Chatham Lodging Trust (CLDT) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Chatham Lodging Trust first-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, and instructions will be provided at the time. (Operator Instructions). I would like to remind everyone that this conference call is being recorded today, May 8, 2013.

I will now turn the conference over to Jerry Daly with Daly Gray. Please go ahead.

Thank you, Angela, and good morning, everyone. And welcome to the Chatham Lodging Trust first-quarter 2013 results conference call. Yesterday, after the close of the market, Chatham released results for the first quarter ended March 31, 2013, and I hope you've got a chance to review the press release. If, for any reason, you did not receive a copy or would like a copy please, call my office at 703-435-6293 and we'll be happy to email one to you. Or you may view the release online 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 Wednesday, May 15, 2013, by dialing 1-800-406-7325, with a reference number of 4616125. A replay of the conference call will be posted on Chatham's website. As a reminder, this 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 market specifically; international geopolitical difficulties or health concerns; governmental actions; legislative and regulatory changes; availability of debt and equity capital; interest rates; competition; weather conditions or national 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 May 7, 2013, 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 reconciliation of these measures to GAAP results in our earnings release.

Now, to provide you with some insight into Chatham's 2003 (sic - 2013) first-quarter results, let me introduced Jeff Fisher, Chairman, President and Chief Executive Officer; and Dennis Craven, Executive Vice President and Chief Financial Officer.

Jeff?

Thanks, Jerry, and good morning, everyone. Dennis and I, again, are happy to be here with you to talk about our first quarter and our prospects for the rest of the year. Again, to reiterate, for the first quarter, earnings $0.02 higher than consensus; and very strong operating results within Chatham and the joint venture properties.

On the balance sheet side, we had a very successful offering in January. The money was put to work within 30 days, and we acquired two great hotels. Additionally, always working on the balance sheet and the debt side, we are pleased with our refinance on an additional hotel that we accomplished during the first quarter as well.

Taking a look at the numbers, RevPAR grew 6.3% at our comparable 19 hotels, in line with industry RevPAR growth of 6.4%. We had solid double-digit RevPAR gains in our Houston hotels; our Pennsylvania hotels; and our New York area hotels in White Plains, New York, and Holtsville, New York, which was aided by the residual Superstorm Sandy business.

Our new Portland, Maine, hotel also had a great quarter, as we discussed at the year-end, in terms of the prospects there, with RevPAR growth of 14%. These strong results more than offset the effects of having two Residence Inns under renovation in Anaheim, California, and New Rochelle, New York. As we moved out of the quarter, in April, RevPAR growth accelerated, up 7.2% at our comparable 19 hotels, and 5.6% when you look at all 20 of the hotels.

Adjusted EBITDA increased 10% to $9.4 million. Adjusted FFO increased 55% to $4.5 million. And adjusted FFO per share jumped 24% to $0.26 per share, $0.02 higher than consensus, and $0.01 above the range we provided. Results benefited from outstanding performance by the two recently acquired hotels in Houston and Portland, very strong operating results in the JV, and reduced interest expense due to the refinancings in late 2012 and early 2013.

Year-over-year, operating margins were unchanged, at 42.1%. We expected that, since we've got hotels under renovation in the first quarter, and the rebranding of the DC hotel, our margins were adversely impacted by approximately 60 basis points due to higher-than-normal repairs and maintenance expenses in those assets. Additionally, when we acquire hotels and there's a change in management, we typically spend a bit more at the outset just getting the hotels back to the condition that we'd like to see them in.

Very encouraging news is that in the first quarter, three-quarters of our RevPAR growth at our 19 comparable hotels was driven by increases in rates, which bodes well as we progress through this year, and our operating expenses normalize. Our operating model, as you know, is very efficient at driving revenue growth to the bottom line. As the cycle matures, and a larger component of the RevPAR increase continues to be driven by ADR increases, our ability to generate excess cash flow through operating leverage accelerates, which leads to further dividend increases.

On the operating side of our Innkeepers joint venture with Cerberus, RevPAR growth was 6.8% for the quarter. As most of you know, we've got a significant presence in Silicon Valley, with eight upscale extended-stay hotels; seven Residence Inns; and one Hyatt House there. RevPAR in the Silicon Valley hotels was up over 30% in the quarter. And we continue to see increased demand and ability to drive rates.

