Chatham Lodging Trust (CLDT) 2016 Q2 法說會逐字稿

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

I would now like to turn the conference over to Mr. Chris Daly, President of Daly Gray Incorporated. Thank you, sir. You may begin.

Thank you, LaTonya. Good morning, everyone, and welcome to the Chatham Lodging Trust second-quarter 2016 results conference call. Please note that many of our comments today are considered forward-looking statements as defined by federal securities laws. These statements are subject to risks and uncertainties both known and unknown as described in our 2015 Form 10-K and other SEC filings.

All information in the call is as of August 3, 2016 unless otherwise noted, and the Company undertakes no obligation to update any forward-looking statement to conform to statement to actual results or changes in the Company's expectations.

You can find copies of our SEC filings and earnings release, which contain reconciliation to non-GAAP financial measures referenced on this call on our website at www.chathamlodgingtrust.com.

Now, to provide you with some insight into Chatham's 2016 second-quarter results, allow me to introduce Jeff Fisher, Chairman, President, and Chief Executive Officer; Dennis Craven, Executive Vice 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?

Okay, thanks, Chris. Good morning, everyone, and welcome to our second-quarter earnings call. I'd like to start by spending a few minutes talking about our second-quarter results, which produced RevPAR growth of 0.6%, and has been well reported already below industry performance, and unfortunately, below our guidance range of 2% to 3% for the quarter.

During the quarter RevPAR grew approximately 2% in April, RevPAR declined 1% in May, and then grew again up 1% in June. The quarterly increase was driven by a slight uptick in ADR, and we were able to maintain occupancy year over year at a very high occupancy rate of 86%. From an occupancy perspective, our second quarter represented, obviously, a very tough comp.

I think we need to keep in mind as we look at the numbers here that the Company, in the second quarter, produced an ADR of $164 and an occupancy rate of 86%. Obviously, particularly for select service hotels and upscale extended stay hotels, nothing to be -- nothing to sneeze at, so to speak. Very strong numbers, but numbers that, from a year-over-year basis, are very hard to grow when the overall economy is performing as it is.

As I said, we weren't able to drive a meaningful increase in ADR due primarily to a few reasons. We've got some new supply in our gateway urban markets that most of our hotels are located in, and specifically, certain markets that we've talked about in the past that limit our ability to grow ADR.

We've got lower GDP growth, as I've mentioned, which is impacting business travel. And I think we've seen other lodging companies note that pretty much across the board. And one part of the business that certainly has contributed to the inability to grow ADR, I think, is just the online rate transparency and some of the new brand discounting programs that, over the long haul, we believe, hopefully, will drive more business to the brand dot com websites, and we'll talk about that a little bit more later on.

First, during this cycle, construction of new supply has been concentrated, as most know, in urban markets. And furthermore, it's been built in our asset class: upscale extended stay and premium branded select service hotels. Of course, this development's been in response to significant demand growth for our type of assets and in our prime markets. And we certainly believe that consumers will continue to make the decision to stay in our type of hotels in the future as indicated by our occupancy rate.

And so obviously, for the long haul, we've got the right hotels, and we're in the right markets and well located. In the short term though, it will impact demand. The good news is that we've been able to absorb the new supply from an occupancy perspective so far, but at the price of low ADR growth. This shows the resiliency of the product, the locations, and the brands we own and operate.

Secondly, business travel trends have been soft in 2016, and we believe that trend will continue for the balance of 2016. GDP growth has been moderate at best, corporate profits are mixed, and until we see some more robust GDP or corporate profit growth, corporate travel will be restrained.

At this point in the cycle, historically, we would see a much more meaningful increase in ADR, but online rate transparency is a new force that's adversely affecting us this cycle. As I said, brands have seen travelers booking rooms away from brand dot com sites and they've implemented some discount programs and other programs aimed at increasing loyalty members in their rewards programs, and who would benefit from booking through the brand dot com sites.

