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. [Operator Instructions] As 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.

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 statement 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, 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?

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 that 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, driven by meaningful growth in some of our larger markets, more reliant on the business traveler, RevPar growth was over 25% in the quarter, the fourth best amongst 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. Relative to 2019, RevPAR approved each of the first four months of 2023 with RevPAR down 12%, 5%, 4%, and less than 2%, an encouraging trend and 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. We can look at Destin, Florida up 13%, Portsmouth, New Hampshire, up 40%, Portland, Maine, up 16%, Anaheim up 14%, Fort Lauderdale up 9%, and Savannah up 28%. Occupancy finished the quarter at 69% up almost 14% and about…

Thanks Jeff. Our portfolio performs 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 is a pretty 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 up slightly 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%, meaningfully higher than our fourth quarter 2022 RevPAR growth of 45%. That market remains well off of 2019 levels still down 36%. Occupancy of 64% in the quarter for those four hotels was up 20% over last year and still below 2019 levels by approximately 16 percentage points. Silicon Valley EBITDA was $3 million in the first quarter, which is up 150% over last year, still below first quarter 2019 EBITDA levels though. First quarter international air travel into both San Fran and San Jose airports are at their best level since the pandemic, though still off approximately 16% versus 2019. Again, this is an encouraging trend. In other key tech markets, Seattle RevPAR grew 17% in the quarter. 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% versus 2019 and for the first time since the pandemic March international deployments exceeded 2019 levels. Beating this lower recovery in our Silicon Valley and Seattle markets, Austin continues to do really well and our Residence Inn, Austin RevPAR was up 13% versus 2019 with gains in both…

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 was $7.6 million. While we have seen cost increase due to a reinstatement of certain brand standards and the impacts of inflation on a number of key line items, we were able to generate a solid GOP margin of 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 last several years, Chatham has taken a number of steps to strengthen its balance sheet, and as a result, we now have the lowest leverage and most liquidity we’ve ever had. As of March 31, Chatham’s net debt-to-LTM EBITDA was 4.3x, which is significantly below our pre-pandemic leverage, which is generally in the 5.5x to 6x area despite the fact that EBITDA is not fully recovered to pre-pandemic levels. In Q1, we use $75 million of the delayed draw term loan availability to repay two maturing mortgage loans and the construction loan in our Home2, Warner Center. We intend to use the remaining availability under our delayed draw term loan to repay a $16 million mortgage that matures in May 2023 and use available cash to repay a $20 million mortgage that matures in July of 2023. Over the course of 2023, we’ll continue to closely monitor debt markets to consider opportunities to refinance a $40 million mortgage that matures 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 increases our flexibility to address our 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 when needed. As a reminder, our reported 2022 RevPAR figures did not include results for the Home2, Warner Center since 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.

Thank you. [Operator Instructions] Our first question comes from the line of Ari Klein with BMO Capital Markets. Please proceed with your question.

Thanks and good afternoon. Maybe can you 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 market that has a lot of challenges. To what extent, if any, have they maybe gotten it 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?

Yes. I mean, I’ll start and Jeff can chime in Ari. This is Dennis. I think if you look kind of sequentially from the fourth quarter to the first quarter, I think really the only difference is between kind of October and now as we sit here today, you’ve had 100 plus $1,000 of announced job cuts. So, in the short-term, I would say not all surprising given just the quarter-to-quarter sequential movement. I think the important thing, which I think Jeff talked about is that, we are really – and I think we even talked about this in February, which kind of by the time the second week of February came along, we actually just started to see some trickling of international travel, which is only continued to improve. And 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 Sili 1. And basically 79%, 80%, at Sili 2. So, occupancy wise, the market is continuing. And as Jeff talked about, demand from not only international, but just broadening corporate demand in the market has gotten better. I mean, to sit here in basically April with 75%, 80% occupancy at those four hotels is encouraging. And rates as well, if you look at each of those four hotels rates on average are up, essentially $10 to $15 from just seven or eight weeks ago. So, it’s a good trend. Our operators there are positive about what they’re seeing from a demand perspective. And that at least believe, I think as we’ve worked through the last three months, we’re encouraged by that trend. And we do feel, even though, we took a bunch of intern business last year, which was almost double what we had done historically on a pre-pandemic basis. I think we’ll be able to offset a good chunk of, if not most of that that lost EBITDA.

