Chatham Lodging Trust (CLDT) 2010 Q4 法說會逐字稿

Good morning ladies and gentlemen. Thank you so much for standing by. Welcome to the Chatham Lodging Trust fourth-quarter results conference call.

During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). As a reminder, this conference is being recorded today, Thursday, 17 February, 2011.

I'll now turn the conference over to Mr. Jerry Daly, of Daly Gray Public Relations. Please go ahead.

Thank you Michael. Good morning everyone and welcome to the Chatham Lodging Trust fourth-quarter 2010 earnings conference call.

Yesterday after the close of the market, Chatham released results for the fourth quarter ended December 31 2010, and I hope you 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 Thursday, February 24, 2011 by dialing 800-406-7325 with a reference number of 4405834. A replay of the conference call will be posted on Chatham's website. The conference call is the property of Chatham Lodging Trust. 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 Safe Harbor guidelines, today's conference call may contain forward-looking statements about Chatham Lodging Trust, including statements regarding 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 uncertainties that could cause actual results to differ materially, including the volatility of the national economy; economic conditions generally and the hotel and real estate market specifically; international and geo-political difficulties or health concerns; governmental actions; legislative and regulatory changes; availability 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 February 17, 2010 unless otherwise noted. 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've provided and encourage you to refer to the reconciliations of these measures to GAAP results in our earnings release.

Now, to provide you with some insight into Chatham's fourth-quarter 2010 results, I'd like to introduce Jeff Fisher, President and Chief Executive Officer, Dennis Craven, Executive Vice President and Chief Financial Officer, and Peter Willis, Executive Vice President and Chief Investment Officer. Now let me turn the session over to you, Jeff.

good morning everyone. It's great to be here again to discuss our strong operating results and our expectations for 2011 and beyond.

Before we talk about what's past, of course, which is 2010, I just want to reflect a bit on what we have accomplished since our IPO at the end of April because we, in less than a year, have certainly executed the business plan with the kind of focus that our management team I think is well-known for from its prior days at Innkeepers, which is owning and operating, with its third-party operators, premium select service branded and particularly focused in the upscale extended-stay segments of the hotel business. The acquisitions we have made since the IPO and with the IPO have proven over and over again that I think we certainly understand where to buy hotels. The yields that we talked about that we would expect to receive from the hotels that we acquire, as Dennis will talk about a little bit later, have been achieved exactly within the target range that we told our shareholders. We expect to continue to do that as we move forward, enhancing the asset quality of the Company, buying hotels most importantly where it's hard to build new hotels.

Now, of course none of us expect very much new supply over the next few years, but nonetheless we are here for the long haul. We are here to pay dividends for the long haul. We think the assets that we own certainly will provide our shareholders the opportunity to share in that dividend growth and EBITDA growth as we move forward.

Really with the most recent offering that we did a few weeks ago, it really makes me feel that the Company is now poised again to grow externally because of the clean balance sheet that we have. Of course, to reiterate, our leverage levels are to be no more than 35% as measured against our investment debt to investment in hotels at cost. We now have the opportunity to buy between $100 million and $125 million worth of hotels now that we've completed the $74 million equity offering I think, in pulling the prior offering, showing our focus on being financially very, very disciplined and really, hopefully, with our shareholders recognizing the importance of being prudent capital allocators here. I think that's an important theme for us as we move forward, the idea of matching acquisitions with smaller stock offerings as we move forward and enhancing the FFO of this company over the long haul with, in the end, a conservative balance sheet as well.

Let's turn though back here to 2010 just for a minute. During the fourth quarter, we did grow our asset base by approximately 33% with the acquisition of two top-notch hotels, the Residence Inn in new Rochelle, New York, which has proved to be an exceptional acquisition based on that internal growth that hotel is putting on the boards, and the Homewood suites in Carlsbad, California, truly a great hotel to own for the long haul.

