Chatham Lodging Trust (CLDT) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Chatham Lodging Trust second-quarter results conference call on the 11th of August, 2010. Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instructions)

I will now hand the conference over to Jerry Daly, President at Daly Gray. Please go ahead, sir.

Thank you, Christie.

Good morning to everyone, and welcome to Chatham Lodging Trust second-quarter 2010 earnings conference call -- our first call since the IPO in April.

Yesterday after the close of the market, Chatham released results for the second quarter ended June 30, 2010, and I hope you've had a chance to review the press release.

If you did not receive a copy of the release or would like a copy, please call my office at 703-435-6293, and we will be happy to e-mail or fax one to you. Or you may view a copy of the release at Chatham's website, www.ChathamLodgingTrust.com.

Today's conference call is being transmitted live via telephone and by webcast over Chatham's website and at StreetEvents.com.

A recording of the call will be available by telephone until midnight on Tuesday, August the 17th, 2010, by dialing 800-406-7325 with a reference number of 4335972.

A replay of the conference call will be posted on Chatham's website. The conference call is the property of Chatham Lodging Trust, and any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Chatham is prohibited.

Before we begin, management has asked me to remind you that in keeping with the SEC's Safe Harbor guidelines, including statements featuring future operating results and the timing and composition of revenues, among others, except for historical information, these forward-looking statements are subject to certain risks and certainties that could cause actual results to differ materially, including the volatility of the national economy, economic conditions generally, and the hotel and real estate markets specifically, international and geopolitical difficulties, or health concerns, government actions, legislative and regulatory changes, ability of debt and equity capital, interest rates, competition, weather conditions or natural disasters, supply and demand for lodging facilities in our current and proposed market areas, and the company's ability to manage integration and growth.

Additional risks are discussed in the company's filings with the Securities and Exchange Commission.

All information in this call is as of August the 11th, 2010, 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.

During this call we may refer to certain non-GAAP financial measures such as EBITDA and adjusted EBITDA, which we believe to be common in the industry and helpful indicators of our performance.

In keeping with SEC regulations, we have provided an encourage you to refer to the reconciliation of these measures to GAAP results in our earnings release.

Now to provide you with some insights into Chatham's second quarter 2010 results, I'd like to introduce Jeff Fisher, President and Chief Executive Officer; Julio Morales, Executive Vice President and Chief Financial Officer; and Peter Willis, Executive Vice President and Chief Investment Officer.

Now, Jeff, let me turn it over to you.

Thanks Jerry.

Good morning, everybody.

Before I get into the results and explain our recent developments, let me first truly say we are real excited to bring you Chatham Lodging Trust after our successful IPO in April. I also want to take this time to thank our shareholders who have invested with us, and want to assure you that we are very appreciative of this opportunity, and we will work our hardest to be good stewards of your investment dollars for years to come.

As I sit here and reflect over the 100 days since the closing of our IPO, I am real pleased with the progress we've made in executing against our strategic plan over that time. I think -- and what I want to do during this call is reference back to our IPO road show in a few instances, because I believe that the measure of the company's success and our report card really relates to what we laid out on our IPO road show as being our business strategy, as being our acquisition goals, the kind of cap rates we would buy hotels that, the kind of markets and locations that we would target, and of course, overall internal growth for the assets as well.

We do have under contract still four more hotels that we expect to close by the third quarter. We will talk a little bit more in detail about that later. We've got a commitment, as we issued a press release yesterday, for an $85 million line of credit. I believe on the road show we said that would be roughly $50 million. So we are pleased to have a commitment for $85 million, together with a built-in accordion feature that would take it up to $110 million.

Our hotels have produced strong operating results right out of the gate, and we do -- and I would like to reiterate what we set on the road show, which is that we would declare a dividend in the third quarter and pay it in the fourth quarter. We expect to do that at our next Board meeting in so far as declaring the dividend.

Of the six hotels, as you can see in the press release, RevPAR was up 10.2% for the period since we acquired the hotels on April 23. That was driven by a 15.5% increase in occupancy to 78.2%, offset by a 4.6% decline in ADR in the hotels to $103.55

Our original forecast for these six hotels, as we said on the IPO road show and the pro formas that we had prepared internally for the assets, was that RevPAR growth would be flat in 2010. Of course that relates back to thinking in the April or pre-April period of time, and we know the world as reported by Smith Travel has certainly gotten better for lodging and the lodging industry as a whole since then.

We are very pleased, needless to say, with our results.

Market-wide occupancy grew in five of the six markets for where our six hotels were, and in terms of RevPAR growth, all but our Farmington, Connecticut property had RevPAR growth during the quarter, and four of the hotels generated RevPAR growth of 15% or higher.

