Chatham Lodging Trust (CLDT) 2015 Q4 法說會逐字稿

Greetings and welcome to the Chatham Lodging Trust fourth-quarter earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Chris Daly. Thank you, Mr. Daly. You may begin.

Thank you, Michelle. Good morning, everyone, and welcome to the Chatham Lodging Trust fourth-quarter 2015 results conference call. This morning, before the opening of the market, Chatham released results for the fourth-quarter 2015, 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 would like one, please call my office at 703-435-6293 and we'll be happy to email you one; or you may view the release online at Chatham's website, chathamlodgingtrust.com.

Today's conference call is being transmitted live via telephone, by webcast, or Chatham's website, and at www -- excuse me, at Chatham's website. A recording of the call will be available by telephone until 11:59 p.m. Eastern Time on Wednesday, March 2, 2016, by dialing 1-877-870-5176, reference number 13629747. A replay of the conference call will be posted on Chatham's website.

As a reminder, this conference call is property of Chatham Lodging Trust, and any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of the Company 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 its other things. 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 geopolitical 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 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 24, 2016, unless otherwise noted. And the Company undertakes no obligation to update any forward-looking statements 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 2015 fourth-quarter results, allow me to introduce Jeff Fisher, Chairman, President and Chief Executive Officer; Dennis Craven, Executive President and Chief Operating Officer; and Jeremy Wegner, Senior Vice President and Chief Financial Officer.

Let me turn the session over to Jeff Fisher. Jeff?

Thanks, Chris. Good morning, everyone. We are certainly pleased again to be here this morning. We are hosting this call -- actually, we are on the road -- for our regularly scheduled Board meeting as well tomorrow, from our residence in the Gaslamp District here in San Diego. We acquired this hotel, as you know, about a year ago.

Certainly a great asset. We are enjoying being in San Diego, and look forward to showing our Board what we have planned in terms of a regularly scheduled renovation as well here at the end of the year.

I'd like to start by spending a few minutes on our fourth-quarter results, which produced RevPAR growth that I'm particularly pleased of, of 4.7%. Of course, as we all expected, slightly below our guidance of 5% to 5.5% that we initially set, but adjusted FFO per share of $0.42, which was within the guidance range we provided. During the quarter, RevPAR grew 4.5% in October, 5% in November, and 4.5% again in December.

We've been keeping a little tally, as everyone has been reporting their results over the last week or so, and we are pretty proud of the fact, as we had hoped and suspected that we would have -- at least so far -- the best results of all C-Corps and all lodging REITs, in terms of RevPAR growth and FFO growth, I believe, in the fourth quarter.

I think that outperformance -- again, we've said it over and over again -- is driven by a number of factors. It's driven by the quality of the hotels that we own. It's driven by the markets that we are in. And the markets that we've acquired our hotels in, as we've said many times, have been very specifically targeted to be the place where job growth is prevalent and strong.

So, you look across the portfolio and you look at the markets we are in, the hotels were not acquired in a haphazard manner. We are in Boston because we like the Route 128 Corridor. We understand the demand generators -- primarily high-tech generators, in that Corridor -- our hotels there are doing very well. Dallas, a great market. Wonderful corporate relocation market; companies relocating from, even for example, Torrance, California, one of the big auto manufacturers.

So, there are continued opportunities for growth. And therefore, for the kind of hotels that we own, they really benefit from that kind of growth in those markets. Denver, Seattle, Silicon Valley -- you know, these markets have driven some very strong results. And we expect those markets to continue to perform better than the industry norm as you look across 2016.

And so, therefore, we want to be conservative with our guidance, because we know we are in a time where things are somewhat uncertain, but nonetheless, proud of the hotels that we own and proud to look at the experience, even in the fourth quarter, with many of our hotels experiencing some very strong RevPAR growth.

The Silicon Valley growth -- again, in the fourth quarter, was a little bit slower than we expected, as we've indicated, primarily because that time of year, the extended-stay business -- engineers, high tech, et cetera -- tends to slow down. But January, the business picked right back up again. And although the Super Bowl was an interesting result for us, in that it actually displaced business from the hotels, because most of the business travelers that normally would come to Silicon Valley steered clear, period. They didn't want to be there.

