The first quarter 2024 earnings call for Chatham Lodging Trust (CLDT) was a symphony of cautious optimism. Executives were clearly pleased with the company's performance, beating consensus estimates and demonstrating resilience in the face of economic uncertainty. Yet, a subtle undercurrent flowed through the transcript, a whisper of anticipation, hinting at a potential tidal wave of travel demand fueled by the relentless surge of big tech.

While analysts focused on the immediate impact of renovations, weather, and the ever-shifting holiday calendar, a deeper dive into the numbers reveals a compelling narrative: the sleeping giant of tech travel is stirring, and CLDT is perfectly positioned to ride the coming wave.

The company's strategic focus on tech-centric markets like Silicon Valley and Bellevue is no accident. These areas are not just geographic locations, they are the beating heart of technological innovation, a global magnet for talent and investment. And while 2023 saw big tech tightening its belt, the winds of change are palpable. Share prices are soaring to record highs, fueled by the tantalizing promise of AI.

The recent announcement of Applied Materials' $4 billion EPIC Center in Sunnyvale is a beacon in this new landscape. This isn't just another R&D facility; it's a collaborative ecosystem designed to bring together industry titans like AMD, NVIDIA, and Western Digital, all companies with a history of generating substantial travel demand for CLDT.

Consider this: year-over-year occupancy growth in Silicon Valley and Bellevue ranged from 13% to 35% from October 2023 to January 2024. In January alone, production from three comparable companies in CLDT's top 10 accounts across their Silicon Valley hotels surged by over 50%. February, despite a month of brutal weather across much of the country, saw continued RevPAR growth in these tech hubs.

These aren't just isolated data points; they are early tremors signaling a tectonic shift in the travel landscape. As AI ignites a new wave of investment and development, the demand for face-to-face interaction, for collaboration and knowledge sharing, will inevitably translate into a surge in business travel. And CLDT, with its strategically located, high-quality properties in the heart of the tech world, stands to benefit disproportionately.

Financial Highlights

Tech Hotel GOP and EBITDA Growth

The following chart illustrates the strong year-over-year growth in GOP and EBITDA for CLDT's tech-focused hotels, highlighting the significant potential of this segment.

Now, let's talk numbers. CLDT has stated that returning to 2019 EBITDA levels in their tech hotels would add a staggering $16 million to their bottom line, translating into an additional $0.32 of FFO. This represents a potential 45% increase in FFO from current levels, highlighting the sheer magnitude of the untapped opportunity.

Interestingly, CLDT's overall portfolio, excluding the five tech-driven hotels, already exceeds 2019 RevPAR levels by 6%. This underscores the underlying strength of their diversified portfolio, but also amplifies the significance of the tech recovery. It's not about bringing the rest of the portfolio up to speed; it's about unleashing the full potential of their tech-focused assets.

This potential is further underscored by the company's robust balance sheet. CLDT boasts the lowest leverage levels in over a decade, with a leverage ratio of just 25%. They are fully capable of addressing all maturing debt without resorting to additional financing. Furthermore, with 24 unencumbered hotels, CLDT possesses the financial agility to capitalize on emerging opportunities in the acquisition market.

The transcript subtly hints at this, noting the recent increase in deal volume and a shift in pricing, making acquisitions more attractive. This, combined with lower financing costs and a downward trending interest rate curve, paints a compelling picture for CLDT's external growth prospects.

Hypothesis

Here's a thought-provoking hypothesis: the confluence of factors described above - a resurgence of big tech, the AI-fueled investment boom, a return-to-office trend, and a favorable acquisition environment - could catapult CLDT's FFO beyond even 2019 levels, potentially reaching $0.50 or more per share. This would represent a dramatic increase from current estimates and reposition CLDT as a leading growth story in the lodging REIT sector.

Of course, predicting the future is a perilous endeavor, and risks remain. The internship program, a crucial driver of summer demand in Silicon Valley, is evolving, with companies offering stipends that allow interns more flexibility in their housing choices. This creates uncertainty regarding the specific occupancy levels CLDT will achieve.

However, the underlying trend is undeniable: the forces driving tech-related travel are gathering momentum. And CLDT, with its strategic focus, disciplined capital allocation, and operational expertise, is uniquely positioned to translate this momentum into substantial shareholder value. The quiet anticipation emanating from their first quarter earnings call might just be the prelude to a resounding tech travel boom.

"Fun Fact: The average daily rate (ADR) for hotels in Silicon Valley during the peak of the dot-com boom in 2000 reached an astronomical $250, highlighting the intense demand for lodging during periods of rapid tech growth."