A you few highlights about the portfolio -- because we do want to note that when you've got such a small asset base -- six hotels -- aberrational results can occur as a result of even one hotel doing real well or doing real bad, so we want to keep that in mind, I think, as we go through the rest of the year, that these kind of -- based on our experience of course at Innkeepers, these kind of results will get muted in terms of the aberration as the asset base increases and we have more hotels.

But for example, the Brentwood, Tennessee -- that's the Nashville asset -- produced RevPAR growth of almost 22% in the quarter, but it really benefited from the closure of the Gaylord Opryland Hotel and incremental business related to the Nashville floods that you might remember, and still, even as we look at the third quarter forecast for the hotel, we see flood business, FEMA business, especially in these upscale extended-stay hotels, commonplace for those kinds of folks to reside for extended periods of time. But still probably some inflated numbers there.

Bloomington, Minnesota produced some great RevPAR growth of 16% as the leisure travel market seemed to really pick up in the Mall of America area. And again, even our Dallas asset, very strong RevPAR growth, there primarily from the corporate demand generators that are close to the hotel and in the market.

FFO per share adjusted for expense associated with our acquisitions as well as shares outstanding since our IPO was $0.08. That's really the key number to focus on. Julio is going to talk a little bit about some of the adjustments and more particularly some anomaly in the share count in so far as how that is calculated since the IPO and for accounting purposes. But $0.08 is the number compared to the consensus estimate of $0.02.

Our hotel operating margins were a healthy 40 -- approximately 43% for the period since we acquired the hotels.

EBITDA margins, 38%. That compares pretty favorably to our original projections as well.

So for the quarter, including the portion of the second quarter we did not own the hotels, operating margins were up 60 basis points compared to 2009.

As I mentioned earlier, we now have eight hotels that we own and another four under contract to purchase.

We will have deployed all of the proceeds from our IPO, should we close on the four hotels under contract, and have additional purchasing power, assuming our 35% maximum target to debt -- and we want to keep referring back to that; we talked about that on our IPO road show -- assuming that, on a pro forma basis we still will be able to acquire an additional $80 million worth of hotels. So we see that as being a significant number.

I do want to note, because I know I will get a question on it, that this Residence Inn White Plains asset is one of the four hotels that are under contract that we are still counting as being able to acquire. However, I think that as time goes on -- and we have roughly 2 weeks per the contract to be able to determine whether or not that asset is going to close or not -- I would say the probability is no greater than 50/50 that that asset will close, based upon the seller's inability I think at least to date, to be able to get that hotel released from its group of lenders in a capital stack with -- that would require, frankly, a substantial discount in order to get that hotel to us.

So we are not at all concerned, frankly, because you might remember when we issued the release regarding signing a contract for those four assets, that there is a substantial breakage fee should the seller not be able to deliver that asset -- meaning, the remaining three hotels that we would buy -- and we are on target, by the way, to close the Altoona and Washington, Pennsylvania acquisitions, probably at the end of next week. That has been a very lengthy process with special servicers and obtaining consents that has gone on for an extra at least 30 or 45 days beyond what we had originally anticipated.

Those deals are set to close, and the -- in effect the effect or real cap rate that we would be buying those three assets for goes up by at least 100 basis points as a result of the breakage fee.

So we feel good, one way or the other. Obviously, we've announced and shown our ability to replace that asset pretty easily and replace that asset if need be with very attractive assets in great markets. So not a problem there.

We do have an active pipeline, again, through our direct relationships in the industry and our brand relationships and our relationships with owners that we've done business with before. And of course we will continue our growth strategy of investing in premium, branded, select-service and upscale extended-stay hotels in markets with high barriers to entry and markets where there are strong demand generators driving the business into those hotels.

We are very pleased with the execution of our strategic plan, as I said, and our operating performance to date, and we look forward to providing you with a return of shareholder value vis-a-vis the dividend in the near future.

In any event, that's the overall picture for our first 100 days, in summary form, and we do hope that our shareholders and other constituents share our excitement about really the development of Chatham Lodging Trust since the pre-IPO and IPO stage, over of this first 100 days.

I know I'm real excited. I know I'm not excited, by the way, about our stock price, but I believe -- and always have believed -- that if we do our job, the stock price will take care of itself over time, and I certainly am fully convinced that will be the case again.

With that, I'd like to turn it over to Julio for some more detail.

All right. Thanks, Jeff.

In reviewing our key statistics for the second quarter, our funds from operations were a deficit of $0.2 million or $0.03 per diluted share.