And actually, one of our very large groups from Apple canceled a few weeks out in front of that event too. So the carry-through there had some negative effect. But again, from a bigger picture perspective, market is still strong. Obviously, it's not a double-digit RevPAR gainer. There really are very few of those left.

And my overall comment is, let's be cognizant of long-term historical growth rates of RevPAR throughout this business and the industry, and let's have reasonable expectations. And I think that the overall multiple of our Company, and some others, have expectations that perhaps were either, A, too high, or B, expect severe contraction in RevPAR and EBITDA, and with most folks guiding anywhere from 2% to 3%, up to 4% or 5% for the year. That translates still into some good growth for us and for most people in the hotel business.

So that's kind of the Jeff Fisher macro backdrop there. The boys cautioned me not to get into politics today. So, I'll try not to do that. In any event, I would like to go back and just reflect a little bit on Chatham's accomplishments in 2015. 2015, of course, seems like a long time ago, given the rapid change in investor and lodging sentiment over the past nine months.

But despite the awful share price performance, and of course, as a major shareholder, I feel the pain. It was a year where Chatham accomplished some very significant things that benefited our shareholders in 2015, and will continue to add value over the long haul. We raised our annual dividend 29% to $1.20 per share, an increase for the fifth consecutive year. And we expect our dividend will grow again in 2016.

We solidified our balance sheet for the long-term, successfully closing on a new unsecured $250 million senior new credit facility that can be expanded to $400 million, and matures in late 2020. Adjusted EBITDA grew an astounding 49%, and our adjusted FFO advanced almost 59%. Adjusted FFO per share jumped 20%. These are strong results, particularly compared to the peer group.

We reduced our leverage while also acquiring four high-quality hotels in San Diego and Los Angeles, Boston, Mass and Fort Lauderdale, for approximately $190 million. And those hotels had very, very strong RevPAR gains, further enhancing the overall performance and quality of the assets and, I think, the NAV of the Company with those assets.

We sold a hotel that was located -- a Residence Inn -- in Torrance California that was in a JV still with Cerberus. It was a 95%/5% JV. We owned that hotel less than three years. We made almost $13 million in the aggregate -- I think a pretty good result. And with our promote structure with Cerberus, we realized a gain of $3.6 million, again, a very strong return and another indication, I think, of the underlying value of the assets in the Company.

We've lived through a lot of hotel cycles as a public company, and we've learned not to lose focus on our goal to own the very best select service assets in the United States that will generate long-term returns, cash flow and growing dividends for our investors. We've got a sound balance sheet. We have no near-term maturities. And I believe we are absolutely set for success as we look forward.

Again, looking ahead to 2016, we are one of the few lodging REITs projecting nearly double-digit FFO per share growth at the midpoint of our range. We've grown FFO per share at an annual rate of over 20% since 2011. Again, putting us at or near the top of all lodging REITs. And we funded our growth using cash flow, as well as a balanced mix of equity and debt. And as such, we've been able to increase our dividend every year since our IPO. And we expect that to continue as we move through 2016.

With that, I'd like to turn it over to Dennis.

Thanks, Jeff. Good morning, everybody. I'm going to walk through our earnings for the quarter and compare them to our fourth-quarter guidance, preparing a -- reconciling between our actual results and the guidance we've provided.

Our RevPAR guidance for the quarter was 5% to 5.5% RevPAR growth for all hotels, and we ended up seeing growth of 4.7%. This was driven by a 3.1% increase in occupancy to 77%, and a 1.5% increase in ADR to $154. The primary drivers behind the underperformance was the decline in our two Western Pennsylvania hotels that are managed by Concord, which saw RevPAR decline 22% in the quarter.

I think everybody is fully aware of the challenges in the oil and gas industry. These two hotels are primarily driven by performance in that sector. So, certainly that is going to have a negative impact on not only our quarter, but also is going to have an impact on 2016, with RevPAR down similar amounts for the full-year projected in 2016.

Our market index was down about 1% in the quarter, while the competitive -- while the markets themselves were down, on average, about 21% in those two Western Pennsylvania hotels. So, certainly not something that's indicative of those two hotels. It's merely an overall market performance.

Our two DC hotels were up 0.4% in the quarter, which is, again, obviously lagging our overall portfolio performance. And another weak market for us was the Carlsbad Homewood Suites, where RevPAR was down 1.4%, as it was impacted by new supply in the market.