With respect to the performance of the JV, EBITDA and FFO from the JV exceeded our internal projections by approximately 10%, adding another $0.01 of FFO in the quarter. The conversion of our unbranded DC hotel to a Residence Inn is making progress, with most of the public space scheduled for completion by the end of June. We expect to complete the work required within the guestrooms by the end of August; and, therefore, we are scheduled for a September 1 conversion to a Residence Inn brand.

We continued our growth when we acquired, for $35 million, a beautiful Courtyard by Marriott Hotel in the heart of the Houston Medical Center. And in late 2012, we acquired another great hotel on the waterfront in Portland, Maine, as we've discussed. The outstanding results in the first quarter again show that those were two great additions to our portfolio, given their brand, their location, the internal growth prospects for those assets, and also their very young age.

In January, we completed a $53 million equity offering at $14.70 per share, and essentially match-funded the offering with the accretive acquisition of the Portland and Houston hotels. We are very cognizant to not to dilute our shareholders with massive offerings that do not have a meaningful use of proceeds within a short period of time. Using reasonable amounts of leverage produces optimal results for our shareholders, and we are comfortable with these levels at this point in the cycle.

We are excited about the opportunity to continue our growth, as we have a very active pipeline for acquisitions, which allows us to make the right deals for our shareholders. When you compare our absolute RevPAR to other public REITs, we have one of the highest quality, select service investment portfolios in the REIT space. And we'll continue to find assets that meet our very strict acquisition criteria. Rest assured, though, we will continue to grow Chatham prudently as markets allow, and with reasonable leverage, match-funding any equity offering as we did in January.

With that, I'd like to turn it over to Dennis for a little more detail.

Thanks, Jeff, and good morning, everyone. For the first quarter, we reported a net loss of $1.6 million or $0.10 per diluted share, compared to a net loss of $1.7 million or $0.13 per diluted share in the 2012 first quarter. First quarter RevPAR was up 4.2% to $101 at our 20 hotels, compared to our prior earnings guidance of plus 3% to 5%. Excluding the unbranded DC hotels, our RevPAR was up 6.4%, with occupancy edging up 20 basis points to 76.3% in the quarter for all hotels; and 77.1%, excluding the DC hotel.

Adjusted EBITDA for the Company increased $0.8 million or approximately 10%, to $9.4 million, with the jump attributable to the acquisitions that we made in late 2012 and 2013, as well as the outstanding performance within our joint venture. During the quarter, the joint venture contributed approximately $2.1 million of adjusted EBITDA to Chatham.

Adjusted FFO jumped significantly -- 55%, to $4.5 million; up $1.6 million from 2012. And on a per-share basis, FFO per share rose approximately 25%, to $0.26 in 2013. In addition to our strong operating performance, the jump in FFO was aided by the $1 million decrease, or approximately 20% decrease, in interest expenses resulting from our refinancing of the line of credit in late 2012, as well as the various refinancing efforts we made in the first quarter.

Looking at the balance sheet, our net debt was approximately $224 million at the end of the quarter, comprised of debt of $229 million at an average rate of approximately 4.25%, offset by $5 million of cash. Debt includes $96.5 million outstanding on our $115 million line of credit. And our ratio of net debt to hotel investments, including our investment in the joint venture, was approximately 44%. Our coverage ratios remain strong on a trailing 12-month basis. Our debt service coverage ratio was about 2.2 times.

During the quarter, our net debt decreased $11 million, as we used proceeds from our equity offering to slightly deleverage the portfolio. As we move through 2013 with very little renovation obligations, we expect to use excess cash to pay down our line and free up capacity for any additional investments. In early 2013, as we discussed, we refinanced about $80 million of debt on three of the five CMBS loans, on the 5 Sisters portfolio that we assumed in 2011. And additionally we paid off an approximately $20 million loan on the DC hotel that was also assumed in 2011 as part of that portfolio.

All of the prior loans carried a rate of approximately 6%; now at a carrier rate of approximate 4.6%. As you saw in the press release we issued not too long ago, subsequent to the end of the quarter we issued $20 million of debt on our Houston Courtyard hotel at an even more attractive rate of 4.18%. With long-term borrowing rates at historically low levels, we will continue to take advantage of these market conditions to fund a portion of our acquisitions.