Brands will tell you about positive gains in enrollments as a result of these activities and direct bookings. Obviously, that comes at a short-term cost to owners like us. To be clear, we absolutely support these initiatives, but only time will tell if this pays off for us. But it should and is a major point of emphasis for the brands and the industry as we move forward to enhance our topline and bottom line.

Looking at some of our individual markets, RevPAR in our four Silicon Valley hotels was only up 0.2%. Occupancy remained strong at approximately 88%, so obviously nearly impossible to grow that out there. And our ADR for those hotels is approximately $217. The Valley remains a very healthy market, and we're experiencing RevPAR growth of a little better here in the third quarter.

We haven't seen any signs of slowing demand, but we've absorbed some new supply that we've spoke about in the past couple of years in Silicon Valley, and specifically, in and around our two hotels in Sunnyvale, and San Mateo and Mountain View have absorbed an approximate 8% increase in supply in 2015. And our two Sunnyvale locations absorbed about a 7% growth in its market tract in 2015, and those markets are adding another 3% in 2016. So I'm pretty pleased with our absolute ADR occupancy and RevPAR results for our hotels that we own. It shows, again, the strength of the brand and the locations and the operator.

Our Denver hotels continue to perform strongly with RevPAR growth of 7.4% in the quarter, all driven by increased ADR. Denver is performing well across all demand segments, whether it's corporate, leisure, or group travel.

Within Los Angeles, our Hilton Garden Inn Marina Del Ray Hotel had a great quarter with RevPAR growth of over 8%. Los Angeles has experienced the highest RevPAR growth in 2016 of the top 25 markets around the country. And year to date, our Marina Del Ray Hotel has seen RevPAR grow approximately 11%.

Another great market is Dallas for us. Even with one of our hotels under renovation for the quarter, hotels were up 7% in the quarter. And for the year, those hotels are up approximately 8%. Dallas Metroplex still remains a hotbed for corporate relocations, and Dallas has done a great job, obviously diversifying its corporate makeup away from oil and gas.

But we got to talk about oil and gas. We got to talk about Houston. We've always been asked about Houston, and we've kind of thumped our chest a little bit over the last year and a half or so talking about our Medical Center hotels and the resiliency of those hotels with positive RevPAR and market share growth while the rest of Houston was going down.

Unfortunately, the bad news here is that whatever's going on in the rest of Houston has really caught also the Medical Center market as well now. In our hotels in Houston, RevPAR declined 3%. Again, much better than the overall Houston market, which saw RevPAR decline almost 10%.

But as we look very closely over the last couple of months, we actually see RevPAR turning down more. And those hotels at the Medical Center have been affected, we believe, by a pretty large supply increase as we look out five miles to six miles away from the Medical Center and from our West University locations. We're seeing, we think, the travelers obviously have the ability, with an almost 1,700 rooms that have been added in the larger market tract, to be able to save some money, and even if they are going to the Medical Center, frankly, travel outside of the Medical Center.

So I think we're going to have a substantial drag on our numbers for the rest of the year with double-digit and large double-digit RevPAR declines in our four Houston hotels. At least that's what we see for the time being. That may not be the long-term trend here, but we've got to, I think, be careful and be circumspect about what we really do expect to produce in Houston.

Oil and gas markets, of course, again have been remaining very challenging to be in. And now and again, we talk about our small hotel in Washington, Pennsylvania, and it continues to suffer with RevPAR down 32% in the quarter, by far the worst performing hotel in our portfolio.

Needless to say, we're investing a tremendous amount of time and effort alongside Island Hospitality to maximize RevPAR given the current environment. We don't have the long-term visibility because our hotels have short booking cycles, as most other select service hotel companies have indicated.

We are nimble and move quickly with regard to revenue management strategies on a day-by-day basis. We're looking at our online channels. We're looking at some of these high occupancy rates and taking some risk in some markets by trying to do some share shifting and get a little more ADR so we can get a little more flow-through to the bottom line in what we perceive to be a pretty flat RevPAR environment. So that's our focus here as we move forward for the rest of this year.