Lastly, we had two hotels that were under renovation in the quarter -- the SpringHill Suites in Savannah and the San Antonio Homewood Suites on the Riverwalk -- where RevPAR was down 19% and 16%, respectively. The San Antonio Homewood Suites, we accelerated the timeline on the renovation from beginning in the first quarter of 2016 to the fourth quarter of 2015, to be able to get some rooms finished prior to some group business coming in here in February and March.

Excluding the reimbursable cost revenue, our hotel revenue of $66.2 million came in right in the middle of our guidance range. Adjusted EBITDA rose 22% to $26 million, and it came in $1 million below the lower end of our guidance, with the primary reason due to lower-than-expected hotel EBITDA margins. Our hotel EBITDA margins were 37.5% compared to our guidance of 39.3% to 40.3%. Hotel EBITDA margins were impacted 130 basis points from an increase in property taxes, of which $200,000 of the $500,000 increase is attributable to some of our Silicon Valley and Savannah hotels.

Another area where costs for us in the quarter were rising is travel agency commissions and gas rewards costs. During the fourth quarter, those expenses were up almost $400,000 or 18%, and impacted our year-over-year margins by approximately 60 basis points. For the full-year, these third-party costs and guest reward costs are up $1.7 million or 23%, as third-party revenue production keeps rising.

And we are certainly, from an owner's perspective, looking at our brands to help owners reduce these costs over time, and continue to find ways to incentivize and drive hotel guests to the brand.com sites for their reservations. Despite these cost pressures using comparable hotel operating results, regardless of who owned the hotels -- and that basically factors in the four hotels that we acquired in 2015 -- our operating margins were flat year-over-year for the quarter at approximately 47%.

We do expect, in 2016, to be able to drive comparable margins slightly higher as we move through the year. Adjusted FFO jumped 27% and came in at $0.42 a share versus our guidance range of $0.42 to $0.44. We were able to offset the $1 million of hotel EBITDA shortfall and stay within our FFO guidance range, due to increased FFO contribution from our joint ventures of about $400,000; reduced interest expense of $300,000, due to the reduced rates as a result of our new unsecured line of credit; and $300,000 from lower income taxes.

Slightly higher G&A was offset by lower amortization of loan costs and other non-cash expenses. With respect to the two joint ventures, our Innkeepers and Inland joint ventures, these joint ventures comprise a total cash investment for us of about $50 million, and our share of their FFO comprises approximately 10% of our enterprise FFO per share.

RevPAR in the Innkeepers portfolio was up 6.1% in the quarter and RevPAR was up 1.5% in the Inland joint venture. GOP margins were up 100 basis points within the Innkeepers joint venture to approximately 43%, and were essentially flat in the Inland joint venture at approximately 40%.

In the aggregate, the joint ventures generated approximately $3.7 million of EBITDA for Chatham, which was above our guidance range of $3.2 million to $3.3 million, and $1.8 million of FFO, which was above our guidance range of $1.4 million. The outperformance was due to better-than-expected revenue performance within our Inland portfolio and better-than-expected hotel EBITDAR -- EBITDA margins across both the portfolios.

The two joint ventures, as we've talked about and mentioned in our press release, are producing outstanding returns, having generated an approximate 17% levered return in 2015, based on the cash distributions that we received throughout the year.

With respect to the Silicon Valley expansions, work continues on the 32-room tower addition in Mountain View, and we expect to complete the project in the 2016 second-quarter. We will begin the redevelopment of the Gatehouse in Mountain View later this year. With respect to the two Sunnyvale locations, we do -- with respect to the two Sunnyvale locations, we expect to begin those expansions in the fourth quarter, and expect that process to take approximately 12 to 15 months.

We are still working through the planning and approval process for the San Mateo location. As originally planned, we're able to -- we're going to be able to add 43 rooms in that location. Given some air rights issues with that area, which is called Mariners Island, the incremental number of rooms is most likely going to decrease in that location to less than 30. So, we are still considering the existing expansion plan at that location.

However, for the Mountain View and the two Sunnyvale expansions, total costs are expected to be approximately $70 million to $75 million. These three projects would add an incremental 220 rooms in Silicon Valley. And we would expect those three expansions to add almost $10 million of EBITDA and $6.5 million of FFO on a full-year basis in 2018, which is very meaningful at almost $0.17 a share.