We have reduced the weighted average rate on our fixed-rate debt to almost 5%, and we've extended the weighted average maturity on our fixed-rate debt to 2021. We have only $5 million of maturities in 2015, and only $38 million maturing in 2016. And after that, our next maturity is 2021. Using reasonable leverage enables us to lock in solid, long-term returns for our shareholders. And, after all, that's what we're here for.

With respect to our joint venture investment, we received no distributions during the quarter, which was expected; as the first and fourth quarters of 2012 are typically slow in terms of generating significant excess cash in those quarters. We did sell one unbranded hotel for approximately $3 million during the quarter. It generated no net proceeds to Chatham, as there was debt encumbering the hotel at the date of sale.

When we look over to our guidance for 2013, it assumes that no factors out there that we are unaware of at this point in time which could have a negative effect on the industry. It assumes economic growth in line with current projections. We are maintaining our adjusted FFO per share guidance of $1.58 to $1.64, one of the highest within the REIT space. The outperformance in the first quarter is going to be offset through the balance of the year, with a slight increase in interest expense of a couple hundred thousand dollars related to the $20 million loan on the Houston Courtyard hotel; as well as the delay related to the DC conversion, which is impacting FFO by a couple of cents for the full year, and $0.01 in the second and third quarters.

As we move through to 2014, though, with respect to the DC hotel, we'll certainly have a very easy comp in that hotel. It'll be operating, obviously, all of 2014 with the Residence Inn brand. And we look for a very good performance coming out of the gates in that asset.

Our second-quarter RevPAR projection is showing growth of 4% to 5% for all 20 hotels. RevPAR at unbranded DC hotel is projected to decline approximately 30% in the quarter, bringing down our portfolio RevPAR growth by almost 200 basis points. We have seen a bit of softness in Tysons Corner in the second quarter, due to sequestration. It hasn't impacted occupancy, but it has impacted the rates that we've been able to gain in that hotel.

Our interest expense, as previously discussed, is estimated for the full year, $10.2 million; which is up $0.2 million, due to the new loan on the Courtyard in Houston. Our projections do not include any other changes to our capital stack or equity offerings throughout the year. From a disposition perspective, we don't expect any in 2013 for Chatham. And within the joint venture, we do expect to have -- to have completed the sale of at least one or two of the remaining unbranded assets in the second quarter.

Lastly, subsequent to the end of the quarter, we did expand our relationship with Cerberus by investing in a new joint venture that acquired a Residence Inn in Torrance, California, for $31 million. We own an approximate 5% interest in the joint venture. And it does carry similar promote features to what we had with the Innkeepers joint venture. That hotel is being operated and managed by Marriott International.

And, Operator, that concludes our remarks. And with that, we'll turn it over to questions.

(Operator Instructions). William Marks, JMP Securities.

Thank you. Good morning, Jeff; morning, Dennis. Hello. I guess first, you mentioned how quickly you were able to put some money to work. And can you talk a little bit about your desire for future investments, and what type of cap rates we're seeing? Are they going down? Are they up? Just some big-picture comments.

Yes, I'll take that one at the outset here. Of course, we have a strong desire to grow this Company. We've said that all along. We have a strong pipeline of hotels that we're working on here. I'd say most of them actually are, again, direct negotiations with no intermediary or broker in the middle here. So we feel good about delivering similar kind of cap rates as we did on the Portland and Houston -- well, Portland was a higher cap rate, but -- as the Houston deal. And we think that match-funding those in a conservative, prudent way, without dumping too much stock on the market either, is very important.

We believe in maintaining the scarcity off the stock; and, therefore, supporting the price of the stock as we move forward and grow this Company. So I would look forward in the second and third quarter to see some acquisition action by us.

Okay, great. And just in the markets, has there been movement in cap rates it off? I know it's a very general question; it varies by market. Are we seeing movement into your markets, more capital into maybe -- call them, secondary market?

Well, I'll tell you what I see. On the select service side of life right now, urban CBD, Gateway city assets that are select service, probably garner similar cap rates as any full-service asset in a similar market. As you know, our strategy has always been to be just outside that center city location. So, within the assets that we're talking about and the hotels that we are targeted to acquire, we're still kind of in this 7.5%, 8% cap 2013 real numbers, achievable numbers, for this year -- as our bogey, anyway. And I don't think that's really compressed over the last 12 months or so, as you've read about some of this other activity.

