Chatham Lodging Trust (CLDT) 2014 Q1 法說會逐字稿

Good morning, everyone, and welcome to the Chatham Lodging Trust first-quarter 2014 results conference call.

This morning, before the opening of the market, Chatham released results for the first quarter 2014 and I hope you have had a chance to review the press release. If you did not receive a copy of the release or you would like one, please call my office at 703-435-6293 and we will be happy to email you one, or you may review 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 until midnight on Friday, May 16, 2014, by dialing 1-800-406-7325, reference number 4681158. 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 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, 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, amongst 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 geopolitical [difficulties] or health concerns, government 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 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 8, 2014, 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 net 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 insights into Chatham's 2014 first-quarter results, allow me to introduce Jeff Fisher, Chairman, President, and Chief Executive Officer, and Dennis Craven, Executive Vice President and Chief Financial Officer. Let me turn the session over to Jeff. Jeff?

Great, Chris. Thank you and good morning, everyone. Well, it's a great day here for Chatham, we think, and our shareholders. We've got a lot to talk about today. Obviously you will hear some excitement in our voice because we've worked long and hard to try to arrange a transaction that we think is as beneficial as it is to our shareholders on all fronts, frankly.

We produced another great quarter of financial results and are really excited, as I said, to announce what we think is a real transformative deal having reached agreement to acquire all of the Innkeepers hotels through two meaningful investments. First, we will acquire 47 of the 51 Innkeepers hotels in a joint venture with Northstar Realty Finance, a premier publicly-traded diversified commercial real estate investment trust and asset management company with $11 billion of commercial real estate assets under management.

Needless to say, we are thrilled to partner with Northstar. We have had a great experience thus far working with them and we certainly look forward to a profitable relationship as we move forward.

Additionally, in the second part of the transaction, Chatham will acquire outright four Residence Inns in the heart of Silicon Valley for its own balance sheet. Upon closing of these transactions, we will issue a press release providing updated guidance and other key information and also hold an investor conference call to speak in more detail about the transaction.

So we are going to take this from a probably more 30,000 foot level than most of you would expect with a transaction like this, but we want to emphasize the deal is not closed yet but we are under firm contract here. We will tell you much, much more, including putting slides on our website with some more detail, about exactly what we are requiring here in both transactions as we move down the road.

But before we get into the first-quarter results, I do want to speak a little bit more on the Cerberus JV. We have had an incredibly successful and mutually beneficial joint venture with Cerberus. In 2011 we opportunistically leveraged our balance sheet to acquire five hotels out of the Innkeepers bankruptcy, as you will recall, for $195 million and to invest $37 million into a new JV that acquired 64 of the Innkeepers hotels out of bankruptcy for a little more than $1 billion.

Upon closing of the sale of the Cerberus JV in the second quarter, the investment will be a home run for Chatham and its shareholders as we expect we will have received total distributions of approximately $114 million in less than three years on our initial $37 million investment. I think I like that. That represents a gain on the investment of $77 million or approximately $3 a share for us. Measured in conventional IRR terms, that equates to an approximate 81% internal rate of return for Chatham.

On the buy side of the Innkeepers transactions, our new JV with North Star is acquiring 47 of the 51 hotels for a cash purchase price of $934 million, or $153,000 per room. Well below replacement costs and still below the $160,000 per room Apollo paid in 2007, when interest rates were almost 7% and the CapEx needs of the portfolio were substantial.

I love the structure of this deal because we roll $26 million of our promote to retain our 10.3% interest in the JV on a tax-free basis. Otherwise, we would be incurring a substantial tax as a result of the transaction and net dollars of not having the money that we do have now without tax obviously to reinvest in the hotels that we are acquiring.

Additionally, we buy four fantastic Residence Inns in Silicon Valley for $342 million, an almost 50% increase in our investments in wholly-owned hotels. We do that by taking the rest of our gain from the JV transaction, which is approximately $54 million, and apply that against the purchase price in a tax-deferred transaction as well. So after application of the $54 million and a release of certain escrowed FF&E money attributable to these four hotels, the net cash purchase price for Chatham shareholders is $273 million, or approximately $363,000 per room.

But when you factor in the expansion plans that I will get into later, where we will be adding significant rooms to these hotels, the pro forma cost per room for these hotels is a very attractive $323,000 per room.

We will fund the acquisition using 10-year fixed rate debt with remaining cash required funded by our line of credit. Just like we did in 2011 when we used our balance sheet to opportunistically make the Innkeepers investments, we are using our balance sheet to make these transformative deals, investing $367 million in total, which by far surpasses any year since our inception. In fact, with these acquisitions, our wholly-owned portfolio investments will eclipse the billion-dollar mark.