We're going to spend approximately $7 million on the redevelopment of the Gatehouse in Mountain View in 2016 and 2017. In 2016, outside of the Silicon Valley expansions, we plan on spending approximately $19 million on our annual capital plan in 2016. And expected cash flow -- cash outflow on the Silicon Valley expansions for the year is going to be approximately $25 million in 2016.

During the fourth quarter, we completed the renovation of the 160-room SpringHill Suites in Savannah, Georgia. And as I spoke earlier, we are just finishing up the renovation of the 146-suite Homewood Suites in San Antonio, Texas on the Riverwalk.

And I think with that, I'll turn it over to Jeremy.

Thanks, Dennis. Good morning, everyone. For the quarter, we reported net income of $4.5 million or $0.12 per diluted share compared to a net loss of $5.3 million or $0.16 per diluted share in Q4 2014. The primary differences between net income and FFO relate to non-cash costs such as depreciation, which was $12.8 million in the quarter; the write-off of $0.4 million of deferred financing costs associated with the refinancing of our revolving credit facility; the $3.6 million gain on the sale of our interest in the joint venture to own the Residence Inn Torrance; and our share of similar items within the joint ventures, which were approximately $1.9 million in the quarter.

Adjusted FFO for the quarter was $16.1 million compared to $12.7 million in Q4 2014, an increase of 27%. Adjusted FFO was $0.42 per share, which represents an increase of 14% or $0.37 per share generated in Q4 2014. Adjusted EBITDA for the Company rose 22% to $26 million compared to $21.4 million in Q4 2014. In the quarter, our two joint ventures contributed approximately $3.7 million of adjusted EBITDA and $1.8 million of adjusted FFO. And we received distributions of $1.3 million from the Innkeepers portfolio and $450,000 from the Inland portfolio.

Our balance sheet remains in excellent condition. Our net debt was $589 million at the end of the quarter, and our leverage ratio was 41.2%. We are very comfortable at this leverage level, and have the capacity to complete our planned Silicon Valley expansions and additional acquisitions without raising equity, although there are no acquisitions currently in the pipeline.

During the fourth quarter, we refinanced our $175 million secured credit facility with a new $250 million unsecured credit facility. The new facility matures in November 2020 and is priced at LIBOR plus 165 at our current leverage level, which represents an 85 basis point reduction from the spread in our previous facility.

Transitioning to 2016, I'd like to note that our guidance takes into account our planned renovations at the Homewood Suites San Antonio and Hilton Garden Inn Burlington in Q1, the Courtyard by Marriott Addison, and the Homewood Carlsbad in Q2, and the Residence Inn San Diego Gaslamp in Q4. Our guidance also assumes 75 rooms will be out of service at our two Sunnyvale Residence Inns starting in Q4 in conjunction with our expansions of those hotels. We also expect to complete our 32-room expansion of the Residence Inn Mountain View by the end of Q2.

Our guidance assumes 2016 RevPAR growth of 3% to 4%, which is in line with recent trends for the portfolio and consistent with what a number of other owners and operators are forecasting. This guidance is predicated on the assumption that GDP growth will be in the range of 2% to 2.5% in 2016.

In 2016, our strongest markets are projected to be Silicon Valley, Bellevue, Denver, Orlando, and Savannah. Silicon Valley and Denver were two of our strongest markets in 2015, and we expect those trends to continue in 2016. Our hotels in Bellevue, Orlando, and Savannah should all benefit from easier comps, since they were all impacted by renovations in 2015.

The only market that we are projecting to be extremely weak in 2016 was Washington, Pennsylvania, which has been significantly impacted by the decline in oil and gas prices. On a comparable same-store basis, including a full-year impact of the hotels we acquired in 2015, 2015 quarter-by-quarter RevPAR was $121 in the first quarter, $140 in the second quarter, $146 in the third quarter, $119 in the fourth quarter, and $131 for the full-year.

In 2016, we are projecting RevPAR of $123 to $125 in Q1, and $135 to $137 for the full-year. Room revenue is projected to be $282 million to $285 million, up approximately 10% from 2015. Other revenue, which comprises F&B, lease, and miscellaneous revenue, is expected to be approximately 5.6% to 5.7% of total revenue for the portfolio.