Adjusted FFO based on weighted average shares outstanding since our IPO was $0.8 million or $0.08 per diluted share. Adjusted FFO was adjusted for acquisition costs, which are now required to be expensed rather than capitalized.

Our adjusted corporate EBITDA was $1.0 million.

For the quarter we reported total revenues of $4.7 million, and a net loss of $0.6 million.

Looking at our balance sheet, we ended the quarter with $97.8 million cash. Total assets at the quarter were $175.8 million, including $73.1 million of real estate assets.

Subsequent to the quarter, we invested $16.5 million on the purchase of a Hampton Inn & Suites in Houston, Texas, and $21.3 million on the purchase of Residence Inn Holtsville in New York.

So far, all of our completed acquisitions have been funded with proceeds from our IPO.

We have an unpaid obligation of $5.2 million to the underwriters of our IPO. That will be paid once we have invested 85% of the gross proceeds from the IPO and the private placement to Mr. Fisher. We expect to pay this obligation by the end of the year.

With respect to the six owned hotels, we will invest $11 million on the completion of the PIPs -- property improvement plans -- and have decided to invest an additional $1.5 million on these six hotels that we believe will better position the hotels for success.

On the recently acquired purchases in Houston and Holtsville, we estimate that we will need to spend just over $1 million to complete the two PIPs on those hotels.

Some exciting news to report, which I'm sure most of you saw in our release from yesterday, is that we've signed a commitment letter with a syndicate of banks, led by Barclays Capital and Regions Capital Markets, to provide a three-year, $85 million senior secured credit facility. Borrowings will bear interest at a rate of LIBOR plus 325 to 425 basis points, based on the leverage ratios ranging from less than 30% to greater than 45% and subject to a LIBOR floor of 1.25%.

Our current all-in rate will be 4.5% on any borrowings currently.

The facility has an accordion feature which will allow us to increase the line of credit facility to $110 million.

And finally, borrowings under the credit facility are subject to borrowing base calculations.

With that, I will give the call back to Jeff.

Thanks Julio.

Just to finish up here, we again want to reiterate that our 35% debt to investment and hotel costs target is still of course something that we believe in and our Board believes in very strongly.

As far as overall thoughts about earnings as we move forward, we continue to affirm the numbers that we put out during our IPO road show, with our corporate overhead being a little bit under the $3 million -- that's the cash portion of the overhead, the G&A -- on an annual basis, the number we fed in April.

Again, we will talk more about our dividend after our Board meeting at the end of September. But we are on track to do what we said we would do there.

And of course with the performance of the hotels being better than we expected, we know that there is more EBITDA and more cash flow there than we had, obviously, originally anticipated. And that, I think, together with our acquisition pace being greater than what we said, as well, certainly will give us good cushion as we move forward through 2010.

And with that, I'd like to open it up for questions.

(Operator Instructions). Patrick Scholes, FBR Capital Markets.

Just a quick question here for you on the dividend. I wonder if you could just share your thoughts or give us an update on what you expect your target CAD payout ratio to be.

I think we're going to refer back to the IPO road show again and stay in that targeted 80% to 85% CAD range to begin with here in the first year, because obviously the outsized G&A and whatever gets you to a number as you move forward, of course, that would be significantly lower than that as a stabilized number. But that's where we'll start out.

Great, thank you, that's my only question.

Will Marks, JMP Securities.

I had a question on the acquisition landscape. You've been successful so far, and it sounds like you're putting the money to work quickly. Can you tell us a little bit about -- we heard from a lot of the other public companies, but I think you face a little different landscape.

Yes. When you say you've heard from other public companies, insofar as what's the take there?

Well, I guess I -- we've heard about full service hotels, and not necessarily your target markets, but just that there are more deals than there were six months ago but nothing to steal out there, and I don't think they are competing for your same product, and that whole distressed environment hasn't really evolved. There's more and more opportunity. But comments related to that.

Right. Well, there's certainly more deal flow, I think for everybody, as evidenced by the transactions that have occurred in 2010 overall. I would say, though, that there is no huge amount of deals waiting in a backlog in so far as that are visible as others have commented on.

But for us, we are, I think -- and really -- not to coin a term -- but we are in the sweet spot here in so far as our focus on upscale extended stay hotels and select service assets, because there's just fewer people competing for these assets, and we are utilizing direct relationships for the most part in all of our 12 acquisitions and other acquisitions that -- opportunities that we're working on now.

So when there is a competitive bid process for a select service hotel, I will tell you, and there's a little bit more visibility on that front, where brokers are bringing some assets to market. We generally are staying away from those kind of transactions. Right, Peter?