Before considering the upside from the expansion opportunities I mentioned, though, these acquisitions are very accretive to FFO considering 2014 EBITDA is estimated to be approximately $25 million and we are financing the acquisition with $273 million of debt that should carry an interest rate below 5%.

We will talk a lot more about the expansion in detail by hotel on our next call, but just to talk generally, in terms of the expansion, these four hotels sit on approximately 24 acres of prime real estate in Silicon Valley and we intend to partially redevelop and expand these hotels. Since the hotels are built in a pod-like construction methodology as gen-one Residence Inns were with eight units per building, the opportunity is to look at the very large site and landmass that these hotels sit on, tear down two or three of those guest house buildings, and maximize coverage in a new four- or five- or six-story tower, as zoning may or may not permit. And it varies, of course, by town and by municipality and by location to be able to add those extra rooms.

So you temporarily remove minimal room inventory over the course of the year and you replace that inventory with a state-of-the-art new building encompassing all new public space on the ground floor and, of course, the sleeping room, the suites above. We will be able to add at least 272 rooms in total, an increase of 36%, and given the amount of land that hotels sit on, there actually could be room for further expansion or other value opportunities as we move down the road.

Switching gears to our solid first-quarter results, we saw RevPAR jump 7.8% to $105 in the quarter even with a tough comparison last year of Superstorm Sandy business. We are aided by an easy comp for the Washington DC hotel since it operated without a brand for two-thirds of the 2013 first quarter, but even taking that into consideration RevPAR was still up 6.5%. Importantly, we saw strong growth across our portfolio with 11 of our 25 hotels posting double-digit RevPAR growth.

Within our markets, occupancy continues to climb, up 2% to 72%, a sign that demand continues to grow. With our hotels typically holding one of the strongest brands in those markets, we stand to benefit most from the underlying groundswell. Island Hospitality has grown market share in each of the past two years and continued that momentum in the first quarter, growing market share at 2.1%.

The converted DC Residence Inn continues to gain traction with a year-to-date market share index of 112, which would be the highest level in any of the last five years. The highest index the hotel had as a Doubletree was 106 in 2012. 2014 RevPAR is projected over $160, which would be 10% higher than any year in the past 15 years. Strong numbers. When we acquired the hotel out of the Innkeepers' bankruptcy in 2011, we knew that the hotel would flourish as a Residence Inn and our thesis is proving out well so far.

With our top line clicking on all cylinders, our margins continue to expand with hotel EBITDA margins advancing 70 basis points to 34.9%. Incremental utility costs and harsh weather, winter weather-related costs adversely impacted margins and profits, as you've heard from others, and we do have a lot of hotels in the Northeast. Operating profit flow-through for all 25 hotels was, at least for us, a modest 40%. Not as well as we would've liked, but not bad considering the weather, the snow removal, and the utility costs increase that I saw in all those P&Ls.

We expect our margins will expand further through the balance of the year and estimate 2014 operating margins for the current hotel portfolio to expand almost 200 basis points to 40%. And we believe there is substantial room for further advancement as ADR grows over the next several years.

We have got a great hotel platform here at Chatham, owning premium-branded extended-stay and select service hotels and employing Island Hospitality, our affiliated manager who we believe is one of the best in the space. With three decades of experience investing in and operating primarily select service and limited service hotels, we believe that we have a pretty unique understanding of how to generate significant value in this space.

I think the most recent transaction that we have announced here today certainly exemplifies the kind of results that we -- and track record that we continue to do. We just look forward to continuing to utilize that expertise as we grow the Company moving forward. Dennis?

Thanks, Jeff. Great to be with everyone today and sharing the exciting news that we've been working on for quite some time with respect to the joint venture with Northstar and the acquisition of the four hotels.

For the first quarter we reported a net loss of $1.7 million, or $0.07 per diluted share, compared to a net loss of $1.6 million, or $0.10 per share, in the 2013 first quarter. One-time expenses of $1.2 million were incurred in the quarter related to the HG Vora shareholder proxy settlement and the unsolicited offer from Blue Mountain Capital Management.

As Jeff spoke, RevPAR was up 7.8% versus our previous guidance of 3% to 4%. February to March RevPAR growth really came on strong at plus 10% and plus 9%, respectively, after a moderate 4% growth in January. With strong top-line revenue growth and continued margin expansion, combined with continued lowering of our borrowing costs, we have been able to significantly expand FFO, up 66% to $7.4 million, and FFO per share rising almost 10% to $0.28 per share, which came in at the upper end of our guidance range.

