Hersha Hospitality Trust (NYSE:HT) Q4 2022 Earnings Call Transcript

Hersha Hospitality Trust (NYSE:HT) Q4 2022 Earnings Call Transcript February 16, 2023

Operator: Good morning and a warm welcome to the Hersha Hospitality Trust Fourth Quarter 2022 Earnings Conference Call and Webcast. My name is Candis, and I will be your operator for today’s call. All lines have been placed on mute during the presentation portion of the call with an opportunity for question-and-answer at the end. I would now like to hand the conference over to your host Andrew Tamaccio from Investor Relations. The floor is yours. Please go ahead.

Andrew Tamaccio: Thank you, Candis, and good morning to everyone joining us today. Welcome to the Hersha Hospitality Trust fourth quarter 2022 conference call. Today’s call will be based on the fourth quarter 2022 earnings release, which was distributed yesterday afternoon. Before proceeding, I’d like to remind everyone that today’s conference call may contain forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties and other factors that may cause the company’s actual results, performance or financial positions to be considerably different from any future results, performance or financial positions. These factors are detailed within the company’s press release as well as within the company’s filings with the SEC. With that, it is now my pleasure to turn the call over to Mr. Neil H. Shah, Hersha Hospitality Trust’s President and Chief Executive Officer. Neil, you may begin.

Neil H. Shah: Good morning and thank you for being with us on today’s call. Joining me this morning are Ashish Parikh, our Chief Financial Officer; and our Executive Chairman, Jay Shah. I’ll begin with our results in the quarter and a quick recap of our strategic accomplishments in 2022 before touching on our capital allocation outlook for the year and discussing our view of the portfolio going forward. Ash will take a deeper look at our first quarter guidance, talk through the balance sheet and discuss our margin outlook. When we last spoke in late October, despite economic uncertainty and market volatility, our positive outlook was driven by performance on the ground, signaling a pickup in travel within the core urban markets, as well as a continuation of demand for differentiated high-end leisure offerings and these trends continued throughout the fourth quarter.

Our comparable hotel portfolio generated 71.2% occupancy and an ADR of $311.86, resulting in RevPAR of $222.10 for the fourth quarter of 2022. The high quality of our portfolio, coupled with the ongoing demand environment, allowed our revenue managers to continue to drive rate in the quarter as ADR outpaced our 2019 rate by 21.5% and all of our markets expanded ADR more than 15% compared to 2019. Our view on rate integrity remains unchanged as we are currently experiencing robust ADR growth throughout February and anticipate continued pricing power as occupancy returns. Our focus on driving rate resulted in a 5% increase in RevPAR for the fourth quarter with RevPAR growth compared to 2019 in each month since September to close out the year.

As I transition to our market performance, I will start with our urban portfolio. Urban demand accelerated into October as RevPAR pulled even with 2019 production for the first time since the onset of the pandemic. In total, our urban portfolio generated over $9 million of EBITDA, 67% of total portfolio production in October, seasonally our strongest month in Q4. And momentum persisted throughout the quarter as weekday RevPAR in December outpaced 2019 for our urban portfolio, weekday RevPAR, driven by a 4% increase in Manhattan. Overall, Manhattan was our largest EBITDA producing market for the quarter, generating $9.6 million or 31% of total portfolio EBITDA. Our two highest EBITDA producing assets for the quarter were the Hyatt Union Square and the Hilton Garden Inn Midtown East, each generating $2.7 million in EBITDA outpacing 2019 by 12% and 15% respectively.

Manhattan’s EBITDA production was rate driven as our portfolio posted 16.8% ADR growth for the quarter. Our Manhattan December RevPAR growth of 6% was driven by over 20% ADR growth for the month from 2019. Now, while we are encouraged to see our hotel surpassed 83% occupancy in December, there is still significant room for recovery as our Manhattan market is still 1,100 basis points below 2019 levels. Boston had yet another strong quarter with 11% RevPAR growth compared to 2019. This was driven by nearly 17% ADR growth. The Boston Envoy outpaced 2019 RevPAR by nearly 5% in the quarter while generating $1.7 million in EBITDA, a 21% increase to 2019. Rounding out our urban portfolio, our Ritz-Carlton Georgetown continues to outperform posting nearly 40% ADR growth compared to 2019, resulting in 67% EBITDA expansion for the quarter.

