Yahoo Finance Chatham Lodging Trust (NYSE:CLDT) Q1 2024 Earnings Call Transcript
Chatham Lodging Trust (NYSE:CLDT) Q1 2024 Earnings Call Transcript May 6, 2024
Chatham Lodging Trust isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings. Welcome to Chatham Lodging Trust First Quarter 2024 Financial Results. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. And at this time, I'll turn the conference over to Chris Daly, President of DG Public Relations. Chris, you may now begin.
Chris Daly: Thank you, Rob. Good morning, everyone, and welcome to the Chatham Lodging Trust First Quarter 2024 Result Conference Call. Please note that many of our comments today are considered forward-looking statements as defined by Federal Securities Laws. These statements are subjects 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 6, 2024 unless otherwise noted, and the company undertakes no obligation to update any forward-looking statement to conform the statement to actual results or changes in the company's expectations. You can find copies of our SEC filings and earnings release, which contain reconciliations to non-GAAP financial messages referenced on this call on our website at www.chathamlodgingtrust.com.
Now to provide you with some insight into Chatham's 2024 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?
Jeffrey Fisher: Thanks, Chris, and I certainly appreciate everyone joining us this Monday morning for our call. As you know, we beat first quarter consensus estimates as we combined RevPAR growth of 2% together with an almost 20% increase in our other operating profit line and property tax refunds on a couple of our California hotels. We generated free cashflow of $8.3 million in the quarter up 10% over the 2023 first quarter. From an asset management perspective, we're laser focused on driving free cash flow any way we can, whether that's by increasing revenue or market share, increasing flow through, or enhancing ancillary operating profits. And in the first quarter, we drove other departmental profits up almost 20% as we increased parking rates in certain markets and enhanced our retail market operation product offerings and pricing.
The year-over-year increase added a penny of FFO to our first quarter performance. The RevPAR increase of 2% was split evenly between occupancy and ADR, and was substantially greater than industry performance above Hilton's North American performance and right in line with Marriott's performance. Generating RevPAR growth and outperformance despite the bad weather in February and the shift of the Easter from April last year into March this year is noteworthy. Our RevPAR was boosted by RevPAR growth of 17% at our five tech hotels in Silicon Valley and Bellevue, and we saw occupancy gain 1,200 basis points at these hotels to 67%, by far the highest level since 2019. Excluding the five tech-driven hotels, first quarter RevPAR was down 1%, but still up over 2019 levels by 3%.
Even better news is the strength we're seeing in April with RevPAR up 5% over 2023 and up 4% over 2019 levels with tech hotel RevPAR up 12% in April, and RevPAR for all hotels, excluding those same five tech hotels in April, was up 3.6%. Tech hotel occupancy finished at 73%, only 400 basis points off the 2019 levels. More encouraging news on the surging demand out there. April RevPAR growth most peers that have reported and supports our thesis that we should continue to outperform the industry and most of our peers in 2024 due to surging demand in our primarily tech driven hotels. Within Silicon Valley, we're confident that the corporate demand growth we saw in the first quarter in April will continue. Additionally, tech companies are moving forward with their intern programs.
This year, many of the companies are providing a stipend to each intern to cover room and meals and the intern can choose where to stay. We're already seeing some intern bookings, not at the level as prior years, but as we talked about in February, so long as the intern programs are active, that is going to generate compression in the market, which is something we did not have last year, and obviously compression boosts occupancy and overall RevPAR results. Mountain View is our strongest market in the quarter, up 19%, as we saw meaningful gains in business travel specifically from our top accounts here, such as Google, Broadcom, and SureFox. Market demand growth has been upper single digits and long term the market sits up well for us as new supply is zero.
RevPAR at our two Sunnyvale hotels gained 12% in the quarter and this market too is showing good underlying fundamentals. Demand is up 13% and future supply is up 1%. We're seeing corporate demand from our top accounts, Apple, Google, intuitive surgical and applied materials and specifically from the start of construction at the big epic center with the garage getting going and that, as we've talked about many times, should be very beneficial for these two hotels over the next few years. San Mateo RevPAR Growth was 6% in the quarter versus 2019. And it's recovered more than the three other Silicon Valley hotels. One aspect to that story is that recently the 476 room Marriott San Mateo permanently closed its doors which will increase Marriott system demand in the market and we should see some increased production here as well.
During the quarter, we sold the Hilton Garden in Denver Tech for $18 million, and including deferred renovation costs, the hotel was sold for an approximate four cap on 2023 NOI. We intend to continue to opportunistically sell some hotels this year with the goal of redeploying those proceeds into higher RevPAR and higher growth hotels and markets. Typical sales targets are going to be hotels with absolute RevPAR and lower absolute RevPAR and margins, and probably hotels that are older that need some upcoming CapEx or regular cycle renovations. We're targeting sales proceeds of $40 million to $100 million, continuing to sell these types of hotels while buying, as I said, higher growth, higher RevPAR and higher margin hotels will enhance shareholder value and cash flow.