Had we generated flow-through of 50% to 60% versus the 40% that Jeff spoke to earlier, our margins would've come in at the upper end of our guidance range and EBITDA and FFO per share would have been $0.5 million and $0.02 per share higher. In addition to the increased utility and harsh winter costs, the fact that occupancy made up more than half of our RevPAR in the first quarter does impact flow-through potential.

Adjusted EBITDA for the Company rose 41% to $13.2 million in the quarter. In the quarter the joint ventures between both the Innkeepers joint venture and our Torrance joint venture contributed approximately $2.3 million of adjusted EBITDA to our results, compared to approximately $2.1 million in [EBITDA] for 2013 fourth quarter -- I mean first quarter. And from an FFO perspective, the JVs contributed approximately $0.03 of FFO per share to the Company, which is basically flat year-over-year with the 2013 first quarter.

At March 31 our net debt was approximately $272 million comprised of debt of $270 million offset by $6 million of available cash. During the quarter, we refinanced a $32.2 million 6% mortgage on the Residence Inn Anaheim Garden Grove with a new 10-year, $34 million, 4.7% mortgage, creating interest savings of about $0.4 million on an annualized basis. We will continue to issue long-term financing at these historically low rates as a means of funding future growth.

The average interest rate on all of our debt now sits at 4.33%, down from 5% about a year ago. From a year ago we have managed to reduce the average rate of our fixed-rate debt about 120 basis points to what is now 4.8% and our average maturity on our fixed-rate debt now is out to 2023.

At quarter end our leverage ratio was 37% based on the ratio of our net debt between investment in hotels at cost. Assuming the consummation of the Innkeepers acquisitions in the second quarter, our leverage ratio will increase from 37% to approximately 52% to 53%, levels very similar to what we operated at from 2011 through early 2013. Additionally, after the Innkeepers transactions close, we will have approximately $75 million available on our line of credit and we will have two hotels out of the 29 that remain unencumbered -- the SpringHill Suites in Savannah, Georgia, and the Hilton Garden Inn in Denver, Colorado.

As Jeff mentioned, we estimate that we will realize a gain of approximately $77 million, or $3 a share, on our current Innkeepers joint venture. We are able to roll over the $77 million gain into the basis of our investments in both the new joint venture with Northstar and the Silicon Valley four pack because of transactions being structured as entity purchases. This provides maximum tax efficiency because we are able to reinvest 100% of the gain into further income-producing hotel investments, in essence leveraging that gain into further income and earnings and building shareholder value.

In April, our Board of Trustees approved a 14% increase in the dividend, now standing at $0.08 per share per month, equating to an annualized dividend of $0.96 a share. With minimal CapEx obligations for the next several years and debt locked in at very attractive long-term rates, our free cash flow projections are very strong. We have increased our dividend every year since our inception in 2010 and we will continue to reward our shareholders with increases as our FFO per share climbs.

We have stated since our IPO that we will continue to grow dividends in tandem with our earnings. As a percentage of FFO per share, we paid out approximately 60% in 2012, 56% in 2013, and what is projected to be approximately 54% in 2014 based on the current midpoint of our guidance which is around $1.73 per share. Our confidence in the overall health of the hotel industry remains very positive and our Board of Trustees will continue to reevaluate the dividend each quarter.

As a company and a management team, we know that dividends make up the primary component of REIT returns over time and our goal is to continue to build a successful company that produces strong cash flow that will provide such dividends to our shareholders.

Turning attention to our guidance for the second quarter and full year, we have basically raised our full-year RevPAR growth by 50 basis points and the lower end of our EBITDA and FFO per share guidance to account for the outperformance in the first quarter. As Jeff alluded to, at least for this call, we are going to keep it at kind of the 30,000 foot level on the Innkeepers transactions, and like he said, we will issue a press release and host an investor call after the transaction has closed.

But at least to give some preliminary guidance on what it means to Chatham; our share -- because of the reduction of the JV from 51 hotels to 47 hotels, our share of 2014 EBITDA of the JV on a pro forma basis would go from $10.6 million to $8.1 million, which equates to about $3.1 million -- excuse me, equates to about $0.06 or $0.07 per share of FFO. But it would reduce our current run rate of $1.73.

However, when you include the four-pack acquisition, early in the call Jeff noted that 2014 hotel EBITDA is projected to be approximately $25 million and with estimated borrowing costs on the $273 million of debt at a rate of around 5%. And when you factor those assumptions, the addition of the four pack would add approximately $0.40 of FFO per share on a full-year basis. When you put those two together a pro forma 2014 FFO per share basis, these transactions would accrete approximately $0.33 to $0.34 of FFO per share to Chatham.