That's correct.

And I guess the valuations haven't changed in three months or so? But (multiple speakers)

Right, right. Still in that 7.5% to 8.0% cap range generally for what we're buying. And that's primarily because we are not bidding against six or eight other companies that can close.

Okay. And that's because these are not widely marketed? Or it's because there's just not the competition?

Yes, it's really because they are not widely marketed. We are really going in there with owners that we either know or have heard may have some interest in selling. Or frankly, just direct relationships or our own cold calling in some cases to individuals that really realize that when they look at the landscape -- because they are not unsophisticated -- they know that Chatham Lodging Trust is a low-levered company that can close and has shown its propensity to acquire these kind of assets in the brands that we like, and so therefore I think that we are clearly, I think, on a nationwide basis the most credible company, particularly public company, that operates in this space on a nationwide basis to buy these hotels.

So that seller can kind of scratch his head or talk to his or her advisor and say, well, what about Chatham? And most of the time they will say, well, those are the old Innkeepers guys; they bought and sold over 100 and some odd hotels, and they've got a great company now and are back at it again. So I think that helps.

And Will, much like what we did talk about on the road show, we are facing sellers that are faced with a looming debt maturity and -- as well as some PIP mandate requirements -- property improvement plan. And this is accelerating some opportunities that are coming our way.

And these folks have equity, but they just don't want to write a check, and so we are really -- given our relationships and our reputation as a credible closer, we're getting some great opportunities to have some great discussions with a lot of folks.

Okay, great. Thank you.

[Phil Laypan], Barclays Capital.

Good morning.

Good morning, [Julie].

Just wondering, you mentioned your SG&A expectations of around $3 million. But over the longer term, what do you expect your SG&A as a percentage of revenue to be? Is there a run rate you can provide?

Well, we are pretty straight-on where we said on that IPO road show, again. We said $2.7 million for this year. We said based on number of hotels, $3.5 million in 2011, which can move up to $4.0 million, depending upon how big the company really get and pretty quickly dropping that down to below 1% of assets, I think, if you were looking at it that way as you move out on a run rate basis to 2012.

Okay, thank you. And then, just on the CapEx, how much of that will be spent this year, and how much of it will be in 2011?

In terms of -- oh, in terms of the PIP money, you mean, that we're spending now?

I guess just total CapEx, the PIP plus the additional $1 million -- if you have that.

Oh, let's see. It looks like we've got about $4.0 million to $4.2 million to be spent in 2010, and the balance of that money in 2011.

Okay, thank you.

Patrick Scholes, FBR Capital Markets.

Yes, just a quick follow-up question here. Jeff, you had mentioned in a previous answer here that when you are bidding on a hotel, it's -- you're not going up against six or eight bidders, but for your -- for the ones that you're targeting, about on average how many other competitive bids are you seeing for the hotels that you're targeting?

And really, how does that compare to what you're seeing for the number of bids for your typical, upper-upscale urban hotel out there that many of the other companies are going after?

You know, it's hard for me is to directly comment on the upper-upscale full-service guys. Maybe Peter can add some color to that. But we all know who the candidates are for those hotels -- between eight and 12 bidders anyway, I would guess, many of whom are public companies on the full-serve side; right Peter?

Yes.

But I have to tell you the truth -- New Roch, no other bidder; Holtsville, direct deal with somebody that I sit on the Residence Inn Board with. I could tick these off one by one -- the four LOI assets, no other bid; direct deal with RLJ and Tom Baltimore, of course, on the initial six. A few other things we're working on. One is more of the LOI seller assets, and another one is another direct deal.

We are enjoying, I think, an enviable, unique position, for the time being anyway.

Great. I appreciate the color. Thank you.

(Operator Instructions) There appear to be no further questions at this time. Please continue with any other points you wish to raise.

Well, I appreciate everybody's attendance here. I appreciate having all of our shareholders that we do have, which I believe is a great group. Our analysts are absolutely, I know, very supportive and fully understand the economics of the company. And with that, we just look forward to doing exactly what we have done during the first 100 days.

I assure you, as you can see, our target-market focus with acquisitions like New Rochelle, like the Holtsville deal on Long Island that came with its own sewer treatment plant because there is no sewer out there -- i.e., a great barrier to entry -- I think further shows our continued focus on being in places where there are high barriers to entry, to assure that this cash flow, which is going to grow over the next I think several years, will be very consistently growing as we move through this next part of the industry cycle.

With that, I'd like to close the call. Thank you all.

Thank you. This concludes the Chatham Lodging Trust second-quarter results conference call. Thank you for your participation. You may now disconnect.