With respect to hotel investments, we are seeing more deal volume and we hope to have an acquisition announced this quarter. Acquisition targets are coming from developers looking to recycle their own capital, as well as owners who are facing some meaningful risk related to refinancing and the effects there from. As we all know, the levels of CMBS debt maturing in 2024 and 2025 is pretty staggering for the industry and should provide additional opportunities for well-capitalized owners like us with the capacity to buy. I want to switch gears to address our capital structure as it's been a critically important focus for us over the last few quarters especially. At quarter end, we were at the lowest leverage levels in over a decade with leverage ratio under 25% and a net debt to EBITDA ratio are very healthy 4 times.
Subsequent to the end of the quarter, we further enhanced our financial strength, raising $50 million via increased borrowings under our term loan. We currently have 25 hotels that are unencumbered. Over the past few years, through a combination of asset sales, free cash flow, and the issuance of common and preferred equity, we've repositioned our balance sheet to handle the meaningful tranche of maturing debt this year, debt that dates back to 2014 during one of Chatham's highest growth phases since our IPO. We are well capitalized to repay all maturing debt this year. In April, we repaid the $29 million maturing mortgage on the residents in Anaheim, and we have $255 million maturing in July. Let me tell you, it's great to put this overhang behind us because we've heard about this for some time from analysts and investors and I'm proud of the work our team's been doing on this front and I'm sure our investors will share my sentiment.
Including our $260 million credit facility and our upsized $140 million term loan, we have a $400 million of floating rate debt exposure that will allow us to benefit from what should be a declining interest rate environment in the future. So in conclusion, we remain confident that Chatham is well positioned to outperform most peers as we have the most internal growth upside, we think of most other lodging REITs, especially within our tech hotels. The remainder of our portfolio is performing well. New supply is less than 1% across our sub-markets, and our balance sheet is in great shape to be opportunistic on the transaction front. With that, I'd like to turn it over to Dennis.
Dennis Craven: Thanks, Jeff. Within our tech markets, in addition to Silicon Valley, our residents in Bellevue has been thriving this year with RevPAR growth of 40% in the quarter, and that's almost entirely due to occupancy growth of 37%. Demand growth was almost 20% in the Bellevue market as we are seeing acceleration in all business travel segments. Our standard retail segment, which is BT, room demand was up over 1,800 room nights or approximately 42%. And importantly, special corporate, meaning our key corporate accounts was up over 1,800 room nights or 55%. Amazon, Microsoft, Accenture, and ByteDance or TikTok, all of which are historically top accounts for us, generated over 1,500 room nights in the quarter. And demand for Meta and Toyota is surging as we look forward 60 days.
In November, Amazon opened a portion of the Sonic building in Bellevue, welcoming more than 1,000 employees and intends to double its Bellevue workforce from 10,000 to 20,000 employees over the next couple of years. ByteDance has also expanded its office presence in Bellevue with two new office leases and with supply projected below 1% in the Bellevue market, this corporate expansion is very good news for the hotel and for us and it's going to help us continue to outperform. Some additional RevPAR tidbits from the quarter. Our first quarter RevPAR was not impacted by any renovation impact as we had three hotels with renovation disruption in each of the first quarters of 2023 and 2024. First quarter weekday occupancy was the highest since 2019.
And for the first time since the pandemic, first quarter weekday occupancy outpaced weekend occupancy. Deployments, we continue to monitor San Francisco's airport saw international passenger traffic surpass 2019 levels in February and March for the first time since 2020. Total domestic traffic into SFO is up approximately 3%. At SeaTac, international deployments are up approximately 15% through February, and domestic is up about 1%. We're seeing most of that inbound travel generally coming from the Asia region. Outside of our tech driven markets are seven primarily leisure-oriented hotels that comprise approximately 19% of our first quarter room revenue saw RevPAR increased 1% year-over-year. Top gainers were Anaheim and Portland, and on the downside, our worst performers were Destin and Savannah.
Weekday and weekend occupancy were approximately 70% for each of those periods with weekday ADR of $173, outpacing weekend RevPAR of $163. And that $10 gap compares to a $4 gap in the first quarter last year. Our top five RevPAR hotels were led by the Residence Inn Fort Lauderdale with RevPAR of $273, which was flat to last year. Our Residence Inn San Diego, Gaslamp at $195, followed by our Hilton Garden and Marina Del Rey at $167, despite being under renovation. And then followed by our Residence Inn Mountain View at $158, and our Residence Inn Washington, D.C., and White Plains, New York, both with RevPAR of $154. At our 38 comparable hotels, GOP margins were down 120 basis points with the majority of that attributable to labor and benefits, which adversely impacted margins by 110 basis points.