Urban luxury trends are impressive. Meanwhile, in Philadelphia, our Westin generated nearly $2.4 million of EBITDA in the quarter, despite disruption from a rooms refresh project that is currently underway. Our Rittenhouse Hotel in Philadelphia outpaced 2019 RevPAR by 3%, driven by nearly 30% ADR growth. Once again, South Florida’s continued strong run drove our resort performance in the fourth quarter. The Parrot Key Hotel and Villas and the Cadillac Hotel and Beach Club were top five EBITDA contributors for our portfolio, generating $2.4 million and $2.3 million of EBITDA respectively. South Florida was our second biggest EBITDA contributor generating $6.5 million, over 20% of the total portfolio. For 2022, these two assets loan generated almost $22.7 million of EBITDA and are on track to achieve the return on investment we projected when we undertook the transformational renovations at both of these assets back in 2018.

We also upgraded the Ritz-Carlton Coconut Grove pre-pandemic and Q4 achieved 37% growth driven by 33% ADR growth. The Ritz-Carlton exceeded group revenue by 20% in Q4 and has a very strong outlook for 2023. On the East Coast, the Mystic Marriott and the Annapolis Waterfront Hotel generated $2 and $1.8 million in EBITDA outpacing 2019 by 76% and 47% respectively, clearly demonstrating the earnings potential of best-in-class assets in regional resort markets with multiple demand generators. On the corporate front here at Hersha, after a strategic and transformational year for our company, we begin the new year with significant cash on hand, access to an undrawn revolver and a lower leverage profile than we have had in many years. While we remain constant in our markets and our portfolio, we are further comforted with our financial position.

While the debt and transaction markets remain muted, we will remain flexible and entrepreneurial in our approach. We constantly monitor the markets and actively underwrite opportunities to expand our footprint. Given our financial flexibility and relatively low sensitivity to the interest rate environment in a time of economic certainty, in a time of economic uncertainty, we are particularly well positioned to act swiftly when the right growth opportunities present themselves. Our management team has worked diligently to right size our balance sheet and to close the significant NAV gap that persists for our portfolio. We still believe that we traded in an outsized discount to our private market value and are extremely sensitive to any capital allocation decisions that would impact our NAV or leverage as a trade off to growth.

This is my first call as CEO of the company. And before turning the call over to Ash for a more detailed look at our financials, I wanted to take a moment to make some comments about our portfolio today in light of this NAV gap. Our performance during 2022 was far ahead of what many had expected, not only from a RevPAR standpoint, but most definitely from our full EBITDA recovery versus 2019 peak we achieved during 2022. Although the anticipated timeline of recovery in our markets was estimated to be sometime in the latter half of 2024 or even 2025, we surpassed 2019 EBITDA production in every quarter of 2022. And with EBITDA expansion in both our urban and resort markets, we delivered the largest outperformance in the fourth quarter with comparable portfolio EBITDA of $31.4 million, a 12.6% increase to 2019.

This outperformance is a result of our execution, but importantly it is a result of our streamlined and focused portfolio. Through our deliberate work to dispose of our non-strategic assets, we’ve created a high quality purpose-built portfolio levered toward high growth urban markets, and a strategic mix of resort markets. Our properties are located on premium real estate and in markets where we identified a multiplicity of demand generators, and this refined portfolio continues to be positioned to outperform as the industry continues its long recovery. We believe it is important to understand that seasonality of our portfolio is also fundamentally different than the portfolio we held before the pandemic. With the changes we have made since 2020, our resort portfolio benefits from multiple demand generators.

