Chatham Lodging Trust (CLDT) 2011 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Chatham Lodging Trust second-quarter results conference call.

At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session with instructions provided. (Operator Instructions). I would like to remind everyone that this conference call is being recorded today, Tuesday, August 8, 2011 at 10 AM Eastern Time.

I'll now turn the conference over to Carol McCune, Executive Vice President of Daly Gray. Please go ahead.

Thank you, John. Good morning, everyone, and welcome to the Chatham Lodging Trust second-quarter 2011 earnings conference call.

Yesterday after the close of the market, Chatham released results for the second quarter ended June 30, 2011, and I hope you've had a chance to review the press release. If you did not receive a copy of the release, or you'd like a copy, please call my office at 703-435-6293, and we'll be happy to e-mail a copy 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 16, 2011, by dialing 800-406-7325 reference number 4458922. 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 express 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, 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 markets 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 SEC.

All information in this call is as of August 8, 2011 unless otherwise noted. 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 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 second-quarter 2011 results, I'd like to introduce Jeff Fisher, President and Chief Executive Officer; and Dennis Craven, Executive Vice President and Chief Financial Officer. Now let me turn the session over to Jeff Fisher. Jeff?

Thank you, Carol. Good morning, everyone. We are pleased again of course to be here to talk to you about developments at Chatham Lodging.

Before I get into some second-quarter details, we just want to again reiterate that the Company continues to look forward in terms of its internal growth prospects. And without a doubt, we know and we believe that as we talk about the second quarter, that will pretty much be the end of reporting sub-standard results relative to the overall peer group because of the high percentage of hotels that we have had under renovation commencing when we accelerated those renovations at the end of last year.

So it's been a couple of quarters of some results as we expected them to be and perhaps a slightly slower ramp up that I'll talk about in further detail here in a minute during the second quarter. But most importantly, we all want to focus on where we're heading, not look too much in the rear view mirror here, and our current results month by month including the first eight days of August appear to be back on track relative to our hotels' performance.

And of course adding the five, so-called five sister hotels from the Innkeeper's bankruptcy in a deal that closed in July as we've reported previously, will not only enhance our internal growth here at the Company, but definitely will enhance our NAV. We've got hotels that we bought at a substantial discount to replacement cost. We got hotels in very high barrier-to-entry markets. And those hotels have very strong upside as well.

We know from past experience that hotels which have these characteristics, such as these five hotels, generate RevPAR comparable to other full-service hotel brands, such as Marriott and Hilton. And when you factor in the operating margin performance of these hotels, you get strong risk-adjusted returns that do provide consistent dividends over time.

Since we've been operating the five sisters for quite some time, we know where the opportunities are and we are confident that we will be able to drive even greater returns now that approximately $11 million was spent to renovate four of the five hotels in the past few years. This will help our management teams drive enhanced revenue into the hotels because they simply have a better product to sell the local businesses, groups, and other extended-stay customers that those hotels serve.

The five hotels as I said really complement our portfolio as they are premium-branded hotels, mostly Residence Inns here again and in locations like Tysons Corner, Virginia, Foggy Bottom, downtown Washington, D.C., on the Riverwalk in San Antonio, and Anaheim, California, and Mission Valley.

So on a pro forma basis, including these five hotels with our existing 13, we will have over 20% of our rooms in California, 30% of our rooms in the Northeastern United States, and another 10% of our rooms in the Washington, D.C. area. So over 60% of our rooms are in those three target markets.

Though that's a very important, I think, transformation (technical difficulty) particularly compared to where we started at the IPO, and we will continue to focus in those markets and utilize that bi-coastal strategy where RevPAR is strongest, RevPAR growth has been strongest and we expect will continue to be strong as we move forward. Our Tysons Corner in Washington, D.C. hotels have been up approximately 6% year to date when excluding the time the Tysons Corner Hotel was under renovation.

One of our goals as we grow is to add hotels, as I said, with strong upside, whether through internal growth or through improved operating margin initiatives. These great locations command premium RevPAR for select-service hotels proven by the fact that they generated $25 RevPAR premium with operating margins of approximately 50%, compared to our existing 13 hotels. Just to give you an indication of the performance of these five, for June and July, RevPAR is up approximately 8%, so we are off to a great start there.

