. I think for the most part, we're in a pretty good position for the next 4 or 5 months until things start to ramp back up. But I think we're going to be good at least from an employee perspective for a good bit.
Got it. And just following up, how are you thinking about employee costs kind of year over year into 2023 on a like for like basis?
Yes, I mean, our year to date run rate is about plus 7% or 8% in terms of wage per hour Across our portfolio, which is down from kind of 10% the last couple of years, obviously 2020 is kind of Thrown out that we are experiencing mid single digit increases leading into the pandemic. So it's a little bit down from our year to date Last year, I think as we move into 2023, we're still we would still expect wages
Great. Thanks for all the
color. The next question comes from Anthony Powell with Barclays. Please go ahead.
Hi, good morning. Just a question on the intern business. I know that you're having, I guess positive discussions with the clients, I guess, right now. But if that were to be shrunk or even eliminated next year, given some of the tech challenges we're reading about, What's the option to backfill that with other business next year?
Well, I mean, we saw it first of all, we don't think it's going to be canceled or anything like that. I mean, Yes, we've been doing that business for a long time. The only thing that ever stopped it was in 2020 2021 with the pandemic. So despite prior recessions and tech downturns, they still did the intern business and they still did group related business throughout the year at our hotels in terms of demand. So listen, I think if we were faced with that challenge, We obviously would have to revert to what we did in the 2020 2021, which is get as much business as we can from Kind of what we call non business travel related segments.
But we don't think there's a huge risk in that The discussions we've had with the tech companies that we do intern programs with in both Each of Austin, Silicon Valley and Bellevue are pretty confident in what's going to happen year and we've already started the discussions with them a little bit earlier than we used to in regards to rates for that business next year, which right now are pretty encouraging.
Got it. Okay. And maybe one more on, I guess, the Portland potential development. Could you maybe update us on what a project like that would take to complete in Timeframe, targeted returns. I think you talked about it's hard to build in a city, maybe give some more details there and What you think the overall opportunity is for that project?
Well, I think we think the overall opportunity is great. It's the Hampton in Portland has One of our top performing assets since we bought it a decade ago, the process there is quite time consuming. We do have and are having active discussions around that project, but I think in terms of building it And getting first of all, getting approval to build it and then building it, it's probably still a good couple of years off from being open in that market.
So 2025 is just kind of a good target you think?
Probably so, if you had a circle a year.
All right. Thank you.
Yes. The next question comes from Tyler Batory with Oppenheimer. Please go ahead.
Hey, thank you. Good morning. First question for me, I really want to dive into trends in the business and what You're seeing October, I think down versus 2019, September up 6% with 2019. So just trying to understand The delta there in terms of the performance versus 2019. And then if you could, remind us seasonality for your portfolio, How you're thinking November December should shape up compared with 2019?
Sure. Yes, I mean November is we're a weekend at the moment. So it's a little too early to tell what we're looking like in terms of RevPAR for the full month, but it's a little bit down from certainly from an absolute RevPAR perspective down from October. Usually our RevPAR kind of once you get past October, it goes down in November, down further in December and then starts building back up January, February into March. So Jeremy might have some more detail on just how much that is and I think he does give you the Yes, just a point of reference, like in 2019, October RevPAR was $146.50 in November RevPAR was $12,181, in December it was $97 So you see a pretty
Okay, great. That's helpful. And then in terms of the acquisition Commentary, I'd imagine perhaps frustrating there aren't more opportunities out there right now to transact. What needs to happen in your mind for that bid ask spread to narrow and kind of what do you think is the catalyst and the timeline for that as well?
Yes, I think as I indicated, it's got to come from pressure and real pressure on owners with deals that really, really are having to go back to their partners with capital calls. That's generally in the past always been sort of the catalyst for deals to happen. Some partners will put up the extra capital, but there's always those deals and those partnerships that don't. And Instead, they say, let's see if we can sell this hotel or let's sell this hotel. And that's when opportunities occur.
It's I don't know the timing exactly is hard to predict, but We positioned our balance sheet purposely to be in good stead and to certainly have the capacity To do it, now look, we've got to get some risk to be clear, really strong returns and pricing really needs to drop Given the environment today and given our multiple and given where stock trades, so There's a variety of different things that need to occur and line up for us to really pull the trigger because we're not going to do dilutive deals. And I think we've been around long enough to understand the math relative to what it takes to really make an acquisition
Okay. And then last question for me on capital allocation. Balance sheet is in great shape, Performance is really strong. Not a whole lot to do on the acquisition front, it sounds like. Where does the dividend Fit in here.
Kind of what are your expectations? What are you looking at in terms of potentially reinstating Yes, significant payment.
Yes, I mean, we are going to reinstate clearly. You keep talking about our cash flow Talking about our flow through, we're finishing for the Board some calculations relative to the NOLs and sort of how that affects overall distribution requirements. And I think Dennis or Jeremy can kind of chime in on this, but we're going to be in a position here in a relatively short period of time To initiate a dividend, the level of the dividend probably given our conservative nature should ramp up That's visibility ramps up into next year on earnings, right? Yes. All right.
Any other questions out there?
Just to check, there had been another question. Seeing none, I would like to turn the conference back over to Chad and management for any closing remarks.
Well, again, I just want to thank everybody for being on the call and to follow the company as we move forward here George, continuing the kind of results we've been able to post, look forward to a continued
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.