Photo by Upal Patel on Unsplash

First, it has benefited significantly from an increase in domestic leisure travel, which led to record EBITDA production. Second, in addition to demand for high-end experiential leisure travel, which we believe will continue, our purpose-built resort portfolio is also positioned to benefit from additional revenue streams and non-leisure demand. All but two of our resorts are located in markets that cater to additional travel segments including convention centers, corporate headquarters, and universities. The most notable case of evolving market drivers can be seen in Miami, which has experienced a significant influx of new business and residential relocations in the past three years, as well as the renovation of its convention center. Similar market trends apply to resort markets in Annapolis, California and New England.

The exceptions are our resorts in Key West and Monterey, California, which are more solely focused on leisure. We do expect these resorts to stabilize in 2023 after unprecedented performances in 2021 and 2022, but we do not expect significant retracement. Parrot Key in particular is on pace to significantly outperform 2019 and is still benefiting from its comprehensive renovation following Hurricane Irma. The Sanctuary Beach Resort will be undergoing an ROI capital project this year that will set the property up for another level of growth moving forward. In our urban markets, we made the decision to sell our urban select service portfolio, which reduced our reliance on business transient. Our focused urban portfolio is located in markets with long runways for growth and will benefit from the additional return of occupancy and demand that we expect aided by an increase of group business transient and international travel as markets around the globe continue to open up from pandemic error restrictions and travel to key gateway markets in the U.S. accelerates.

We recognize the macroeconomic outlook remains uncertain. But despite the constant drumbeat of recessionary forecasts and negative sentiment data, we see actual economic activity as measured by job gains, industrial production and retail sales still indicating growth. This is certainly true for what we are seeing on the ground in our hotel performance as well. In summary, our portfolio is exceptionally well positioned to expand cash flow generation through operations as it benefits from the broader trends we see across the market, including the growth of experiential travel and demand for differentiated high-end leisure travel and the continued pent-up demand, especially from business travel and the international segments, all in an environment of very low supply growth.

The setup in fundamentals is very encouraging. With that, let me turn it over to Ash to discuss in more detail our financial outlook, margin performance, and our updated guidance for the quarter.

Ashish Parikh: Great. Thanks, Neil, and good morning, everyone. During the fourth quarter, the company completed the sale of the Courtyard Sunnyvale, the only remaining asset of the Urban Select Service portfolio that closed in August 2022. In addition to the sale of the Hotel Milo Santa Barbara, Pan Pacific Seattle, Gate Hotel JFK Airport and our joint venture interest in the Courtyard South Boston. In total, the asset dispositions completed during 2022 generated approximately $650 million in cash proceeds €“ in gross proceeds. And net proceeds from these sales reduced our total debt by approximately $510 million, while generating unrestricted cash of nearly $120 million. In conjunction with our strategic dispositions, we completed a comprehensive refinancing over our credit facility.

As of year-end, the credit facility consisted of a $373 million term loan and an undrawn $100 million revolving credit line at 2.5% over the applicable adjusted term SOFR. The facility matures in August of 2024 and has one 12-month extension option to August 2025. As part of our refinancing, we used an existing swap to hedge $300 million of the new term loan at a fixed rate of approximately 3.93%. As of year-end, 73% of our outstanding debt is either fixed or hedged, and despite the recent surge in interest rate. Our fourth quarter weighted average interest rate was approximately 5% with a weighted average life-to-maturity of approximately 2.6 years. We closed the year with $230 million in cash on hand in addition to our $100 million undrawn revolver.

Since the onset of the pandemic, management has been focused on reducing our leverage and creating additional financial flexibility with a stated goal of three times to four times debt to EBITDA. Our transaction and refinancing activity in 2022 allowed us to achieve this goal as we ended the year with just over three times debt to EBITDA on a TTM basis. As a result of our reduced debt profile, we were able to save $2.5 million in interest expense in the fourth quarter compared to the third quarter, despite the rising rate environment. In fact, we were able to generate $1.4 million in interest income on our cash reserves in the quarter via short-term deposit. Moving forward, we will be able to take advantage of increasing rates using similar deposits, which will generate additional €“ significant additional cash flow as we evaluate optimal uses of our cash on hand, which could include additional debt or preferred pay downs depending on how the opportunities unfold in the upcoming year.

