Chatham Lodging Trust (CLDT) 2017 Q2 法說會逐字稿

Greetings, and welcome to the Chatham Lodging Trust Second Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Chris Daly, President of Daly Gray Public Relations. Thank you, sir. You may begin.

Thank you, Christine. Good morning, everybody, and welcome to the Chatham Lodging Trust 2Q '17 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 subjects to risks and uncertainties, both known and unknown, as described in our most recent Form 10-K and other SEC filings. All information on this call is as of August 2, 2017, 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. You can find copies of our SEC filings and earnings release, which contain reconciliations to non-GAAP financial measures referenced on this call at our website at chathamlodgingtrust.com.

Now to provide you with some insight in Chatham's 2017 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?

All right. Good morning, everyone. While we're certainly happy to report what I consider to be a quarter that is well within our guidance on the upper end, more positive news on a few different firms here and rather than have me, this call, walk through some of those numbers, I think we'll do things just a little differently because in the release, we mentioned that we're going to -- that we have some hotels on a contract to sell, and I just wanted to talk about a little more of the big picture and, that is, Jeremy will further elaborate on the rest.

But first and foremost, we are in the process of recycling capital through the sale of 2 hotels and redeployment of that capital into what we expect will be 3 acquisitions. I do want to emphasize that whether it's the sale of the hotels, where there's contingencies as there always are and relative to the acquisitions. Today -- we have to say that they are not closed and they may not close, but we fully expect to be able to accomplish our capital recycling goals in 2017 and going forward in 2018, one way or the other. We have a very focused and high-quality portfolio. As you all know of hotels and diverse set of markets around the country and although the buyer's universe is not deep, we do have hotels and markets that was specifically selected for a variety of reasons and one of which is where we think cap rates for the individual asset and the buyer cap rates are low and buyer pool is a little broader to both domestic and, particularly, foreign capital. So we've entered into agreements to sell 2 hotels for gross proceeds, as I said, of approximately $80 million. These will be the first asset sales since our inception in 2010. But I want to be clear, we're certainly not interested in shrinking the size of the company. We're going to take those proceeds and reinvest them. In fact, we've identified hotels that will fully reinvest the proceeds on the sale, and our hotels are located in exactly the kind of coastal markets, in this case, East Coast markets, that match up with our strategy of acquiring premium-branded upscale extended-stay hotels like Residence Inns and Marriott Courtyards, in markets that really have a higher demand growth quotient than the norm. And, I think, we really specialize in understanding where those markets are and that's not by reading Smith Travel Research and look at a city or an MSA and saying that one's got 6% demand growth and that one's got 4.2%. It's by utilizing our knowledge as asset managers and our management companies' specific market knowledge in operating over 160 hotels around this country to understand where businesses are relocating, what factories are got -- are being built, where and looking at and understanding, of course, the supply quotation in those markets. So we feel pretty good about our ability to kind of select and pick the hotels purposely that we're going to acquire and that we're going to grow with. And we think and certainly redeploying the capital always, if we can, into younger assets is a very important criteria for us as well and with higher cash-on-cash returns, so selling at a lower cap rate and getting the spread relative to where we see the acquisition in a market that should enhance our NAV, because the underlying market growth will have greater market growth than the overall portfolio growth. That's the goal, and that's how we're going to opportunistically recycle capital over the next year or 2.

So secondly, we're going to leverage our existing assets where there is an opportunity to add significant value, where we already own the land and have invested in the infrastructure and already own a hotel there. Some of -- 2 or 3 of our hotels, as we've talked about before, you have some extra land that we can add and in some time -- cases redevelop and we're working still towards our Sunnyvale expansions and looking still at particularly our Cherry Creek, Colorado and Portland, Maine -- on fire market in Portland, Maine to building a parking lot there. But even little opportunities, we've taken advantage of like taking meeting rooms out in limited-service hotels or upscale extended-stay hotels that were just not being used very often since we really don't do that kind of business and a regional developer overbuilt the hotel. We've turned some of those rooms in some cases into 5 additional sleeping rooms, and that's a very accretive and positive move, and we got those kinds of things going on or completed here in 3 hotels in 2017. So we think -- and we know that, that will add value and pay off down the road. Thirdly, as we also have mentioned, we're going to develop a hotel or 2 on a very select and limited basis. I started in the industry well over 30 years ago, building hotels. We've got the internal expertise to do that. And, again, operating over 160 hotels around the country, I think the market knowledge allows us to cherry pick and select a market or 2 where there would be a tremendous opportunity, but we're looking for yields that are, honestly, 10% unlevered and better in order to undertake that kind of activity.