Today, we've invested approximately $210 million in 13 well-diversified hotels, comprising 1650 rooms in nine states at a price per key blended of approximately $127,000 per room, again focused in our target brands, predominantly Homewood suites by Hilton and Residence Inns. Of course, we will continue to grow with those brands, those upscale extended-stay brands, and our favorite premium select service brands like Marriott Courtyard, Hampton Inn, Hampton Inn & suites, and Spring Hill Suites by Marriott.

In December, we told you that we accelerated the renovations on three of the original six Homewoods that we acquired. That really was occasioned by looking at some of the preliminary budgets that our operators were delivering us, looking at 2011, and seeing that since the seasonally slow period in of course December and January are seasonally, for us anyway, the slowest period of the year and for the hotel industry generally, that we should go ahead and double down on the number of rooms that we are going to take out of order. In fact, we did with the idea being that, instead of lingering beyond the first quarter, which was the original plan to have less overall room displacement, we thought that we should get it done and move forward in a strong manner, particularly as we look at some of the ADR opportunities in some of these hotels, and of course some occupancy opportunities as well, depending on which hotel you're talking about. Actually, five of the six have pretty good occupancy upside here. The only one not is our Mall of America hotel, which already has an occupancy rate of 86%. So, we wouldn't expect to be able to lift that occupancy rate very much; that essentially means you are full most of the time. But we look forward to some strong results as we move through 2011, and certainly a payback for the $13 million that are going -- that's going into those six hotels.

So when you look at the total portfolio of the 13 hotels, seven hotels needed full renovations through the PIPs, the product improvement plans, that was delivered by the franchisors negotiated by us with them. Once we get through the first five hotels, then the bulk of our PIP work will be complete. Obviously, all this work -- and Dennis will speak more specifically to it -- is impacting our RevPAR of EBITDA and FFO for the fourth quarter of 2010 and the first quarter of 2011. But again, we believe there is certainly great upside as a result of biting the bullet during this first quarter.

I have been out inspecting the work, and so far what I have seen I'm very, very pleased with. These hotels really, really do look new again. They have not had any substantial renovations for over ten years, and I believe they are poised to increase their market share as you move through 2011.

Dennis will talk again in more specifics about our 2011 guidance, but our RevPAR growth should be up 5% to 7% at least after you consider the impact of the displacement from these renovations for the year. Interestingly enough, as we look at the markets that the hotels operate in and simply analyzing the Smith travel reports for the comp sets that the hotels compete in, even when you look through the fourth quarter and into the beginning of this year, those markets are all growing in generally together, blended, the 6 to 8% range, the market growth, so therefore a good predictor and indicator of where the hotels ought to operate once they are fully back online and the operators are out there doing what they are supposed to do vis-a-vis the hotels. Again, we are not going to comment much on 2012, but obviously as you move down and comp against first-quarter numbers of this year, which obviously are being severely depressed, the 2012 RevPAR growth and EBITDA growth should even be stronger, perhaps, than what the industry norm might be.

Looking back to the fourth quarter for the 13 hotels we own, pro forma RevPAR for the quarter was up 3.5%. We've talked about that before, including the three hotels in December that were under renovation. Occupancy was up 2.7%. Finally, ADR began to turn up almost 1%. That's the first quarter we've seen ADR up for this portfolio of 13 hotels.

Of course, with our portfolio -- and we've commented on this before -- particularly when you own upscale extended-stay hotels, our experience in the past has been that ADR will lag by a quarter or two, compared to other hotel asset classes, primarily because we've already got such high occupancy rates in the hotels attributable obviously to the average length of stay being longer than transient hotels, and project business and other kind of business being booked in the hotels, in some cases 30, 60 and even beyond 90 days. So, you don't get to turn the ADR engine on immediately, nor adjust your mix perhaps as fast as transient hotels, but of course that's what provides the stability of the cash flow in the downcycle. That's why we like this segment and that's why we specialize in this segment.

In the fourth quarter, adjusted EBITDA was $3.4 million for the quarter, which is ahead of our own expectations set out during the IPO roadshow. FFO and FFO per share adjusted for expenses associated with our acquisitions and other charges was $2.2 million, or $0.24 in that fourth quarter.