As you could see, we're very excited about these transactions and Chatham's hotel investments are now approximately $450 million, another big step in the development of Chatham to be the leading owner of premium-branded, select-service and upscale, extended-stay hotels in markets with high barriers-to-entry.

Let me spend a few minutes talking about the second quarter. I was very pleased with our operating results, which were in line with our expectations. RevPAR growth of 3.3% was due to the negative impact of having our Dallas hotel under renovation during the quarter as well as just simply experiencing that slower ramp up that I was talking about that's fairly typical in the extended-stay business.

During a full renovation, you lose that base extended-stay occupancy. So once you finish the reno, you typically take more time to ramp up occupancy related to extended-stay group training, special project business, and otherwise business that was displaced during the renovation.

Once the sales teams get that business back in the hotel, in order to provide that base of occupancy, then you can drive rate through the rest of the business, which is the shorter-stay business that comes into these kind of hotels. And I believe we are in the first or second inning now with those Hilton-managed, primarily, Hilton-managed assets, where the ramp up and some of that base is back, and therefore ADRs are also starting to increase in the overall portfolio.

Having the renovations behind us as I said I think is a very significant accomplishment for us, which not only impacts our existing 13 hotels but also two of the five sisters, where significant renovations were completed during April and May by Innkeepers. Another great benefit to having those renovations completed is that these now improved hotels are in markets that in and of themselves have seen strong RevPAR growth in 2011 with market growth of approximately (technical difficulty) there.

As these renovated hotels ramp up post-renovation, RevPAR growth accelerates. As we saw this with our entire portfolio growing approximately 6% in June and July, so as we move forward into the fourth quarter and beyond, our internal growth should be strong.

With RevPAR growth starting to accelerate, so too our operating margins. Our GOP margins were a very healthy 44.4% in the quarter, up 70 basis points over 2010. This is where having an aligned management company as a partner proves beneficial to all Chatham shareholders. As owners, we are able to work closely with our manager to drive better results, past experience has proven this out, and that we have had historically the highest operating margins of the select-service public hotel REITs.

With that, I'd like to turn it over to Dennis to provide more color on the second-quarter operating results. Dennis?

Thanks, Jeff. Good to be with everyone this morning. Second-quarter RevPAR was up 3.3% on an increase in occupancy of 2.6% to a little over 83%, and a 0.7% increase in rate to about $116.

As Jeff alluded to earlier, as these hotels come out of renovations, the first thing that you really start to ramp back up is that occupancy, and then you get the rate pop, which is exactly what we're starting to see in the portfolio.

When you look at the hotel portfolio for Chatham including the 18 -- for 18 hotels, which includes the five hotels, the five sister hotels that we closed in July, you'll see that pro forma second-quarter RevPAR was up 2.5% on a 1.2% increase in occupancy to 83.1%, and a 1.2% increase in rate to $127.

You see because our hotel portfolio is comprised of select-service and extended stay hotels, room revenue accounts for approximately 97% of our revenue. And for the second quarter, that RevPAR translated into revenue of approximately $14.9 million.

Just to give you a flavor for the five hotels, when you look at actually RevPAR -- when you look at RevPAR for the five hotels for June and July, compared to where our portfolio is, as Jeff alluded to, those are off to a good start with RevPAR up approximately 8% in June and July.

But just to give you an indication of the rates that these five hotels are bringing into the hotels, you're looking at rates in the $150 to $160 range at these mid-80% occupancy levels. So these are definitely high-quality hotels that have done very well for us in the past at Innkeepers as well as what our expectations are for Chatham.

For the second quarter, we reported a net loss of $1.9 million or $0.14 per diluted share, compared to a net loss of $0.6 million or $0.09 per diluted share.

Impacting us in the second quarter of 2011 were acquisition costs related to the Innkeepers transactions of approximately $1.2 million as well as accelerated depreciation of a little over $2 million on assets that we replaced in our renovations that we did on our Homewood Suites hotels.

The fact that we incurred the acquisition cost hit in the second quarter was merely just for timing from an accrual perspective. We obviously didn't close those transactions in the second quarter, so we didn't have the benefit of any revenue, EBITDA or FFO from those acquisitions.