We expect increases in ADRs to account for a significant portion of our RevPAR growth in 2016, which should enable us to continue increasing margins. We expect hotel EBITDA margins to be 43% to 43.6% in 2016 compared to 43.1% in 2015. Our 2016 margin expectations reflect a full-year of ownership of the Hilton Garden Inn Marina del Rey, which has lower EBITDA margins than some of our other hotels because of its ground lease.

Our full-year forecast for corporate cash G&A is $8.8 million, which is flat to 2015; corporate non-cash G&A, which represents amortization of share-based compensation for the Board and employees, is expected to be $3.5 million. Interest expense, excluding amortization of deferred financing fees, is expected to be approximately $27 million in 2016 versus $26.3 million in 2015.

The increase reflects higher average debt balances in 2016 than 2015, as we used debt to fund the acquisitions of the Residence Inn Dedham, Residence Inn Fort Lauderdale, and Hilton Garden Inn Marina del Rey in Q3 2015. Our cost of debt will improve as the spread in our new facility of 85 basis points lower than the spread in our previous facility.

We are forecasting non-cash amortization of deferred financing fees and franchise fee applications to be approximately $1.5 million in 2016 versus $1.8 million in 2015. On a full-year basis, our two joint ventures are expected to contribute $17.4 million to $18 million of EBITDA and $9.3 million to $9.9 million of FFO in 2016.

From a cash flow perspective, capital expenditures are expected to be about $44 million in 2016, with $19 million related to our 2016 capital plan and $25 million related to the Silicon Valley expansions. We expect the $19 million of capital related to our annual capital plan and $12 million related to our Mountain View expansion to be spent ratably throughout the year. We expect the remaining $13 million of capital related to our Sunnyvale expansions to be spent beginning in Q4.

All in all, we expect 2016 to be another solid year. Based on the midpoint of our guidance, adjusted EBITDA and adjusted FFO per share are both projected to increase by 9%. We expect a quarterly contribution of adjusted EBITDA of approximately 20% in Q1, 28% in Q2, 31% in Q3, and 21% in Q4, and we expect a quarterly contribution of adjusted FFO to be approximately 18% in Q1, 30% in Q2, 34% in Q3, and 18% in Q4.

I think at this point, operator, that concludes our remarks, and we'll open it up for questions.

(Operator Instructions) Gaurav Mehta, Cantor Fitzgerald.

First question on the acquisition pipeline. I understand there is no acquisitions in 2016 guidance, but I was just hoping to get your view on what you are seeing in the market in terms of product flow and pricing.

Well, there's not much going on out there. This is Jeff. Good morning. And there are some select service hotels that some brokers have listings on that are trying to give some interest. But frankly, on our end anyway, given our multiple, we certainly don't think, as we've said many times, now is the time to be buying.

The math doesn't work, obviously, and therefore, we are just going to double-down on our focus in really maximizing the earnings from the portfolio that we've got. I can't tell you, just on a bigger sense, there really haven't been enough transactions in the last three months, four months, since everyone's multiple has really contracted and overall economic fears have persisted, RevPAR growth rates have dropped. You know, macroeconomic world events have been a little bit dicey.

So you can't really put your finger on a cap rate, if that's what you are looking for, to say, yes, what was a 7% cap is now an 8% cap. You know, I kind of feel that's the way it ought to be, and perhaps in some cases, on a one-off or two-off selective basis, I've heard that that's more realistic right now at this time.

Okay, great. And a second on the RevPAR side, can you talk about the trends that you've seen in January and February?

Yes, we've talked a little bit about them. I mean, they're -- so far in January, were pretty consistent with the numbers that we had as we went through Q4, perhaps a little bit less. Did we put a number out for January yet or --?

No, but I mean our January RevPAR growth was a little over 4% for the portfolio.

I think we just put a number out. So -- and again, February, honestly, the results are moving around so much, particularly because of that negative Super Bowl impact, for us anyway. With our two big Sunnyvale hotels, February will probably come in lighter than that. That's why we guided in the first quarter lower, specifically for some not-great February results.

Okay, great. That's all I had. Thank you.

Thanks.

Thank you.

(Operator Instructions) Anthony Powell, Barclays.

Your hotel in Denver materially outperformed that market. I was wondering if you could talk about what drove that outperformance, and also your view of the Denver market this year as a whole?