I am pleased to report too that property-level operating margins were up over 40% for the quarter, up 170 basis points year-over-year, so, again, good result, good flow through from these hotels. We certainly expect that trend to continue, if not be enhanced, as the mix of RevPAR growth should shift to be more ADR as opposed to the occupancy growth that we had in the second half of 2010. So the margin improvement, again, we will talk about as we move through this year. I believe that we certainly add value through aggressive asset management and active engagement with our managers for this portfolio and other hotels that we underwrite and acquire.

Peter might talk a little bit or answer questions on the pipeline, but again, I look forward to being able to invest in the same kind of high-quality assets that we have shown you so far that we can bring to the table, that $100 million to $125 million of acquisition capability and capacity that we talked about. We will continue to enhance the income potential from this portfolio, buying hotels in key markets, primarily coastal markets, top 10 or 15 MSA markets in the United States, at prices that generally equate a 7 to 8 cap range, or some folks like to think about it in an EBITDA yield range, 8% to 9% there.

Of course, if you look at the last 12 months results for the 13 hotels we currently own, our investments are yielding an 8 cap right now. Again, we are pleased to look at that kind of return and validate what we have been saying insofar as the ability to buy hotels. Of course, with the RevPAR growth and the EBITDA growth that we expect, we certainly expect these yields to continue to rise, and with our fairly I think pretty conservative dividend payout ratio, again, looking for dividend increases as we move through 2011.

So before I turn it over to Dennis, I just again want to say that we certainly are pleased with the where we stand today. I think we've got a great portfolio of hotels. We are certainly looking forward to closing on the new Pittsburgh acquisition, which will be a brand name of course that you are familiar with, since most of our hotels are Homewood Suites or Residence Inns anyway. Again, adding that hotel and others as we move forward gives us opportunity and our shareholders I think the opportunity to move through 2011 and continue to see this company grow, both in earnings and share price. Dennis?

Thanks Jeff.

Just reviewing our key statistics for the fourth quarter, we reported total revenue of $12.4 million with a net loss of $0.3 million. EBITDA was $2 million and adjusted EBITDA was $3.4 million for the quarter. FFO was $1.1 million and adjusted FFO was $2.2 million or $0.24 per share based on shares outstanding since our IPO, just for those, just to make sure we adjust FFO and EBITDA for acquisition costs, which were $1 million in the quarter, as well as other charges of about $100,000.

Looking at our balance sheet, during the quarter, we used available cash and borrowings under our line of credit to acquire the Residence Inn in New Rochelle and the Homewood suites in Carlsbad. We ended the quarter with approximately $5 million of cash, total assets of $222 million, and approximately $210 million invested in the premium branded hotels that Jeff has talked about.

Total outstanding was approximately $50 million with net debt of approximate $45 million, which equates to about 21% of our investment in hotels at cost. At December 31, borrowers outstanding [on the line] with $38 million, so we still had capacity of about $47 million under the line of credit.

As most of you know, as Jeff alluded to early in the call regarding the renovations that are ongoing, we do have product improvement plans, what many refer to as PIPs, that are required in connection with the acquisition of certain of our hotels. Of the 13 hotels, seven require full renovations and five of those are currently ongoing, and most of that will be completed by the end of the first quarter. Our Dallas Homewood Suites really is the only one that will trail, from a renovation standpoint, into the early part of the second quarter as we waited to start that renovation until after the Super Bowl weekend in Dallas.

Our estimated total cost for these PIPs is unchanged from our last earnings call, approximate we $17 million. All of the current projects are expected to be completed within our budget estimates on -- or, again, as we accelerated some of those well ahead of schedule.

During the fourth quarter, we spent approximately $3 million on the PIPs. We expect to spend approximately $12 million in 2011. The last two remaining renovations for the year are going to be in our Homewood Suites in Maitland and our Spring Hill Suites in Washington, which will begin later this year in a period of time that will minimize that displacement.

During the quarter, we did declare a dividend, our second dividend of $0.175 a share, which was paid on January 14, 2011.