Okay. Thanks for that. In my last question is, you guys -- you did gave a Q2 forecast, as well as full-year. Q2 RevPAR growth seems higher -- it is right in the middle or the exact same as full-year. Are Q3 and Q4 consistent? Is there any one quarter that's a difficult comp?

Yes. Q2 -- in Q3, we expect to be a little bit better than Q2 in terms of RevPAR growth. Q4 is going to be a little bit down, not in terms of -- not negative in terms of RevPAR growth, but from a growth perspective; lower, in kind of that 2% to 4%, 3% to 5% range. Because of what we talked about in February, which is we are coming over very difficult comps with the Superstorm Sandy business that benefited us in the fourth quarter by about 160 basis points.

So you do have that very abnormal comp for that one hotel that may bring back just a normalized throughout the rest of the year. Certainly, April was a little bit better than we expected. May is trending well; not much different than what we forecast, but it is picking up steam as we move through the month. So, all in all, things look pretty good.

Okay, great. Appreciate it. Thank you.

Nikhil Bhalla, FBR.

Yes, hi. Good morning, everyone. Hi, how are you? Just a question on sequestration here in DC. You talked about seeing some impact on the rate side, not so much on the occupancy side. If you could just give us some color on what may be going on in the market here. Is it the competitors who are dropping rates to pick up some volume? Just any color would be appreciated. Thank you.

Yes, I think when you look at both our DC asset as an unbranded asset, currently, and the Tysons Corner asset, what -- and one of the benefits is we've got -- they're both extended-stay type boxes. And the ability to bring in occupied rooms for that room product has allowed us -- I think you saw maybe Chesapeake talk about some impacts on RevPAR because of some sequestration at a couple of their hotels.

With our hotels, we've been able to do a very good job just maintaining occupancy with the Residence Inn and even with the DoubleTree; even with it being out of service, without a brand, we've been able to maintain that. So, the only impact has just been the fact that the overall room demand is down a little bit, and therefore you do have to sacrifice your rates.

It's really yield management, Nikhil.

Got it. And just when you open the new Residence Inn later this year, do you expect that maybe the impact [versus] at that point in time when you open this hotel?

Look, I would guess that this issue obviously remains there for the balance of the year, for wherever hotels that are being affected. We are no less bullish, though. It's only a 100, 104 room hotel. And when we plug this baby into the Marriott reservation system, I think we already know what we're going to get. So, again, maybe ADR could be affected just a little bit, but I think it's going to be a real strong operator. And it is a great location.

That's great. And then just finally, Jeff, when you look at what you have in the pipeline right now in terms of acquisitions, would it be fair to assume that your next -- most of your acquisition candidates are part of the JV with Cerberus?

No, no. We've got a very nice pipeline of hotels that are from other owners that we've done business with before, or individuals that we have been talking to. So, the opportunity to buy I think, over time, will always be there out of the JV. But we've got a good -- we want to have a deep pipeline. And we want to be able to make acquisitions that give the kind of going in yields for the first year that we know result in positive accretion for our shareholders here.

Got it. Thank you so much.

(Operator Instructions). And, gentlemen, there are no further questions at this time.

Well, we'll finish up just by saying again that we are, as we normally say, we're pleased here with our results for this first quarter. As Dennis indicated, April was a great month; May looks strong. The only negative impact here at all is running an independent hotel that, in the prior year, was plugged into the Hilton reservation system and was a Doubletree. So, obviously, year-over-year, we've got some drag there.

But I'll tell you what -- we are working as fast as we can. I will be at that hotel tomorrow. And in terms of this DC conversion to Residence Inn, we do expect some pretty strong back-half-of-the-year results out of that. Additionally, as we grow this Company, we are using -- one of our top acquisition criteria is to be acquiring hotels that have RevPAR growth and internal growth prospects at least as good, if not better, than the internal growth of the Company taken as a whole.

So we're looking for accretion on all ends as we grow here. And I feel very positive about our ability to do that, and continue to grow our cash flow and our share price as we move forward. So, hopefully we've done a good job. Lack of questions sometimes, hopefully, means that on this call. Any other questions, Dennis and I are here to take those calls anytime. Thank you all.

Ladies and gentlemen, this concludes our conference call for today. Thank you for participating. Please disconnect your lines.