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 Silicon Valley challenge market. What I guess kind of 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 you’re approaching it?

Yes. Look, I mean, we have overall very, very low leverage and a lot of unencumbered properties that serve as borrowing based the credit facility, much more than we need there. So I think we’re probably unlikely to put in longer-term fixed rate debt on a bunch of the Silicon Valley properties given the performance levels. So we’re likely just to put debt on other assets. So, rates have been coming down a little bit. Spreads kind of depend on the week. I think in today’s market, new debt probably has a six handle on it. So there’s going to be some increase in cost at some point unless rates come down, which they certainly could depending on, on what’s going on in the world. But I think overall, we’re probably less likely to put debt on the Silicon Valley asset, so that won’t really have an impact on our refinancing plans.

Ari, this is Dennis. Just one thing I want to just continue to add just on Silicon Valley, because obviously that’s a big component. The fact is between all of the layoffs of the tech company since kind of late in 2022, their employment numbers are still well above where they were four years ago. And I think certainly as you look forward, and again in a market that we’re running 75%, 80% occupancy and having come through tech layoffs probably as many as there have been since the financial crisis, I think it is not necessarily – I mean, listen, we certainly would love RevPAR to be higher, but it’s not the end of the world either. The hotels are doing well, rate will continue to rise and demand is going to continue to come back. We’ve owned these hotels, whether it be with Chatham or with Innkeepers since the late 90s. And every cycle is better than the prior one. So, I think that growth is coming. It’s just a question of the timing of how it comes back.

Thanks. Appreciate the color.

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

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 said in the 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?

Most of our Silicon Valley business is Asia, engineers staying in the hotels. I was there two weeks ago, we’re still doing the appropriate breakfast for that clientele in our Residence Inn. And so that business at least for us seems pretty darn strong.

Okay. And then on the acquisition front, as we think about gateway full service hotels in New York and other big markets like that having problems, big ticket hotels with refinancings probably later this year, how would you characterize your segment of the market, Jeff, as it relates to opportunities? I know that you say, one or two hotels can move the needle. But do you get the sense that we’ll see kind of a barrage of $20 million, $30 million, $40 million extended stay hotels to the market, or are they just easier to refinance and that’s not going to happen?

It’s hard to tell. I mean, every time we speculate, and you’ve been around for a long time too. Every time we speculate about oncoming distress, it seems like going back to obviously the GFC and to the beginning of the pandemic and all the other cycles we’ve been through, it never quite happens the way we expect it to happen. But I think there should be just call it select service hotels across the board. There’s a lot of debt, there’s a lot of debt maturing. I think extended stay hotels are way closer, if not on top of 2019 EBITDA numbers. So, probably as a group, frankly, you might see less issues within what we really like to acquire. But that doesn’t mean there won’t be anything to acquire because there’s just so much of it and it’s really owner dependent upon the status of what their balance sheets may or may not look like. Of course, they’re all non-recourse loans anyway, but what does their FF&E reserve account look like? What kind of capital calls have they had during the pandemic? What’s their appetite to put money back in, et cetera. So, we're kind of cautiously very optimistic about opportunities down the road.

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

It wasn't intended that way.

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

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

Hey, Jonathan, this is Dennis. No, I mean, I think, outside of that, especially if you look at our major markets, as I talked about with Washington, D.C. is coming back to life finally. You know, Dallas, Texas is just really on fire. Los Angeles, especially with Marina del Rey is doing really well. San Diego has just been killing it. It was more leisure driven in the early years of the pandemic, it's now back to a pretty strong convention calendar, business traveler. So, outside of, I would say Silicon Valley and Seattle, everything else is pretty good. Even Austin, which is another tech related market, our two hotels at the domain, good growth not only year-over-year, but versus 2019 and it's been able to still run high 80s%, 90% occupancies as well. So, very encouraging, pretty much everywhere else.