And obviously, again, not thrilled, as I'm sure many of you are, with where the industry stands and where the economy stands. But I'll tell you what, again, even in the third quarter looking at 85-plus% projected occupancy rates with an average daily rate of around $170 plus or minus, we're pretty pleased with that kind of performance and the kind of coverage that gives us to pay our dividend and to move forward here.

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

Thanks, Jeff. Good morning, everyone. Just to add to Jeff's topline commentary, a key point of focus for the industry is the mix of our customers. And you've heard it with many of our other peer companies reporting.

For us, in the second quarter, we continued to experience the same shift in mix from the first quarter in that our business transient traveler production is down. In our portfolio, transient travel, and specifically, the corporate traveler makes up about 90% of our overall room demand. And again, like others, we've seen that soften a little bit here in 2016.

From a margin perspective, our same-store full-quarter operating margins were down 120 basis points to a very, very strong 50.7%, which sequentially, just comparing that to the first quarter, was up about 410 basis points. And really just goes to show you, as Jeff alluded to, despite the fact that there are some challenges in our portfolio and in the industry, this portfolio has done a very good job of producing a strong cash flow. And we were able to get a lot of production in terms of margin performance over the past couple years, and it's obviously proven out in the high margins.

Hotel EBITDA margins were down 150 basis points to 44.2%, which was at the lower end of our guidance range, with RevPAR only increasing 0.6%, and our operations already very streamlined. Considering that our hotels ran at an occupancy of 86%, really our margins were under pressure and had to decline a little bit.

The continuing trend for us and the industry is the growing cost to acquire guests. OTA booking commissions and brand loyalty program fees, discounts, and expenses are continuing to increase. After significant increases in 2015, we continue to experience a pretty big jump in costs this year. For the second quarter, guest acquisition costs for us were up approximately 10%. In dollars, that only equated to about $200,000. But it did impact our year-over-year margins by approximately 30 basis points. Not as impactful as the past three quarters, but again, nothing certainly to cheer about there.

To counteract the OTA booking volume that comes with higher commissions and fees, brands have been and are implementing rate discounts for loyalty members. And so for those, enrollments have been encouraging. Having said that, as a franchisee, we are paying for the privilege of putting a valuable brand name on our real estate and expect our franchisors to work with us and our operators to maximize the value of the brand without any significant incremental negative impact on our top or bottom lines over the long term.

Despite the fact that RevPAR growth missed our topline performance, we were able to hit the bottom end of our FFO range due to lower income taxes and slightly better than expected performance in our joint ventures.

With respect to the Silicon Valley expansions, we are nearing completion of the 32-room tower addition in Mountain View and will begin redevelopment of the gatehouse in Mountain View later this year. The Silicon Valley expansions remain a great long-term investment and will provide our customers in Silicon Valley with additional rooms in the brand of choice for additional lodging in Silicon Valley, which is Residence Inns. Some of the most valuable companies in the world are our key customers, and like them, we will continue to invest in our assets in the Valley to provide them the lodging they desire.

Costs remain unchanged for the Silicon Valley expansions that we provided in our last call. We still expect the incremental 220 rooms that we're going to add on a full-year basis ultimately to add approximately $10 million of EBITDA and $6.5 million of FFO; so again, a great long-term investment.

When you look at our RevPAR guidance, it assumes the current trends impacting our portfolio will continue for the remainder of 2016. Second quarter GDP growth of 1.2% was well below expectations, partially driven by a reduction in inventory; but nonetheless, a headwind for lodging and a sign that the corporate traveler isn't as productive this year.

There's nothing out there to suggest GDP growth is going to accelerate meaningfully, which will certainly have an impact on corporate profits as we move forward throughout the year. With profits lag in corporate travel patterns have obviously -- we've seen a slight decline in corporate travel production, but we do expect it to remain sluggish for the rest of the year.