On a CPOR basis, these costs are up approximately 6% year-over-year. Labor costs, which are by far our largest expenses, have stabilized over the past nine months or three quarters. Our first quarter average hourly wage is essentially unchanged from our 2023 third and fourth quarter hourly wages. Our employee headcount remains about 20% below pre-pandemic levels, and we are not experiencing really any labor supply shortfalls around our markets. Thankfully, as we've talked about for a few quarters now, our margin comps will become easier after the second quarter as we are still ramping up housekeeping and other brand required expenses in the first half of 2023. Our top five producers of GOP in the quarter were led by our Gaslamp Residence Inn with $2.5 million.
The ninth straight quarter it's led our portfolio, followed by our tech heavy Sunnyvale II Residence Inn with a $1.5 million of GOP. And third was our Residences Inn Fort Lauderdale, and rounding out the top five were our Courtyard Dallas downtown in our Embassy Suite Springfield which managed to reach our top five despite being under renovation for most of the quarter. Importantly looking into hotel GOP at our five tech driven hotels, hotel GOP of $5.3 million was up a strong 22% over the 2023 first quarter. GOP margins for the five hotels were up 110 basis points, and GOP at Residences Inn Bellevue was up approximately 80%. Tech hotel EBITDA was up almost $1 million or over 25%. So again, encouraging trends coming out of these markets. As we previously disclosed, if we get back to 2019 EBITDA levels we would add approximately $16 million of EBITDA or over $0.30 of FFO.
With respect to capital expenditures, we spent approximately $10 million in the quarter and still expect to spend about $37 million in 2024. During the quarter we completed renovations at our Hilton Garden in Marina Del Rey, our Homewood Suites in San Antonio, our Hyatt Place Cherry Creek, and lastly, our Embassy Suites in Springfield, Virginia. We have no renovations planned for the second quarter. With that, I'll turn it over to Jeremy.
Jeremy Wegner: Thanks, Dennis. Good morning, everyone. Our Q1, 2023 hotel EBITDA was $21 million. Adjusted EBITDA was $18.9 million. And adjusted FFO per share was $0.16. We were able to generate a GOP margin of 38.6% and hotel EBITDA margin of 30.8% in Q1. While our Q1 GOP margin was down 120 basis points from our Q1 2023 margin. We are seeing a stabilization of most of the large cost increases that we saw in the second half of last year. Our Q1 hotel EBITDA margin increased 10 basis points versus Q1 2023 due to approximately $800,000 of property tax refunds received Q1 of this year. Our balance sheet remains in excellent condition and we have made significant progress on our plan to address debt maturities. In January 2024, we completed the sale of the HGI Denver Tech for approximately $18 million, which included an expected renovation cost of approximately $6 million, represents an EBITDA multiple of 20.5 times and a cap rate of 3.8%.
Our cash balance at the end of Q1 was $72.3 million, which together with $50 million of incremental proceeds raised through an add-on to our unsecured term loan that we closed last week, provide a pro forma quarter end cash balance of $122.3 million. With a pro forma cash balance of $122.3 million and $260 million of undrawn availability under our revolving line of credit, our pro forma total liquidity of $382 million exceeds the $281 million of remaining debt outstanding at March 31st that matures in Q2 and Q3 by over $100 million. We are currently in the process of executing $60 million of CMBS financing, which will further reduce the revolving credit facility utilization required to address our remaining debt maturities. We expect these CMBS financings to close in the next month and have rates in the 7% to 7.25% area.
As of March 31st, Chatham's net debt to LTM EBITDA was 4 times, which is significantly below our pre-pandemic leverage, which is generally in the 5.5 times to 6 times area, despite the fact that EBITDA has not fully recovered to pre-pandemic levels. Turning to guidance for Q2, we expect RevPAR growth of 2.5% to 4%, adjusted EBITDA of $28.7 million to $30.4 million, and adjusted FFO per share of $0.33 to $0.36. Our Q2 cash interest expense guidance of $7.7 million reflects the $50 million term loan add-on we completed in early May and assumed $60 million of CMBS issuance in the second half of May. We expect Q2 interest income of approximately $700,000. Second quarter interest expense and interest income do not represent run rates for Q3 and Q4 as our cash balances are much higher in May and June due to the borrowing of money in May to fund the July debt maturities.
With respect to hotel EBITDA margins, in general we expect year-over-year margin comparisons to be much easier starting in Q3 as we begin to lap the fuller staffing levels and other costs that were not completely reflected until the second half of last year. Year-over-year EBITDA margin comparisons in Q2 2024 are impacted by approximately $1.2 million of one-time benefits depositably impacted margins in Q2 of 2023. This concludes my portion of the call. Operator, please open the line for questions.
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