So again, we'll work on these strategies, and we will be able to grow our portfolio and our earnings. Even during times when the acquisition pipeline overall is bend, you don't see a lot of trades out there, again, this year, but I do think that we're able to, as I said, be selective and take advantage of our overall contacts and market knowledge and franchise or relationships that we've been utilizing forever.

Finally, we're going to continue to invest in our existing portfolio throughout the cycle to not only renovate, but to upgrade and provide the experience today's traveler wants. Obviously, we're cognizant and are looking at whatever the new brands are that, particularly, Marriott and Hilton have rolled out and we certainly want to make sure that even if we have a 10-year-old Residence Inn that we are absolutely competitive to, for example, an element that may or may not be built down the road. So we will invest in our assets. We will continue to upgrade them, to remain competitive throughout the cycle and in the future. So I think this 4-pronged strategy and approach really exemplifies what we're doing here and on a go-forward basis. And our long-term goal is really to be the best pure-play select service and limited service hotel REIT with the highest RevPAR and highest margins. And we know we've been the highest margin company for quite some time. We continue and I think with some of the other companies that are limited service -- that had been limited service companies, either merging with companies that have other assets, that absolutely would not be characterized as limited service hotels and/or companies that have been acquiring hotels over the last 2 years in their capital recycling efforts that have not been limited service or upscale extended-stay hotels with more boutique or resort. We know that's not our game. So our focus is in the brands and in the markets that we know and that we love and that we have experience in. And we will continue to upgrade (inaudible). This portfolio is a tough one to upgrade, as we noted, but we'll particularly in age so that we're competitive and younger to deal with whatever the supply that comes down the road.

Well, with that, I'd like to turn it over to Dennis to talk a little more specific.

Thanks, Jeff, good morning. Our second quarter was a good quarter with FFO per share of $0.65, finishing at the top end of our range. RevPAR declined 0.5% for the quarter, which was slightly better than the midpoint of our guidance range of flat to minus 1.5%. Excluding the 6 hotels in our oil and gas influenced markets, RevPAR would have increased to 1.7% for the quarter. Like many, April was the weakest month of the quarter for us with RevPAR down 3.7%, May RevPAR grew 1.2%, and June RevPAR rose 0.6%. The continuing theme for us is that we have aggressively been pushing ADR, which jumped almost 3% in the quarter to a very strong $169. Certainly, an impressive ADR and a testament to the quality of our portfolio, as Jeff alluded to just prior. Although occupancy was down a little over 3%, absolute occupancy levels remain a very healthy 83%, which is noteworthy given the substantial increase in new supply across the industry and within our markets. Working with Island Hospitality, we remain hyper focused on our revenue management strategies and in the second quarter, we outperformed our market's average RevPAR growth by 162 basis points, which is a phenomenal result. Popping ADRs, as we did also comes into play when we talk about our ability to generate high operating margins.

Looking at a few of our specifics in key markets within Silicon Valley and Sunnyvale, where we have almost 500 rooms, year-to-date demand has grown 0.7% while new supply has grown 1.5%. Given that dynamic, we're pleased that RevPAR was essentially flat, but we were able to grow ADR by a really impressive 5.2% in the quarter. As Jeff mentioned earlier, we have strong relationships with some of the largest companies in the world and although it's difficult at times to manage the demands of some of those companies, our teams on the ground do a fantastic job, managing inventory during peak events, such as product launches or global training initiatives. Residence Inn is the brand of choice in that market, given the long-term nature of many of the guests traveling to the valley.

Like Silicon Valley, our Residence Inn Bellevue, Washington is well-positioned within the market in terms of location and brand. We are host to many tech travelers with our largest account being Microsoft and have excellent relationships with other tech companies, such as Ericsson, LG, SAP and Accenture, and additionally, the hotel benefits from the spending in the Greater Seattle area related to Boeing. RevPAR to 3 San Diego hotels advanced almost 8% in the quarter. Even though it's under renovation, our downtown Gaslamp Residence Inn was able to grow RevPAR 1.1%, which is encouraging given the amount of new supply that has come into that market over the last 2 years, including another Residence Inn within walking distance of our hotel.