As Jeff alluded to, our four Houston hotels are certainly experiencing some challenges at this point of 2016. Those four hotels are adversely impacting our portfolio RevPAR growth by approximately 180 basis points in the third quarter and 250 basis points in the fourth quarter. Additionally, our Silicon Valley expansions are bringing down our RevPAR growth by approximately 40 basis points in the fourth quarter when those commence.

Despite these two items, one of which is because we are obviously taking rooms out of service at our choosing in Sunnyvale to commence the expansions, our overall portfolio performance is a bit better than the headline for the portfolio, but certainly still a little bit disappointing.

From a margins perspective, as RevPAR growth moderates -- and for us, we are forecasting basically flat RevPAR for the remainder of the year at the midpoint of our guidance -- it certainly becomes difficult to maintain margins at our prior levels. And as such, we're forecasting margins to decline about the same as our second quarter, so somewhere in the range of 100 to 150 basis points.

With that, I'll turn it over to Jeremy.

Thanks, Dennis. Good morning, everyone. For the quarter, we reported net income of $12.3 million, or $0.31 per diluted share, compared to net income of $12.8 million, or $0.33 per diluted share in Q2 2015. The primary differences between net income and FFO relate to non-cash costs such as depreciation, which was $12.2 million in the quarter.

Adjusted FFO for the quarter was $26.7 million compared to $27.2 million in the 2015 second quarter, a decrease of 1.8%. Adjusted FFO per share was $0.69 per share versus $0.71 per share in Q2 2015, a 2.8% decrease year over year. Adjusted EBITDA increased $100,000 to $36.8 million compared to $36.7 million in Q2 2015.

In the quarter, our two joint ventures contributed approximately $4.9 million of adjusted EBITDA and $3 million of adjusted FFO in line with our guidance of $4.8 million to $4.9 million for EBITDA and $2.8 million to $2.9 million for FFO. During the quarter, we received distributions of $3.2 million from the JVs.

Our balance sheet remains in excellent condition. Our net debt was $586 million at the end of quarter. Our weighted average cost of debt was 4.4%. Our weighted average maturity was 7.2 years. And our leverage ratio was 41%. In Q2, we used free cash flow to reduce our net debt by $8.1 million.

Transitioning to our guidance for Q3 and full-year 2016, I'd like to note that it takes into account renovations at the Residence Inn San Diego Gaslamp in Q4 and completion of the 32-room expansion of the Residence Inn Mountain View by the end of Q3.

We have amended our full-year RevPAR guidance to reflect actual performance in the second quarter and current business trends. We are lowering the bottom end of our RevPAR growth range by 200 basis points and the upper end of the range by 250 basis points, and lowering our hotel EBITDA margin guidance by approximately 100 basis points.

We now expect Q3 RevPAR growth of minus-1% to plus-1% and full-year RevPAR growth of 0% to 1%. As a result of our RevPAR margin adjustments, we are trimming the midpoint of our adjusted EBITDA and FFO per share range by approximately 5%.

Operator, at this point, we will open up the call for questions.

Thank you. At this time, we will conduct a question and answer session. (Operator Instructions)

Anthony Powell, Barclays.

Hi, good morning, guys. Had a question on supply growth. You mentioned the impact supplies had on some of your markets so far. How's the supply growth outlook for the rest of this year and next year in your key markets?

Anthony, it's Jeff. How you doing?

Good.

I'll start out by answering that. We've got something that we call a supply calendar here that we use internally, which for each hotel lays out the supply over the next couple of years. And I will tell you that I think, for the most part, we still have a little more supply coming; not meaningful though in Silicon Valley. Let's see, do you have that calendar in front of you, Dennis?