As Neil noted, we have begun a renovation at our Sanctuary Beach Resort in Monterey this year. And we expect this will significantly improve cash flow for the hotel in years to come. With this renovation and a few lifecycle refreshes on deck to the portfolio, we project CapEx spend of approximately $35 million to $40 million in 2023, up only $10 million as compared to 2022 due to our significant investment in the portfolio before the pandemic and our selective disposition of assets that required major capital investments, which did not meet our internal return requirements As in previous years, we’ll attempt to complete the majority of these renovations in the first quarter of the year, which is seasonally the slowest quarter of the year for our portfolio.

And this will impact our first quarter results at a few of our hotels, including the Western Philadelphia, where we are undertaking a full refresh of the rooms after completing the public areas a few years ago, a complete restaurant renovation at the Mystic Marriott and renovations at both Hilton Garden Inns in Manhattan that are receiving public space upgrades. With that, I’ll transition to the portfolio’s performance and our outlook. Our consolidated portfolio generated EBITDA of $31.8 million for the quarter. This is only $1 million left than our production in the prior quarter, despite a reduced property count following the closings I discussed earlier, which was offset by the strong pickup in our urban portfolio. Our corporate cash flow, however, increased 20% quarter-over-quarter to $16 million as a result of reduced interest expense and a more efficient balance sheet.

In the fourth quarter, EBITDA margin for the comparable portfolio was 33.1%, a 209 basis point increase to 2019 within our projected range of growth. Both our urban and resort markets exceeded 2019 EBITDA and GOP margins in the fourth quarter. After surpassing 2019 EBITDA margin by 383 basis points in the fourth quarter, the resort portfolio has achieved margin growth in each quarter of 2022. Meanwhile, our urban hotels realized EBITDA margin growth of 124 basis points compared to the fourth quarter of 2019. This marks the first quarter of EBITDA margin expansion for the urban hotels compared to 2019 and is up sequentially from a loss of 833 basis points in the first quarter of 2022. Quite a remarkable recovery during the year for our urban hotels with more growth on the horizon.

I would like to reiterate that we currently forecast maintaining margin growth in 2023 compared to 2019 levels on an annual basis with 2019 representing the last normalized year of performance before the impact of the pandemic. We will continue to measure margin performance in 2023 against that baseline. Look at human capital, although some of the staffing challenges the industry experienced over the past two years have abated, competition for talent remains strong. On the positive side, we are generally filling roles more quickly and retaining employees longer than earlier in the pandemic, but labor costs remain elevated. In addition to the benefit of ADR driven RevPAR and revenue growth, we have been able to offset much of that increase and the broader impact of inflation with operational efficiencies and staffing model changes, which we were able to achieve in part through our franchise operating model and close alignment with our affiliated management company.

As we look at the changes we made over the past few years, while many of our pandemic error staffing models and offerings were not intended to be sustainable over the long term or to be permanent, we are pleased that many of the long-term efficiencies we achieved as a result of new staffing protocols and uses of technology are sustainable over the longer term. Looking ahead, now that we have returned to a more normalized offering environment, we will be able to maintain the high level guest experience that our customers are accustomed to at our hotels while continuing to generate industry leading margins and cash flows. As we move into the next leg of the recovery, much of our portfolio’s margin growth will be driven by the acceleration in our urban markets.

While we are very pleased with our fourth quarter performance, our urban portfolio was still 1,400 basis points below 2019 occupancy. We anticipate significant additional return of occupancy and demand in the urban market aided by an increase of group business transient and international travel. The additional €“ the resulting additional revenue will have a higher flow through to profitability as the majority of our fixed labor and managerial staff have returned to our hotels, and we will only require variable labor to meet this additional demand. Looking ahead to 2023, although the first quarter is seasonally the lowest contributor for our portfolio, accounting for approximately 14% to 16% of full year EBITDA on a historical basis. Performance through mid-February has exceeded our internal forecast, despite the disruptive ongoing renovation work that I highlighted.