The San Diego CBD market has been quite resilient and demand growth is outpacing supply growth so far in 2017, 5% growth versus 3% in supply growth. Also benefiting our 3 San Diego hotels was a fairly easy comp in Carlsbad where Homewood Suites was undergoing renovation for a part of the second quarter in 2016. As we all know, Houston has been a challenging market for everybody in terms of lodging. For us, our 4 hotels started to quickly deteriorate in the second half of 2016. Since then, RevPAR to 4 Houston hotels was down 22% in the second half of 2016, down 4% in the first quarter of '17 as it benefited from the Super Bowl and then 20% in the 2017 second quarter. For the balance of 2017, we still see RevPAR declining approximately 9%. Despite this market suffering from the impacts of oil and gas, the market continues to absorb more and more new supply and it's still in -- under construction.

Again, on the weak side, our 2 small hotels in western Pennsylvania continue to take it on the chin with RevPAR down 22% in the quarter. Our dual-branded Marriott hotels opened in Altoona, Pennsylvania this year, which competes directly with our Courtyard and in Washington, Pennsylvania, that market has been beset with not only new supply in the past couple of years but significant reductions and fracking in the area.

Updating industry-wide, supply/demand for the upscale chain -- chain scale year-to-date, room supply increased 6%, which is significant but demand almost offset this growth by growing 5.3%. This 70 basis points spread is essentially unchanged from 2016 when upscale supply outpaced demand by 60 basis points. We're certainly feeling the effect of new supply in markets, such as Anaheim; Downtown Dallas; Pittsburgh, PA; and New Rochelle, but encouraging for us is that this is the third consecutive quarter in which direct supply growth in our markets has declined.

In addition to revenue management, we are dedicating more time in resources to analyzing profitability and determining ways to reduce costs or minimize increases in certain categories. For the quarter, our operating profit margins declined to 130 basis points to a still very strong 49.4%, which was the upper end of the guidance range for the quarter. Excluding some onetime adjustments related to our workers' compensation reserves between the 2016 second quarter and the 2017 second quarter, our operating margins were actually only down 40 basis points, which is encouraging given the RevPAR declined slightly in the quarter.

A combination of the increased ADR as well as very tight expense controls helps us to maintain our operating margins a little over 50% on a recurring basis, which is exemplary. Our biggest challenge is finding and keeping qualified labor, especially in housekeeping and this is not just Chatham issue, but certainly an industry issue. On a per occupied room basis, our rooms' labor costs have risen approximately 4% in the quarter and year-to-date. The issue of increasing costs have been driven by not only the minimum wage requirements, but also new supply in terms of hotels that's causing operators to offer what we believe is above-market wages in certain locations to entice employees away from our hotels.

As we've talked about in the past few quarters, for us, it seems as if the rising pressure related to guest acquisition costs, TA commissions and loyalty costs seem to be abating for the third consecutive quarter. Our acquisition costs were flat year-over-year at approximately 4% of revenue. Again, we have a tremendous amount of information at our fingertips given our relationships as asset manager as well as Island Hospitality. We're able to analyze revenue daily and especially forecast what that means for the rest of the month. And we use that information to control and minimize expense creep within the month, for the month.

On the CapEx side, our renovations are ongoing and on budget for the year. Our 2017 capital expenditure budget of $27 million is still applicable as we're planning on renovating 6 hotels during the year.

And I think, at this point, that concludes my remarks. I'll turn it over to Jeremy.

Thanks, Dennis. Good morning, everyone. For the quarter, we reported net income of $5.1 million or $0.13 per diluted share compared to net income of $12.3 million or $0.31 per diluted share in Q2 2016. $6.7 million of the $7.2 million decline as related to an impairment we took on our SpringHill Suites located in Washington, Pennsylvania. The primary differences between net income and FFO relates to noncash costs, such as depreciation, which is $11.7 million in the quarter; onetime gains or losses, which were $6.7 million and our share of similar items within the joint ventures, which were approximately $1.8 million in the quarter.

Adjusted FFO for the quarter was $25.2 million compared to $26.8 million in Q2 2016, a decrease of 6%. Adjusted FFO per share was $0.65, which represents a decrease of 5.8% from the $0.69 per share generated in Q2 2016. Adjusted EBITDA for the company declined 4.9% to $35.1 million compared to $36.9 million in Q2 2016.

In the quarter, our 2 joint ventures contributed approximately $4.8 million of adjusted EBITDA and $2.7 million of adjusted FFO. Second quarter RevPAR was up 2% in the Inland portfolio and down 3.1% in the Innkeepers portfolio. The strong performance in the Inland portfolio was largely attributable to the significant amount of renovation that was completed on those hotels in 2016, and the weaker performance in the Innkeepers portfolio was primarily due to the disruption being caused by renovation occurring in that portfolio in 2017.