Hey, Anthony. Good morning. The Cherry Creek Hotel -- which really, since we bought it, the Hyatt Place in Cherry Creek is really benefiting from just a very good location in a market that has seen tremendous demand growth really from the transient customer.

From a corporate perspective, the Hotel does sit adjacent to a pretty large office tower, but it's really not the primary driver of business in that market. And we've continued to see just nice outperformance out of that hotel. The Hilton Garden Inn at the Tech Center as well as upper-single digit RevPAR growth in the quarter, and that one is more obviously corporate-driven. But again, just that entire Denver area -- and we see it in our Innkeepers assets as well that are in Denver -- just a -- it's just a very strong market.

All right, thanks for that. And Jeff, I don't know if you can comment on the broad RevPAR growth outlook for select service hotels relative to full service. Last year, I think select service outperformed, but we've seen a bit of a reversal of that trend in the STR data recently, so I wondered if you could comment on that outlook?

You know, I don't really know enough about full service hotels to be able to give you a very good comparison, but you know what the trends are, and you know where select service companies have positioned themselves for RevPAR for this year. So, I kind of think that the numbers are out there for everybody to see.

Yes, I mean, certainly, Anthony, as well from a new supply perspective, even though the historical new supply growth is still less than 2% projected for 2016 in the -- within kind of the upscale segment, it's closer to 5%. So, there are certainly, across the country, from a new supply perspective, that will have somewhat of an impact in 2016 and 2017.

Got it, okay. My last one from me -- your credit facility now has the option to -- for you to buy back shares, $75 million. What's your overall view on share repurchases this year relative to other uses of capital?

Yes. I mean, listen, I think at this point, we are -- it's a nice mechanism for us to have. We don't have any plans to announce any type of share repurchase programs at this point. It allows us to repurchase, I think, $75 million of stock, which is a little less than 10% of our float.

I think for our shares, it would be difficult to really acquire much -- many shares anyways. But listen, from a use of proceeds perspective of our credit facility, right now with the Silicon Valley expansions projected to generate kind of a low-teen returns, that's the best use of our capital at this point.

All right. That's pretty clear. Thank you.

Thanks, Anthony.

Blair Brantley, BB&T Capital Markets.

I just wondered -- I had a question about the Silicon Valley and kind of the updated plans there. Can you kind of walk through what's happening with the last piece of that expansion plan again?

Yes, basically, with the -- I think you are referring to the San Mateo location?

Right.

Yes, so the -- the area in the hotel -- well, the area where the hotel sits is something called Mariners Island. And just going through the process of getting the approvals there, we've uncovered some old provisions within the plan of that Mariners Island area. And essentially, what we are looking at, at the moment, is the 43 rooms that we thought we were going to be able to add in that location, at least as currently where we stand is going to be less than 30.

So from a -- just a pure returns perspective, we are -- if we get held to that number of rooms, then from a pure returns perspective, it doesn't appear as though that is going to make a whole lot of sense to invest the dollars in adding the rooms. So, we still are looking at that situation.

Just to be clear, the reason why -- if it was pure incremental rooms, any room you add, in our view, in Silicon Valley is going to make you money, and it's going to increase the NAV of the Company. But you've got to take down rooms, okay, meaning existing buildings -- and you remember these are eight-plex kind of individual buildings -- in order to build the new rooms.

So, the math starts looking pretty dicey when you are taking down a number of rooms. And in that case, I think we were originally going to take down -- what were we taking down, 24 there or something? -- in order to -- or a little bit less in order to create the new room count. But now, if the new room count can only be 30, then it's just a wash.

Right, okay. And then how does your -- how does the CapEx plan for the other two pieces fit versus what you had planned or what you had thought it would be earlier?

Well, certainly, costs --

-- [$70 million, $75 million]?

Yes, I mean, certainly, costs are rising if you when -- and we've spent a bunch of time out there in the last six months just understanding what's going on and as we planned these expansions. But construction is just rampant in the area, whether it's multifamily, whether it's corporate.

So certainly our expansion costs have risen about 25% since -- you know, from a year and a half ago. So it's not surprising given what's going on. The good news is that the hotels have continued to grow from a RevPAR and earnings perspective, so the returns are still pretty strong, but there's obviously a lot of construction activity in Silicon Valley.