Subsequent to the end of the quarter, we entered into an agreement to acquire an upscale extended-stay hotel in Pittsburgh, Pennsylvania for $25 million. This acquisition is going to be funded in two parts, which is, one, being the assumption of an existing $7.3 million mortgage loan which will bear interest at 6.5%, and in addition, just a few weeks ago, we did complete the offering of 4.6 million shares that generated net proceeds of approximately $69 million after offering expenses.

From a use-of-proceeds standpoint, we used $43 million to repay all amounts outstanding under the line of credit. We're going to use $18 million to fund the equity component of that Pittsburgh acquisition with the balance of those funds, about $8 million, will be used to fund the completion of the PIPs here in the first quarter and early second quarter.

Looking into 2011, which most expect the lodging recovery is going to continue, we are no different in that view obviously as industry fundamentals continue to improve with hopes for continued economic growth in the US and across the world. But we hope that -- we expect that will continue for us, and as most hotels -- hotel companies are out there, we will see 2011 in the next few years being very attractive for the industry.

With respect to the actual release, we hope the guidance provided helps everybody gain a little bit of a better understanding of our operating model. Since there wasn't really a whole lot of publicly available information on the Company, that's been available since really late in the summer of 2010, so we hope that information does prove to be helpful for you all.

But please note that, before I get into the guidance specifics, that it does assume that the Pittsburgh acquisition closes on May 1. We do have a loan that we are in the process of assuming. So it's all subject to lender approval, but we expect that we should be able to get that closed by May 1. Obviously, it contemplates the offering of the 4.6 million shares early this month.

I'm not going to go through every bullet that's in the release, but just to give you a little extra perspective on certain of those points with respect to RevPAR, we're projecting RevPAR to be down 1% to 3% in the first quarter, again due to the significant renovations that we have in place at five of the six original Homewood Suites. Then we expect to be up 5% to 7% for the balance of the year.

As we indicated in our IPO, the initial six hotels which were strong performers in 2009, obviously that, from a year-over-year RevPAR improvement standpoint, as we come out of the renovations, we do expect them to gain some additional market share, but they were strong performers in 2009. I think, in 2009, the industry RevPAR was down 17%. This portfolio of 13 hotels, including those original six, was down 11% in 2009. So they did outperform the industry in '09. Therefore, I think what you'll see is maybe not as pronounced RevPAR increases as we get through 2011, but certainly we expect that market share to continue to improve.

Other revenue as a percentage of our total revenue is $2.5 million, so on top of the actual room revenue, just to make sure that you've got that in line with your operating model. Hotel margins are expected to be 34% to 35%, hotel EBITDA margins, after property taxes and insurance, which is expected to be up in the 100 to 200 basis point range, similar to we saw in the fourth quarter of 2010.

We do, because of the Pittsburgh acquisition, we do have, in our model, acquisition costs of about $300,000 to$400,000. We do plan on paying certain income taxes of a few hundred grand related to our TRS operating profits in 2011.

With respect to the borrowings on our balance sheet, we do have -- we will have, especially subsequent to the Pittsburgh acquisition, three property-specific loans at an average rate of 5.9%, which is going to be about $19.5 million after the Pittsburgh loan assumption. For our line of credit, we currently, after the offering, we had about $41 million outstanding through February 9, at which time we paid off the entire balance of the line of credit. The line of credit does carry a minimum rate of 4.25% when LIBOR is below 1.25. Additionally, just to make sure everybody is on board, there is a 50 basis point fee for any unused portion of that $85 million line of credit. So just given our size, that 50 basis points is, give or take, about $400,000 a year in terms of an interest cost that's inherent in that line of credit.

Shares outstanding, with the completion of the secondary offering, we're going to have 13.82 million shares outstanding. When you look at actually kind of 2011 from a contribution standpoint with EBITDA and FFO, you know, what most of you should look at is quarter one, that contribution range to be in a 13% to 15% range, quarter two 29% to 31%, quarter three 33% to 35%, and quarter four 21% to 23%. Again, we hope that proves beneficial for everybody to help keep their -- keeping up with their operating model.