Yes, so I mean, basically, if you look at, whether it's Silicon Valley, we still have some absorption in Anaheim, Savannah as well, that's coming that we've obviously known about. But it's really the same markets that we've talked about. So it's Silicon Valley, San Diego, Anaheim, Savannah (multiple speakers) --

Houston in Q4 2017 has a bunch coming on still at least on paper. But whether that materializes or not, they'd have to be breaking ground about now or so to get there.

In Houston, you still have the 1,000-plus-room Marriott Marquis downtown less than five miles away from the Medical Center. So those are the five markets where -- and again, a little bit different this cycle is the fact that the new supply early, at this point, has been in the major, major markets.

Okay, thanks. And just on some of the OTA costs, you mentioned that you're seeing some pricing pressure given the member discounts. I would have thought that that would have led to fewer OTA costs kind of in real time. What percentage of your bookings were coming from OTAs now versus a year ago? And if you're seeing some impact from the member discounts, why isn't that number going down?

It's only, for us, about 7% of our production at the moment, Anthony. So it's not as meaningful at the moment. But when you truly look at those acquisition costs -- and the acquisition costs aren't just for the third-party booking costs, but even with our brand costs as well -- those are certainly impacting not just the OTA line item.

And even though it's on a small base year over year, particularly the cost is a large --

It's up 10%.

Yes, it's a large double-digit cost increase.

What costs are going up? Are they commission percentages, or just -- points or --? If you can give some more clarity, that'd be great.

Yes, I mean, the commission rates are not necessarily going up, but the production -- because those contracts have been renegotiated by Hilton and Marriott in the past couple years to lower the overall commission rate. So it's the production that's continuing to increase that's the primary driver on the OTA side.

So for example, when you've got some hotels that are hit by less corporate transient travel, what's likely to occur and what we see occurring and what we're looking at very carefully is the e-channel gets opened up by the revenue managers and by our hotels in order to keep that occupancy and in order to fill up the hotel. But there is a cost, and the net ADR is really what you got to think about and consider the increased cost to push that business into Expedia or otherwise. So that's kind of, I think, an industry-wide phenomenon that you'll see occurring over time.

All right, I'll get back into the queue. Thank you.

Patrick Scholes, SunTrust.

Hi, good morning. A couple questions here. I may have missed it on the call. You had a Pennsylvania hotel that experienced negative-30-plus% RevPAR. What was the driver of that weakness?

Yes, Pat, that's the one that's in Washington, Pennsylvania, which is very much reliant on nothing but oil and gas production. So it's certainly been pretty decimated by that one.

Okay. Can you give us a little color on how July is fairing so far for you?

Well, not very good, Pat. Probably a negative month here in July, and I'm not sure we're going to throw the number out there now. But July, I think for the industry and for us, was not a good month. We're seeing some little better numbers here in August.

Yes, I mean, some of that obviously was the July 4th shift that benefited the last week of June. But yes, we certainly are expecting better improvement in August and September.

Okay. And then that's related to my next and final question here. As you think about the remaining months of the year, I wonder which ones you would think would be outperforming -- you would expect to outperform your range for the rest of the year, and which ones you think will be on the softer side versus that full-year range?

Yes, I mean, I think when you look at our third-quarter, August and September are some of the better months. We don't have as much visibility in the fourth quarter. So typically October is a strong month for us, but we just don't have enough on the books to confirm that that's definitely going to be the case. But those three months are typically, at least as we kind of look at where we're forecasting based on what we know, August, September, and October.

I will say this -- I mentioned it on the call, Pat -- our July results in our Houston hotels is very bad. And we're not going to throw a number out there because it might spook some people, but we're definitely considering that in terms of a large drag on this overall portfolio, which heretofore, has not existed.

So it seems like that contagion has really spread to our West University and Medical Center assets. So we're, again, just kind of with a very short visibility and short booking window, can't tell you exactly where it's going to be, so we're going to air on the conservative side there without a doubt.

Okay, thank you. I certainly appreciate you being upfront, obviously, and sort of telling it how it is; so appreciated. Thank you.