Our balance sheet remains in excellent condition. Our net debt was $563 million at the end of the quarter, and our leverage ratio was 39%.

In Q2, we issued 648,000 shares under our ATM program after we were added to the S&P SmallCap 600 Index, which generated $12.9 million of net proceeds. We've also entered into agreements to sell 2 hotels, which will further strengthen our balance sheet when the transactions close. While the sales prices are higher than our tax basis in these hotels, we do not anticipate paying special dividend or utilizing a 1031 exchange because our current dividend exceeds our expected retaxable income enough to absorb the anticipated gains.

We intend to use the proceeds from the ATM share issuance and pending asset sales to help fund acquisition and development opportunities that we are currently pursuing.

In Q2, we work with Colony NorthStar, our partner in the 2 JVs, to refinance the debt on -- with both JVs. The $840 million CMBS loan on the Innkeepers JV was refinanced with a new $850 million loan. The Innkeepers refinancing extended the maturity by 3 years to June 2022 and reduced the rate by 60 basis points to LIBOR plus 279 basis points. The $817 million CMBS loan on the Inland JV portfolio was refinanced with a new $780 million CMBS loan. The Inland refinancing extended the maturity 2.6 years to July 2022 and reduced the rate by 30 basis points for LIBOR plus 330 basis points.

Transitioning to our guidance for Q3 and full year 2017, I'd like to note that it takes into account the anticipated completion of the renovation of the Homewood Suites, Maitland, which commenced in Q2 -- in Q3. The commencement of renovations of the Homewood Suites Bloomington, Minnesota and Homewood Suites Brentwood, Tennessee in Q3 with anticipated completion in Q4 and the renovation of the Residence Inn Mission Valley starting in Q4. Since the timing of potential asset sales and acquisitions is uncertain, we have not included these in our guidance.

We expect Q3 RevPAR growth to be minus 1% to plus 1% and full year 2017 RevPAR growth to also be minus 1% to plus 1%. For the full year, our RevPAR guidance assumes the current trends of modest GDP growth combined with above-average new supply, and the upscale segment will continue for the rest of the year.

Our full year forecast for corporate cash G&A is $9.1 million. On a full year basis, the 2 JVs are expected to contribute $15.8 million to $16.2 million of the EBITDA and $7.6 million to $8 million of FFO. As a result of our share issuance in Q2, our weighted average fully diluted share and unit count is now expected to be $39.8 million in Q3 and $39.4 million for the full year. The incremental shares from the equity issuance are expected to reduce our FFO per share by approximately $0.01 per quarter, until we deploy the proceeds into acquisitions or development opportunities.

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

(Operator Instructions) Our first question comes from the line of Gaurav Mehta with Cantor Fitzgerald.

So a couple of questions. First, on asset sales. You've talked about these being first asset sales since 2010. So I was wondering why you're deciding to sell now. And how many more assets should we expect to be sold after the 2 assets are closed?

Yes, I will address that, Gaurav, it's Jeff, and then Dennis and Jeremy can follow on. But I think, the rationale here is not to simply sit still at a time when we all know RevPAR kind of best case is flat or up a little bit or down a smidgen in the current environment. We're looking for ways to make money. I mean, pure and simple. And we see some of our West Coast assets, particularly, are kind of in markets where foreign capital is very attracted to be there and to pay cap rates that really, as I said, would allow us to achieve a good positive spread on something that we might be able to buy. And if we are looking at assets that we think either are a little bit older or maybe having upcoming, even if it's just a soft goods, renovation and not having to take the downtime, the displacement and the capital to do that and sell at a pretty attractive number, then we think that's our job.

Okay, and I guess, on the acquisition side, could you talk about what you're seeing in the market? And then would you be acquiring more assets only if you are able to sell more assets? Or that's not dependent on that?

Yes, I mean, it's -- that's the general idea. As we did issue just a little bit of stock on an opportunistic basis because we knew we had a couple of interesting things in our pipeline. The market is no different overall in terms of number of hotels that are out there to buy or folks that even really want to seriously talk about it. But nonetheless, we're able to kind of get in there with some direct relationships, and as we always have and here and there, make a few interesting deals and we'll continue to try to do that subject to being able to and you can never match perfectly, obviously, the timing of selling something and buying something, but we'll do the best we can on that front.