With that, I'm going to turn it back over to the operator for questions.

(Operator Instructions). [Soleil Lapan], Barclays Capital.

Good morning. I was wondering Peter maybe -- how are you guys? I was wondering if Peter could maybe provide some more detail on your pipelines. How close are you to future deals, or any other details would be appreciated.

Good morning everyone. We feel really good about our pipeline right now. Unfortunately, there's nothing we can get specific with you on, just given the precarious state of our negotiations. But suffice it to say the targeted assets, the locations, the markets, the pricing and all of the metrics that Jeff already spoke of and Dennis were right in line. That's -- we are obviously working toward staying in that pricing target. But again, it's a bit of an empty answer for you because we can't get any more specific at this stage.

Thanks. Also, I know you said your RevPAR or your ADR growth kind of lags other companies by a few months, given the longer stays. I'm wondering how we should think about the split between ADR and occupancies for the year for you guys. We are generally thinking 50-50 for other companies, but if you could help me think about that.

Yes, I think that's generally correct. We've got -- of our 13 hotels, just looking at the portfolio, we've got five of the six Homewood Suites, five of the original six Homewood Suites, which we do see coming out of the renovations, there's going to be some occupancy opportunities there for those hotels which we should be able to gain market share on. For the balance of the portfolio generally, we're looking at some of those that already have occupancies over 85%, which we will certainly look to push -- to push that mix around a little bit to pull up some additional rate in exchange for that occupancy. So I think 50-50 is a reasonable split looking at 2011.

Okay, great. Then just lastly, on the corporate overhead guidance, it seemed a little higher than what I was expecting. I just was wondering if there's been any change, or is this kind of a good run rate to use going forward or what's driving it to be a little higher than (multiple speakers)?

Yes, certainly through 2010, as far as from a corporate overhead and more importantly employee perspective, I think, from 2010 to 2011, we certainly see, as we plan on bringing in new acquisitions, additional employees that are going to be needed from an asset management perspective and accounting perspective, a capital perspective. So I think the predominant increase year-over-year is just mainly starting to build in employee personnel with the growth of the Company. On top of that, I think just on top of that in 2010, as you well know and I think that Jeff alluded to from the IPO forward in terms of cash incentive compensation for 2010, the three executives of the Company elected not to take any incentive compensation for 2010, being a startup and wanting to do the right thing for the shareholders. So, you also see some planned incentive compensation in that 2011 estimate.

(Operator Instructions). Will Marks, JMP Securities.

Good morning. Hello. The first question -- you've mentioned this in the press release and you talked about it in the call. I'm still not clear on, within the additional guidance, where if you invest $100 million, does -- I know part of the $100 million goes toward Pittsburgh, but does this assume an additional $100 million is invested?

Yes, just to be clear, the operating model assumes the close -- the initial guidance assumes the completion of Pittsburgh on May 1. So you have Pittsburg built into that from May to December 31. The $100 million is on top of the Pittsburgh acquisition, but what you'll see in that pro forma EBITDA and FFO range, that includes Pittsburgh for the additional four months of the year, for 2011, as well as $100 million of acquisitions on top of it.

Perfect. Thank you. Some additional questions -- maintenance CapEx, you're going to have very well renovated properties, but should we still assume some sort of 4% or 5% budget?

I don't think you should assume 4% or 5% for 2011. I think if you look at kind of most of the portfolio, obviously we are spending $13 million on the PIPs for the original six hotels, $17 million in total. I think that, from a maintenance capital perspective, you're talking about maybe $500,000, $600,000 for 2011, which is about 1% of revenue.

Okay. Thank you. All right, moving on, on the margins, you typically, for your type of assets and historically I think with Innkeepers, ran at fairly high relative margins to full-service assets. How should we think about where you can get? Is there a peak level margin you just can't do better than?