Our January results were very encouraging with our comparable portfolio RevPAR ahead of January 2019 by approximately 4%. And month to date, our February RevPAR is ahead of February 2019 by 5.5%. And we continue to see a healthy pickup in our booking pace for the remainder of the quarter. Our current plan is to provide comparable 2023 results versus our comparable 2019 results as long as it remains relevant and meaningful instead of comparing against our 2022 results. As we look at our January results, our comparable portfolio RevPAR was up over 65% for all of our urban markets, versus January of 2022. And our comparable portfolio was up over 35%. And at this time, we don’t find these results to be meaningful to our stakeholders. While analysts forecast for the broader economy in 2023 vary significantly, results on the ground have been positive thus far.

And our portfolio is positioned to drive cash flow at higher margins than before the pandemic. This steady and improving cash flow coupled with our current balance sheet and low interest burden relative to historic levels, allows us to stay nimble and adapt to the economy real time. As Neil noted, management remains committed to maximizing shareholder value and closing the gap between our NAV and public market value. Whether that is through capital investments in our portfolio, pay down of debt or acquisitions, we will view all corporate activities through a lens of shareholder value, while striving to maintain lower leverage and flexibility. So this concludes my portion of the call, and we’re happy to address any questions that you may have.

Operator?

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Q&A Session

Operator: Thank you. So our first question comes from the line of Bryan Maher, B. Riley Securities. Your line is now open. Please go ahead.

Bryan Maher: Great. Good morning. I appreciate all those comments, very thorough. We’ve been hearing that later this year, in the New York City market in particular, there is likely to be some owners with refinancing problems given the current state of the capital markets, particularly as it relates to debt and interest rates. Are you guys thinking that there might be any opportunities for Hersha there? And what are your thoughts of that and maybe any other markets where you’re seeing that potentially happening relative to your exposure already in that market?

Neil H. Shah: Sure, Bryan. Bryan, this is Neil. You asked about New York in particular, New York, absolutely, we do think that there will be opportunities in €“ not only in New York, but in every major market in the country. We do think that there will be €“ there is currently a significant kind of lack of credit out there for hospitality. It’s the market has definitely thawed since say, October, November, December, and there are some lenders out there that are bit €“ or that are providing quotes on the hotel transactions, but very few and far between. LTVs are a lot lower than they were one year ago. And the cost of financing and just interest expense levels are 300, 400 basis points higher than they were a year ago. So there is clearly a challenge for anyone, any owner, who has a maturity coming up.

If they don’t have a maturity and they have just a swap or a cap expiring, that’s a major issue. I think that we haven’t seen a huge influx of potential distressed opportunities yet. But I would say that by the time we were at ALS late January, there were now more and more deals appearing in the brokers books. There was still real question on whether anything could get done, whether the sellers were realistic or whether the buyers are leaning in enough. But I do feel like across the next quarter or two, until the credit markets really start moving and transacting and spreads come in, I think the next couple of quarters there is an opportunity for REITs or for other buyers to €“ that have conviction and are willing to be lower levered or all cash, all equity on a transaction may be able to find some good opportunities.

So we’re out there looking. You mentioned New York versus other markets. We do have a very significant position in New York and we’re €“ frankly, we’re very grateful for it. In 2022, it was a very strong performance, but in 2023 and 2024, we think there is a very strong outlook for New York performance. Supply remains very low. Demand fundamentals are very strong. But it is nearly 30% of our EBITDA, or 25% of our EBITDA on an annual basis. And so, we are probably more likely to look at other markets where we can get additional exposure. We think that there is other urban markets in our existing portfolio, there’s other resort regional destinations in our existing portfolio, and there’s also some new markets that we take a look at. So that’s a long answer, Bryan, but we’ll continue to look at various markets and various opportunities.

We haven’t seen anything yet that’s highly compelling, but we are seeing opportunities just to reinvest in our existing portfolio to drive the incremental growth this year. And again, we’re very €“ with our market exposures, we think our organic growth is going to be very impressive this year. So we don’t feel like we have to make acquisitions and deals, but we do have the flexibility and capital to do so.