Detailed narrative
Business Travel Acceleration and Demand Drivers
Business travel, which constitutes 75% of Chatham's EBITDA, is accelerating at a faster pace, with corporate travel for Delta and United up 20% to 35%. Small to medium-sized businesses are surging, benefiting upscale and mid-scale hotels. Hilton also noted strong growth in mid-week business transient📎 travel, particularly from small to medium-sized businesses, with their rate growth outstripping large corporates.
This trend is expected to benefit Chatham more than peers.
Silicon Valley Resurgence
Silicon Valley, accounting for 17% of Chatham's EBITDA, saw Q2 RevPAR grow 7%, boosting the portfolio by 40 basis points. July RevPAR accelerated to 26% across the four hotels, with Sunnyvale hotels up 41%. ADR reached a post-pandemic quarterly high of $212.
Strong corporate demand from top accounts like Applied Materials, Palo Alto Networks, NVIDIA, and Google is driving this growth, alongside significant capital investment announcements in technology, including Databricks and Amazon expanding their office footprints in Sunnyvale.
Acquired Midwest Portfolio Performance
The recently acquired six-hotel portfolio in Missouri, Illinois, and Kentucky is surpassing expectations. Q2 RevPAR was up 9%, split evenly between occupancy and ADR, with occupancy at 83%. July RevPAR jumped another 13%, with occupancy up 9% to 86% and ADR up 3%.
The portfolio achieved Q2 GOP margins of 49.3%, 250 basis points higher than the portfolio average, despite RevPAR being 20% below the portfolio average, indicating strong profitability and lower operating costs.
Expense Management and Productivity
Chatham demonstrated strong expense management, increasing non-room profits by $400,000 or 13% in Q2. Excluding a one-time📎 workers' compensation refund, department expenses were down almost 1% on a CPOR basis, and all hotel operating expenses were up only 2% on a CPOR basis.
Employee productivity was excellent, with Q2 occupied rooms up 13% over Q1, while headcount increased only 4%. Property insurance costs were down around 10% for the full year.
Capital Allocation and Development
The company repurchased another $3 million of stock in Q2, bringing total purchases to over $18 million out of a $25 million plan, equating to approximately 5% of outstanding shares at an average price of $7.29. Chatham commenced construction on a 130-suite Home2 Suites in Portland, Maine, with an anticipated opening before summer 2028.
Total construction costs are expected to be $45 million, with an estimated unlevered year two stabilized yield of around 11%.
Asset Disposition Strategy
Chatham is marketing one of its smaller hotels for sale, similar to assets sold last year, with expected proceeds of less than $20 million. The proceeds are intended to pay down the revolving credit facility, which currently has $60 million to $70 million outstanding.
The disposition is not included in current guidance but will be reflected upon closing, with an announcement expected by the Q3 earnings call in November.