Adjusted EBITDA was $4.3 million in the second quarter, compared to $1 million in 2010, with obviously the primary drivers the fact that we did have 13 hotels for the entire quarter of the second quarter of 2011, compared to only six hotels for a portion of the 2010 quarter since our IPO in April of 2010.

Adjusted FFO was $3.3 million or $0.24 a share based on the weighted average shares outstanding during the quarter. And for the six months ended June 30, adjusted FFO per share was $0.37.

As Jeff alluded to earlier, we have essentially completed the renovations on five of the six original Homewood Suites hotels. And by the end of this year, we will have fully renovated about 60% of our 18-hotel portfolio, putting us, we believe, in a great spot to take advantage of what we hope is a lodging upcycle. And we're in the beginning stages of that.

We spent approximately $10 million to date on those renovations, which is about $1 million less than what we had originally budgeted for these five hotels. So we are happy that we are able to get these hotels done on time and under budget.

Our Homewood Suites in Maitland, Florida began its renovation after July 4 to make sure that we conducted that renovation during the low season and minimize the impact on hotel operating results. That renovation is on time and within budget, and we expect to complete that renovation during the third quarter.

The last major renovations that we have planned for the year include the Washington and Holtsville locations, which will be renovated during the November to January and February months, which represent the slowest parts for those hotels of the year.

Looking ahead to 2012, we really only have two full renovations that we have to undertake, which is the Residence Inn in Anaheim and the Residence Inn New Rochelle, which are both due to have renovations in the latter part of 2012.

So from a capital expenditure standpoint for this portfolio of 18 hotels, we'll have the majority of that work behind us with just two hotels to tackle in 2012.

We did finish the quarter with approximately $31 million of cash and cash reserves and total assets of approximately $250 million. At June 30, debt outstanding was only $12 million and really just represented -- only represented the mortgages that were outstanding on the Altoona and Washington hotels.

Subsequent to the end of the quarter, we obviously have completed the $195 million acquisition of the five sisters hotels. That acquisition was funded through the assumption of five individual mortgage loans, secured by those hotels individually, totaling $134.2 million, with the balance funded from available cash and borrowing under our senior secured revolving credit facility.

These mortgage loans carry a weighted average interest rate of 6%, mature in 2016, and amortize based on a 30-year amortization period, except for the loan related to the Residence Inn Anaheim/Garden Grove, which is interest-only for the first couple years until 2013.

Another key point that we negotiated in that process was that these five loans are prepayable in whole at any time without any prepayment premiums or defeasance, despite the fact that they are CMBS instruments.

During the second quarter, we did amend our $85 million line of credit to provide for some temporary changes to our leverage ratio and coverage ratios. We do have the accordion feature in place that we can use to take our line up to $110 million. And these amendments obviously were designed so that with available cash, it allowed us to close on the five sisters, as well as the pending Pittsburgh acquisition as well.

A ratio of net debt to investment hotels is approximately 50%, which we've alluded to on our past calls, which is -- we're very comfortable operating at those levels, at those leverage levels at this stage of the cycle.

That being said, we're going to continue to look at opportunities that are NAV-enhancing, which one of those opportunities may be the potential sale of some of our hotels to refine our existing hotel portfolio, and recycle that capital into assets with higher growth rates. And we'll obviously consider the equity market is pretty shaky out there right now.

So as a management team, we understand that. So we're not going to do anything in terms of considering that scenario without knowing anything that we do is going to be enhancing to the value of the Company.

During the quarter, we declared a dividend of $0.175, which was paid on July 15, 2011, and our Board of Trustees and the Company will continue to evaluate the dividend on a quarterly basis. And as we roll the five sisters hotels into our consolidated results, we'll look at the current and future income projections in helping our Board determine the expected and projected dividend payouts.

Before I turn it over to the operator, I would like to reiterate we are maintaining our guidance that we issued on June 29 with respect to all items, except for the net income and net income per share, which has been reduced approximately $2 million due the accelerated depreciation on the assets that we replaced -- that we decided to replace during our renovations. This adjustment does not influence FFO, adjusted FFO, EBITDA or adjusted EBITDA.

That concludes my remarks on the quarter. And with that, operator, we'll turn it over for questions.

(Operator Instructions). Felicia Hendrix, Barclays Capital.

Hi, good morning, guys.

Hey, Felicia.