It still makes sense with an un-levered 12% to 14% return, which is what we project, based on not even inflating RevPAR. Okay? Just quick and dirty using existing RevPAR numbers. So, we are still real excited about having those rooms onboard. And also, those buildings in each hotel also gets us a brand-new lobby. We call it a Gatehouse in a Residence Inn, but it's the area that you serve your breakfast, your evening cocktail and reception area.

So all of that together will enhance, I think, our overall RevPAR as well. And the timing on those is, as Dennis indicated, is more of a Q4 start rather than mid-Q3. So we haven't slipped much, but when you drive around in Silicon Valley, you do see a lot of apartment construction, and you see Google, you see Apple's new headquarters under construction. And frankly, the contractors are having trouble finding labor.

Okay. Yes, that kind of segues into my next question about just overall tech spending environment and if you've seen any changes there?

You know, we are watching this really closely here, because obviously trends are pretty volatile right now in the industry. And you know we are keeping our hands on pretty much a weekly basis what's going on. And we are told and we don't see any substantial trends there.

There have been a couple of newspaper articles in the San Jose Business Journal in the last month, oops, XYZ is going to lay off some people. And there is some obviously negative things being written, since the IPO market has fallen apart, about VC travel and that kind of stuff. But frankly, they don't stay in our Residence Inns; the engineers stay in our Residence Inns.

So I think maybe the upper-end hotels might be feeling a little bit of that impact. So, we still feel good, but we are, I would say, more cautious and careful about not waiting until the last minute to book business, trying to put some heads in beds perhaps a little earlier, because we definitely see, wherever you look, less of a transient business customer in the hotels.

Okay, thank you very much. Appreciate it.

Right.

Bryan Maher, FBR.

If we could switch gears a little bit, you talked a little bit about the Hyatt that you have in Cherry Creek. And you have an awful lot of the Hilton product and the Marriott product, but only a little bit of the Hyatt product. Can you tell us what you're seeing out there in the field as it relates to the various brands that you kind of traffic in? And do you think you are getting more bang for your buck from kind of one brand or another? And do you think you'll do a little bit more with Hyatt in the future?

Well, let's see how we can do this nicely. (laughter) We -- and as you know, we love Residence Inns. And it's not because we love Residence Inns; you know, we really like the returns we get on our investment in these hotels. So, our preference, as you know, is to be in the upscale extended-stay business.

We've got some Hyatt houses that fit that bill. They were formally Summerfield Suites. And then Hyatt bought that chain, so -- and converted them. But what we see, as particularly compared to Marriott and Hilton, is just less contribution through the reservation system. And even though that Hyatt Place in Cherry Creek has really done well, when you look at the contribution numbers, and you look at the source of business and the market segmentation of the hotel, what you find is a lot of it is OTA business.

And it's not sort of Hyatt.com. And that, I think, is probably a fair cross-section of the few Hyatt Places that we own and the Hyatt Houses that we own.

Well, that segues perfectly into kind of my follow-up question on the OTAs and their impact. And a lot of discussion as it relates to the OTAs at ALICE this year. Can you kind of weigh in on what your view is there?

And when we look at Marriott and Starwood combining, and a lot of discussion on maybe some others combining, in an effort to, eventually, years down the road, maybe being able to muscle the OTAs back a little bit, what are your thoughts on that bigger picture action?

Well, to me, it's all positive. Dennis mentioned the impact in Q4 to our FFO and to our earnings. I think primarily, other than some real estate tax increases that are one-time, the expansion of our TA costs as a line item, and particularly all in the OTA line is just enormous on a year-over-year percentage basis.

So, anything that the brands can do to combat this and get us a little more in line with the airline fees that are paid, et cetera, as an industry, we are just getting gouged. And the cost to deliver that room just keeps going up. We are not facing labor cost pressures and wage pressures, and certainly not sort of food cost pressures or otherwise utilities seem to be in line. I mean, you know, frankly, that is the pressure. It's the OTA line.

Okay. Thanks, Jeff.

All right.

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Well, we appreciate everybody being on the call today. And again, we are looking forward to 2016. We're looking forward to continuing to put up what we see as some outperformance numbers. And hopefully, over time, our share price and our multiple, as compared to others, will reflect the quality of the assets we have. And most importantly, if we are exceeding on metrics, then I think that our multiples should exceed the norm as well.

So that's our goal. And we're going to keep working towards that. Thank you, all.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.