That's great. I appreciate that color. And then switching gears on the capital structure, Jeremy, you highlighted the strong leverage profile in the prepared marks. Any updated color you can provide on how you're thinking about the leverage profile moving forward?

I think we have capacity to add a little leverage over time. Even at kind of current EBITDA levels. So I think we'd be comfortable taking leverage to four and three quarters, five times, something like that. And then as EBITDA recovers, especially Silicon Valley, that should give us more buying capacity as well.

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

Thanks.

Thank you. [Operator Instructions] Our next question comes from line of Anthony Powell with Barclays. Please proceed with your question.

Hi, good afternoon. Thanks. A question on the extended-stay brands, a lot of the major brands seem to have a lot of energy around these new mid-scale brands in the extended-stay segment, that's something that you would look into long-term, or are you still more focused on more of the upscale extended-stay market?

Hi, Anthony, it's Jeff. It certainly is going to be interesting to see how all this shakes out. I believe that Marriott will announce theirs at the upcoming NYU conference. So there'll be a full roundup of everybody in the business. And look, we're not going to foreclose any opportunities because we like extended-stay. Obviously, we're very happy with our Home2 performance and that is more of a mid – upper mid-scale brand than Residence Inn or Homewood Suites. We do a bunch of those and we look at other opportunities in some of the other brands. So I think it's certainly a proven business model, if anything, perhaps might get overplayed a little bit, but there's also not as many developers able to truly finance the construction of those deals as the brands would lead you to believe. So we'll see how much really gets built. It'll be interesting.

So you're not worried that these brands would be too low ADR or, I mean, it sounds like the business model is still even attractive, even at lower price points?

It just depends on what the service model is really be, first of all, we're not going to get involved in a $40 or $50 RevPAR deal, but if the RevPAR is pretty close like a Home2’s RevPAR is to Residence Inn or Homewood, yet your margins are – you could prove them out to be weigh in excess or in excess of 50% at the GOP line. Those numbers can work really well depending on construction cost.

Got it. Okay. And one more on the Silicon Valley and I guess to the interim business. Can you remind us, when did that start last year? Was that in June? So is that a Q2 impact or is that more 3Q in terms of the year-over-year comparison?

It's a bit of each. Anthony, I mean, really, the interns last year and really every year, some trickle in the last week of May, the bulk of them are in June, basically June, July and August. So it's essentially a third of it in June, two-thirds of it, July and August.

So I guess, we'll start seeing that impact on the comp this quarter. I mean I know you get back some of it, but I guess…

Yes.

In June, you could be. Okay. All right. Okay. All right. Thank you.

Thanks.

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

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 just kind of pick up the ball a little bit and conclude with good news in Silicon Valley, because I was there as I mentioned a couple of weeks ago, and spent extensive amount of time in every hotel, meeting with the teams, particularly our sales team. And I will tell you, there's a lot of excitement around, for example, AI and business that's being talked about that will be generated by the big companies that we already do business with, that everybody knows the name of, for incoming this year and certainly moving into 2024, it's funny, I read the Silicon Valley Business Journal and about two or three weeks ago I read that they had the lowest amount of startups funded in three or four years in Silicon Valley. And that week that number was eight or nine. So in a normal week, more like 30 to 40, there's still business in Silicon Valley. And there will be plenty of business I think as we move through the year and in the future years and that's why we like our exposure there. In good times and in bad times, as Dennis indicated, we've certainly lived through many cycles there, but there continues to be exciting developments in a lot of different arenas. There's a further funding of a company that does those vertical helicopters that our folks are talking to with another round of financing coming in on those for approval and flight in 2024. So all is not lost and will be more than fine. And with that, we will talk to you next time. Thanks.

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