I think our experience going back to the Innkeepers stays for this select service model is going to tell you that kind of in the run-up to 2006, '07, and '08, from an operating margin perspective before taxes and insurance, were in the mid to upper 40s% for the entire portfolio, 75-plus hotels. So I think if you kind of look at that from an operating perspective, I think that's no different for us. Our RevPARs are a little bit different, a little bit higher for this select service group, so whether it can get a 50% I wouldn't want to tell you that.

On a blended basis, probably not, but very similar to where we were in the Innkeepers days. I certainly would expect, as Dennis says, through the cycle being in a 46%-ish range. That's GOP by the way.

Right. Okay. Then the last question -- I think, Jeff, in your prepared comments, you talked about RevPAR growth and how it can compare to full-service assets. Given being select service and maybe not (technical difficulty) urban locations, the thinking is not just me, I think out there is that you can't get the same kind of RevPAR growth yet -- and you also had less of a decline. So maybe that is also an issue. Maybe there's not as much catch-up. But at the same time, your 5% to 7% RevPAR growth this year, which includes an impact from renovation, seems to be probably in line with others who are maybe more 7% or 8%, which sounds like you would be if it weren't for renovations.

Certainly, if you look at our portfolio, including impact of renovations, we are looking at 5% to 7% post-renovation for second, third and fourth quarter. But I think, once you kind of look at it on a run rate basis after they come out of the renovations and hopefully pick up some of that market share, that I think over time what we would tell you is that the RevPAR performance compared for the upscale extended-stay and select service will lag the luxury by a little bit. But it's not a pronounced 8% versus 4%. It's more 100 to 200 basis points over time.

When you look at even PKF and Smith travel expectations, you look at a difference between upscale, where most of our hotels fall, the prediction over the next few years is about a 7.2% CAGR. You look at upper upscale at 8% and luxury at 8.9%. So there is your difference, at least if you believe the experts. I think our numbers at -- in that -- at that 5% to 7% range reflect pretty much that 100 to 150 basis point difference with Marriott saying North America would be 6% to 8%, and a few of the luxury accompanies indicating maybe a little bit higher. So, we always want to be conservative about what we put out there. Nonetheless, what we say is and we certainly look back through history in the 20 years-plus that we have been owning hotels like this, and we fairly well mimic, honestly, what the industry results are, depending on the blend, of course, of locations that you own your hotels in.

That's great. Thanks for the color.

Nikhil Bhalla, FBR Investments.

Good morning guys. Just a question for you, Dennis, just following up a little bit on the margin side. The 34% to 35% margin for 2011, does that reflect mainly the renovation impact in 1Q, if you can give a little color on -- around that, thank you.

Nikhil, certainly the 34% to 35% is on a full-year basis, which does take into account the first quarter. When you have the renovations going on, you have a couple of different things which is obviously, from the revenue side, you're being displaced. But typically what you also see in those periods is a little bit of extra repair and maintenance expenses that just from having to clean rooms and clean up after crews and get rooms ready for delivery back into the systems, though. I think it will have some impact on it, and it does have a little bit of an impact on it, but it's not a couple hundred basis points or anything like that.

Got you. So just if you were to exclude the renovations, as you mean that renovations did not actually occur in 1Q on an apples-to-apples basis, where do you think the margins would've been otherwise?

Yes, I think I'd have to take a look at it a little more specifically on that. I can certainly get back to you on it, but like I said, I don't think it's going to be significant, but I'll get back to you with the specific on it.

Thank you very much.

Management, there are no further questions at this time. Please continue with any closing remarks you may have.

Well, I appreciate, again, everybody being on the call. We certainly look forward, as we always say, to moving through this year with some robust growth, getting the portfolio size up, getting our liquidity, continue to move forward on a share trading basis, and have the share price follow accordingly. So with that, we look forward to speaking with you soon. Thanks.

Ladies and gentlemen, this does conclude the Chatham Lodging Trust fourth-quarter results conference call. If you like to listen to a replay of today's conference, you may do so by dialing 1-800-406-7325 or 303-590-3030 using the access code 4405834. (inaudible) would like to thank you very much for your participation. You may now disconnect. Have a very pleasant rest of your day.