Good morning, Felicia.

So Jeff, you gave us a bullish overview of what was going on. A lot of it driven by acquisition and also renovations particularly regarding your outlook.

Just wondering is the fact that the Company is -- the properties are coming out of renovation, they're generating higher RevPAR, is that what's driving your guidance for the rest of the year? I'm just asking because I'm wondering if the recent economic uncertainty gives you any pause regarding your outlook.

Well, we figured that would be the first, the second, and maybe even the third question today.

There you go.

So thanks for starting us right out. Look, I will tell you that as of last night, August 8, we were exactly on forecast for all the hotels that we own. And I've spent plenty of time yesterday just going through with our operators, hotel by hotel, market by market, looking at the August forecast, looking, frankly, at some early September forecast numbers.

We just don't see it and I'm sure you'd hear that from other hotel companies as well. We don't see any affect of what's happening in the financial markets at the hotel level.

Obviously, I don't have a better crystal ball than anybody else. But frankly, we are bullish because we think that our hotels are definitely on the ramp up, and we see a good future barring some severe -- I mean the only caveat I'll make is the same anybody else would make, a severe double-dip recession here, such that GDP is substantially negative and businesses -- because that's who we're doing business with.

We're doing business with all these companies that for the most part have met or exceeded their second-quarter earnings expectations that have piles of cash. And those are the corporate customers that are in our hotels. So unless they shut off travel, I would suspect we'll be just fine moving forward.

Thank you for that. And then moving on to your balance sheet in the call you have last month you mentioned that you're comfortable operating at a higher level of leverage, where you are now. And again just getting to this economic uncertainty, I was just wondering if you were starting to think about your leverage differently.

And just in line with that, I was wondering if you could discuss your thoughts about capital raising. Given where your stock is trading, how are you thinking about raising capital?

Well, look -- we weren't raising any common equity at levels that existed even 30 days ago. So certainly looking at these absurd numbers for the group and for us, clearly, we are -- and I think we're in the same mode, which is we have completed a pretty important transaction here. We have a very nice portfolio of hotels, and we are very content to watch those hotels generate cash and pay dividends to the shareholders and validate frankly our entire thesis, which is owning these kind of Residence Inns and Homewood Suites and Courtyards and the like in the kind of markets that we're focused in will be able to provide consistent dividend paying cash flow that we can increase our dividends with unless again the world just falls apart.

So I think shareholders will be able to benefit. And I'm a big one myself, and I certainly would think that if anything this looks like the time to buy stock not sell stock.

Okay. Agreed. And just in terms of your -- and so, I'm assuming that you're comfortable with your current leverage.

Oh, yes, because we're going to get, again, this continued ramp up. And even on a comp basis, you know the hotels' RevPAR growth and EBITDA growth was nonexistent in the first and second quarter.

So our benchmark for growth here I think is very different than some of the other companies that experienced upper single-digit, or maybe one or two with double-digit RevPAR growth during the first six months of this year. I just think we're going to be looking pretty strong and feel good about 2012.

Great, fantastic. Thanks a lot.

Thank you.

Rochan Raichura, JMP Securities.

Hi, good morning. This is Rochan.

Good morning.

Hey, Rochan. How are you?

Good. How are you?

Good.

I just had a quick question on renovations and what's remaining in the budget for the rest of the year.

Yes. For the rest of the year as we alluded to, really the only thing that we have left, we've got the Maitland Hotel that's ongoing at the moment. We do have the Washington and Holtsville hotels that are scheduled for late in the fourth quarter.

From a total spend perspective, though, you're looking at -- we've spent about $10 million to date on those first five hotels. You're going to have in total a remaining spend of about $5 million. I will tell you though that the Washington Hotel basically is already pre-funded in a reserve account, so the net number as far as out of cash flow is going to be about $4 million, assuming that all that gets spent between now and December 31.

Those fourth-quarter hotels will trail from November into January, so you may have a little timing there. But for those projects, the net spend is about $4 million.

And as a percentage of our rooms by the way, let's just be clear, we've got very, for the most part, small hotels that we're talking number of rooms count, etc., so it's fairly de minimis I would think insofar as impact. Right, Dennis?