Oh, you've done a great job in terms of sorting through some of the other conversations as well around the industry.

(Operator Instructions)

Bryan Maher, FBR.

Yes, good morning, guys. Quick question kind of circling back to Anthony's point on OTAs. Do you think that as and if Marriott and Hilton become successful with this membership pricing and kind of shifting reservations to their online system that the OTAs may come around and be a little bit more agreeable or lighten up on some of the commissions? Do you see that maybe happening in the next 6 to 12 months?

Hey, Bryan. This is Dennis. But I certainly don't see anything like that happening in the next 6 to 12 months. Certainly as you get to the end of these agreements with Marriott, Hilton, Expedias, we would certainly think that over time, the industry is able to have a little more leverage in those negotiations to lessen the impact of those fees.

And then as it relates to what you're seeing now in your portfolio in the second quarter and kind of in the back half of 2016, does that get you to think a little bit more about either acquisitions or dispositions as it relates to your portfolio? How do you think about what you're experiencing now as to what you want to do with the portfolio going forward?

In terms of investments, whether it's acquisitions, we have the Silicon Valley expansions, which are, in essence, an acquisition that is going to product double-digit returns. So we do believe that that is still a meaningful investment and the right thing to do.

From a dispositions perspective, the market's pretty quiet other than for some headline assets and some of the -- primarily New York City that are garnering some attention. But other than that, the market's pretty slow. So not sure it's the right time to be selling our assets at this point. (multiple speakers)

I was just going to say, I mean, we don't -- even though we're getting hit pretty hard here, we certainly don't think our fundamental business strategy of owning the best brands in the best locations where there's strong identifiable corporate demand generators is the wrong strategy. We think that's the best strategy for the long haul.

Obviously corporate travel, though, is experiencing a lot of softness here, as everybody's commented. But this portfolio with absolute ADRs and occupancies and debt coverage and dividend coverage of what it produces and, frankly, GOP margins that are over 50% makes us smile. So we don't -- we see probably great long-term value in the assets. Putting them into the marketplace today, I don't think you're going to be able to realize that value.

And so it seems like your strategy here is just ride it out?

Absolutely. We believe in the portfolio. I mean, whether we would try to offload Washington, PA once the world stabilizes or not just because it's so reliant on whether the Marcellus Shale is producing natural gas or not is one thing. But it's a small 70- or 80-room hotel. Yes, we're going to ride it out. We're going to add to our Silicon Valley presence because the returns there are very strong, and the customer base there is only growing. So yes, that's where we're headed.

Okay, thanks Jeff.

Anthony Powell, Barclays.

Hi, guys. Just one more on Silicon Valley. Do you expect any impact from the (inaudible) renovation, I guess, starting later this year into next year?

We have not identified specifically any business we think is going to go away as a result of that. But obviously -- and we don't think there's really a lot of compression that's coming our way from that part of the world. So I guess the long answer is no. But there is a little more supply coming out there because of the absolute high ADRs and occupancies. So I would expect our RevPAR growth to be muted even though the business is strong.

Got it, thanks. And one more, I guess, on the balance sheet. Most of your maturities are pretty long-dated, so that's a positive. Any work to do there? Have you looked at preferred equity or any other types of deals this quarter?

Not much on the horizon there. Really no debt to refinance. The preferred market's definitely attractive, and it's something we look at sometimes. But no plans to do anything right now.

All right, thank you.

Thank you. At this time, there are no further questions in queue. I would like to turn the call back over to management for closing comments.

Well, thank you all for listening and participating. And again, thanks for being on the call. As I indicated, we do firmly believe in our fundamental business strategy here and the hotels and the locations that we're in. And we will do our best on the operating side, and the team is working on fine-tuning whatever strategies there can be on particularly revenue management and direct sales side to get as much growth out of these hotels as we can. And we look forward to our next conference call with you all. Thank you.

Thank you. This does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a great day.