Okay. And then lastly, you talked about decline in supply growth rate in some of your markets. Are there any specific markets where you're seeing that?

Well, I mean, in terms of declining growth rate, for us that really talks about Houston. And the fact that it's been down on average 20% in terms of RevPAR for the last year. And that is mitigating in the second half of the year to down approximately 9%. So we certainly haven't seen the bottom there yet, but on a relative basis, it's gotten a little bit better.

Are you're talking about supply as well?

Yes. I think you mentioned that for 3 consecutive quarters, yes, you are seeing a decline in the growth rate of supply.

Yes, across our entire portfolio, yes.

Okay. So it's not in any specific market.

Yes, looking at the specific markets, the Seattle Bellevue area has absorbed a tremendous amount of new supply over the last few years, that's coming down a little bit. In terms of growth rate of new supply, obviously, even if you look at Houston market, new supply is still coming, but on a growth rate basis. Relative to what it's happened in the last couple of years, it's down. Similar stories in even Pittsburgh, Pennsylvania is well where it's -- there are still new supply coming and it's still going to impact us, but the growth of that new supply is down from what it was. So it's just an encouraging trend that it's gotten a little bit better, but it doesn't mean that it's over.

Our next question comes from the line of Anthony Powell with Barclays.

In terms of your acquisitions, you talked about some of the demand characteristics you're looking for. What about supply in some of these new markets?

Yes, I mean, I think, listen, in each instance, we look at new supply and what's coming in terms of market demand and what we believe is market growth. And, listen, it's -- none of the markets are without new supply coming. But certainly, we believe that the demand growth is there and the corporate demand in terms of not only just this year, but as you look out 1, 2 or 3 years in terms of what expansions are happening in these areas, whether that'd be corporate relocations or government spending or ship building, whatever it may be, that we believe that just very similar to other acquisitions we made that will be able to absorb that and still have outsized growth.

Got it. And could you give an update on the CapEx in Silicon Valley guesthouse? And just overall was maybe following up the expenses there, and generally, if you do more development there or elsewhere in your portfolio, how would you commence new development?

Sure. Specifically, with respect to Silicon Valley, there's really no update in terms of CapEx or timing there. We're still working on those projects. We've still been spending a lot of time value engineering, the demand -- the construction cost and the build-out of those expansions and redevelopment. So no specific timetable yet. And no -- I do believe that we'll start to go back out to bid on one of those locations within the next few months and we'll have a better handle on it probably as we talk to you guys in November. And then if you look at the second question was related to what, again?

Probably financing.

General financing of Portland or any development, given you have slightly higher levers than peers. So would you issue more equity, cash flow? How would you refinance these types of...?

Yes, listen, generally -- generally, it's going to be a mixture of either asset sales on balance sheet and then if the markets allow and the pricing is right, given, especially relative to what we believe, we're going to earn on those developments, we may be able to use capacity within our ATM. But it's going to be a mixture of all 3 of those things to determine how that works and obviously, developments are -- can take up to a couple of years. So in terms of a significant onetime cash requirement, that's usually developed over a period of time. So it's not something that all of a sudden you're stuck with, hey, we've got to raise $50 million to be able to -- to fund these developments for the next couple of years.

(Operator Instructions) Our next question comes from the line of Bryan Maher with FBR Capital Markets.

So, Jeffrey, you [teased us] a little bit with the East Coastal markets or the new hotels. Are you unwilling to get any more specific than that? And then a second question to that, are those purchases already signed? And are they contingent upon you selling the 2 hotels?

First, I think, you know the answer to the first part of your question, Bryan, but I think...

I had to ask.

All right. We've been around -- there's a long time. So we know we're not in a position to tell you that now. But just as soon as we can, we're still excited about them that absolutely we'll be out there with the information. Secondly, the -- now the acquisition of the hotels are not in any way tied to the sale of the hotels or contingent on those. So there is a CMBS assumption process relative to maybe hotels for sale. Otherwise, buyer is hard and that's the current status.

Thank you. It appears we have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

While we appreciate everybody being on the call this morning. And as we could tell, we're pleased and the kind of environment, particularly, with regard to RevPAR that we're really able to make our numbers and get the kind of flow-through, particularly, that we're getting and, frankly, get the ADR increases that we're getting with a company that, for example, had an 86% occupancy rate to drop to 83% or 84%, to me, is a good job on the revenue management department side of things. So we'll continue to try to get that flow and enhance these earnings with some recycling efforts, as I mentioned. And we look forward to talking to you in the next call or sooner. Thank you.

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