Yes, that's right. I mean the Washington Hotel is 86 rooms; the Holtsville hotel is 124 rooms. So in total you're talking about 210 rooms out of our 2,600-room portfolio that will be renovated in the fourth quarter.

And then like I said looking forward to 2012, the only renovations -- the only hotels that are going to require full renovation are the Residence Inn Anaheim/Garden Grove, as well as the Courtyard in Altoona, which you know we --

Yes, yes. Another small hotel.

Yes, another small hotel though.

Right. And then just in relation to the 18-asset portfolio, could you perhaps give some detail on the ADR and occupancy performance for that portfolio for 3Q '10, 4Q '10?

For the 18 hotels?

Yes.

I mean, yes, I can certainly give you a general term for those. For the 18-hotel portfolio? Or are you just looking for the five additional hotels?

He wants the 18 maybe?

For the 18.

Why we don't we do that offline.

For the 18.

Yes, I can send it to you offline.

No, we can do that offline.

Well, that's great.

And if you could just maybe just -- I don't know if you could quantify but perhaps even qualify how you see the second half of the year in terms of third-quarter and fourth-quarter RevPAR performance? If you can distinguish those two, or if you anticipate that they'll be similar or stronger trends in one quarter over another?

Third versus fourth.

I mean, the answer is no. I mean we see the third and fourth quarters, as Jeff alluded to, we do have this ramp-up effect. For the fourth quarter, it's going to be a little bit better than the third quarter in terms of RevPAR performance that we look at.

In total, the third versus fourth quarter on a year-over-year basis, the growth is almost in line, it's less than 50 basis points between the third and the fourth quarter. So it's not a -- it's certainly, we see the fourth quarter to benefit a little bit better as these hotels continue to ramp back up in the third quarter.

Great. Okay. Thank you for the clarity on those questions.

Thank you.

Nikhil Bhalla, FBR Capital Markets.

Hi, good morning, guys.

Good morning.

Just a question; just some color on segmentation across your hotels, if you can provide some sense of how much is corporate transient? How much is leisure, and specifically government business?

That's very obviously different hotel by hotel. And when you say corporate transient, let's remember that the bulk of these assets are extended-stay hotels. So then within the segmentation of those hotels, corporate is divided in tiers between one to four nights, and on up to 30 plus. So you've got different tiers of corporate.

Suffice to say that 90% plus of the overall business in these hotels is either corporate or government. But I think that in markets obviously like Washington, D.C., or particularly Mission Valley where we do a lot of business with the military there, you've got higher percentages of government business that affect the numbers.

So it's funny; I was just talking to our operators yesterday about even fourth-quarter numbers, and Mission Valley is somewhat dependent upon where the new government per diem comes in at, the special project business services, those Navy ships out there. So you've got dynamics like that that vary hotel by hotel. But overall again, leisure being a very small component, except in one or two hotels during the summer.

Got it. And just a follow-up question on the government per diem rates, any sense of what the 2012 rates may look like for government per diem at the moment especially given that rates have actually been on an upswing all through 2011. So presumably, I would think government rates should be higher for next year, any thoughts?

So when you say an upswing, they had been on upswing except for 2011, is that what you said?

No, as in rates have been -- across the industry I'm talking about.

Yes, because per diems to be clear -- and most people don't know -- were substantially down in 2011.

Yes, yes.

The government per diem. And so the view was that you'd normally -- historically they always lag by a year or so, the view was. And I don't know that that's changed, that 2012 would be up again. So we'll have to wait and see.

Okay. Thank you.

(Operator Instructions). We have no further questions at this time. Please continue.

Well I guess to sum it up; we figured people would definitely have not any derogatory comment to us but better things to do this morning. Nonetheless, we are bullish, we remain bullish.

We think the characteristics of our portfolio, as Dennis indicated, whether it's the five sisters and the 8% RevPAR increases experiencing there, the 6% plus RevPAR increases in the rest, good overall signs in these hotels with all the rooms back online, provide for I think some strong and definitely re-looking at -- strong growth and re-looking at our dividend as we move through this year barring any unforeseen severe downturn in this overall economy. We will keep our nose to the grindstone, we will continue to do our job, which is to make our shareholders as much money as we can, and we look forward to talking with you on or before the next call.

Ladies and gentlemen, this concludes the conference call for today and thank you for your participation. You may now disconnect your lines.