Our current estimate of expansion costs is approximately $59 million, as I think Jeff alluded to earlier in the call. On a pro forma basis, again if you looked at just 2014 RevPAR and EBITDA margins for those for hotels, that would equate to incremental EBITDA of about $12 million on a pro forma basis. So again, when you look at these transactions and you start look at the impact that it is going to have on our company, both the joint venture and the acquisition of the four hotels, certainly it's very meaningful from an earnings perspective to Chatham and to the long-term value of the portfolio.

I think with that, operator, that is going to conclude our remarks. We will go ahead and open it up for Q&A.

(Operator Instructions) Gaurav Mehta, Cantor Fitzgerald.

Thank you, good morning. A couple of questions on the four assets that you are acquiring. So you decided to acquire these four assets out of the 51 hotels that were in the JV. Can you talk about why these four hotels? Then did you look at some other hotels as well?

This is Jeff. We really were, overall, trying to meet I think what Northstar's needs are and ours. So these assets represent probably a lower cap going in than the 47 to some extent, but most importantly require development and expansion capabilities. And, frankly, the willingness to take some rooms out of order and in the near term suffer some earnings hit as a result of taking those rooms out of order because these are hotels that run in excess of 80% occupancy.

So probably just simply better suited for us being a pure hotel REIT and, frankly, having the expertise, the ability, and the desire to do that work as compared to Northstar.

Okay. Then you talk about financing these hotels with fixed-rate debt and LOC. Can you talk about what is the breakdown between LOC and mortgage debt?

We are still working through the mix of that. I think, generally speaking, what we have been doing on all the loans that we've been putting in place is debt, 10-year fixed rate debt kind of in the loan-to-value ratio somewhere between 55% and 65%. I think, generally speaking, that is where this will fall out.

Okay. Then last question I have is on RevPAR. You have 7.8% in 1Q and then your 2Q guidance is 7% to 8%, but if I look at 2014 guidance it's 6% at midpoint. Are you underwriting any kind of slowdown in the second half or outside of the seasonal variation?

We do have -- when you look at the fourth quarter, the fourth quarter is a little bit lower, Gaurav. We have got -- when you look at the breakdown it's basically kind of 7% to 8% second quarter, 6.5% to 7.5% third quarter, and around 4% to 5% in the fourth quarter. Our visibility is not quite as strong for the fourth quarter. I think, given where the trend is, we hope that we will outperform that number, but we haven't formally adjusted that for our guidance.

Okay, great. That's all I have, thank you.

Nikhil Bhalla, FBR.

Thank you. Just a question on the new JV here. Is there another promote structure in place in this new JV with NRF similar to what you had before with Cerberus?

Yes, and we'll talk more about that. On the next call we will get in a little more detail. But, yes, an advantage is rolling our equity, maintaining our 10.3% in those great assets with strong cash flow, and having a new promote structure in place.

Okay, that's good. In terms of EBITDA from the West Coast with the four hotels included, how much of your EBITDA will come from the West Coast now?

As a percentage?

Yes.

All right, I actually got that. It looks like we are going to have roughly 47% of our EBITDA from the West Coast, 40% California, and around 28% from Silicon Valley. But after the expansion, assuming a static portfolio, more like 35% in Silicon Valley.

So, look, that market is strong, as you know, and we will talk a little bit more about the supply and demand fundamentals and what's going on there in our next call.

Just a follow-up question there on that, Jeff. You look at San Francisco RevPAR, of course it has been gang busters, right? Are these assets kind of -- do they do somewhat similar types of growth rates versus what you see in the San Fran market, a little bit lower? How do they track versus that area?

It has been fairly comparable. For the last couple years the market has seen double-digit RevPAR growth. It's once again pretty strong this year as well, in that same double-digit range, so it compares very favorably to the San Fran market.

Okay, that's all I have. Thank you very much.

(Operator Instructions) I'm showing no further questions in the queue. Please continue.

All right. Well, we appreciate everybody listening today and we look forward to closing this transaction and reporting back with some further detail, specifically as to I think the accretion, as Dennis was alluding to. Because you have got to consider the role of the equity and the result of the acquisition of the hotels with that, in essence, that promote resulting in a very substantial -- it should result in a substantial FFO increase and EBITDA increase for the Company.

Additionally, business looks good. Second quarter looks good. Of course, in our hotels there's no long booking window so you don't have, as Dennis indicated, huge visibility, but there's very little new supply here in the markets that we are in. So we look forward to, frankly, I think a very good 2014 and we look forward to reporting back further with good results on our next call. Thank you.

Ladies and gentlemen, that does conclude our conference for today. You may now disconnect.