Chatham Lodging Trust (CLDT) 2018 Q1 法說會逐字稿

Greetings, and welcome to Chatham Lodging Trust First Quarter 2018 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to Chris Daly with Daly Gray. Please go ahead.

Thank you, Rob. Good morning, everyone, and welcome to the Chatham Lodging Trust First Quarter 2018 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 most recent Form 10-K and other SEC filings.

All information in this call is as of May 1, 2018, 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 contains reconciliations 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 2018 first 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?

Thanks, Chris. Good morning, everyone. Thanks for being with us today. Earlier today, we reported our results for the first quarter and, by most key metrics, finished at the upper end or higher than the upper end of our guidance range.

RevPAR declined 2.4% compared to our guidance of minus 2% to minus 3.5%. Adjusted EBITDA of $26.4 million finished slightly above the upper end of that guidance range due to better-than-expected hotel EBITDA margins of 36.3% compared to our guidance range of 35.4% to 36%.

So adjusted FFO per diluted share was $0.36 compared to guidance of $0.33 to $0.35. We faced sub-RevPAR comps to the prior year, and of course, we had talked about that since last year, and particularly when we put our guidance out for this year. And we benefited last year from the Super Bowl in Houston where we have the 4 hotels and the inauguration in D.C. last year where we have 3 hotels. Our D.C. hotels were also hit by the temporary government shutdown earlier this year. Additionally, we had some large corporate business in Silicon Valley that simply shifted from March to April this year.

Looking at our more significant markets in the quarter, RevPAR at our 4 Silicon Valley Residence Inns was down 5% to $177 due to that shift in business. Demand remained strong, though, in Silicon Valley, outpacing new supply by 100 basis points. We got the bounce-back in April, I'm happy to report, where RevPAR at our 4 Silicon Valley hotels rose 10%.

San Diego represents our second largest market where RevPAR slipped 3.1%, but that was impacted by displacement due to the renovation of our Residence Inn in Mission Valley, in addition to a new Homewood Suites that opened within a couple of blocks of that hotel.

Downtown San Diego performance has been really good, and RevPAR at our Downtown San Diego Gaslamp hotel has been strong and is projected to grow approximately 10% this year as the impact of new supply over the last few years is absorbed, combined with a strong convention and events calendar for this year.

Another significant market for us is LA, which posted strong first quarter RevPAR growth of 4.3%. It's also encouraging that our Residence Inn in Anaheim, which had really spent the last 1.5 years going down, is showing positive growth after absorbing a tremendous amount of new supply and stands to perform much better when the Gen 1 Residence Inn within that market leaves the system in the third quarter of this year.

Our Florida hotels continue to outperform, with RevPAR gains of almost 7%. Some of the gains relate to some leftover FEMA business in the hotels, but most of the gains are attributable to much improved Florida demand, benefiting from disruption in the Caribbean and Key West and a little bit of an easier comp, of course, as others have noted, with Zika last year.

We're seeing some improving market conditions across various locations. Within our portfolios, it's interesting to look and see that 1/3 of our portfolio saw RevPAR grow more than 5%. Some of the hotels are in markets that have absorbed most of the competitive new supply, such as our markets in Westchester County and Brentwood, Tennessee. We have markets where demand growth is strong, such as Farmington, Connecticut, Exeter, New Hampshire and Marina del Rey.

The price of oil has risen approximately 35% in the past 6 months, and we're seeing our oil markets come back to life, such as our Washington, PA hotel, where RevPAR was up over 40%. We're also seeing some increase in oil-related business come back into our Houston hotels and some other markets within our JV hotels.

Year-to-date, lodging supply growth was 2%, industry-wide, which doesn't sound high, but most all new supply has been concentrated in extended-stay and limited-service hotels, with which we directly compete. Year-to-date, new supply in the upscale segment rose 5.6%, and this was offset by demand, which rose 6.1% in the quarter.

New supply has certainly dragged on our performance in markets such as Route 128 in Boston, Dallas, including Addison, and Denver, as well as San Mateo, California. We believe a rise in construction costs though and title lending requirements should mitigate some of the planned new hotels as we move forward.

So our second quarter has gotten off to a good start, with April RevPAR rising approximately 3%. Strategically, we are going to continue to diligently execute on all 4 prongs of our strategy. Our balance sheet is in great shape, and we are at our lowest leverage level since 2010.

We are well positioned to deliver further on our strategic approach and accrete value. By the end of the quarter, we expect to close on the acquisition of the beautiful new Residence Inn, Charleston Summerville, in an area that is bustling with development across all property types.

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

Thanks, Jeff. Good morning. Our RevPAR decline of 2.4% in the quarter was driven equally by a decline in ADR and occupancy. Our reported first quarter gross operating profit margins were 44.4%, and our hotel EBITDA margins were 36.3%, slightly above the upper end of our guidance range of 36%, and the driver behind our FFO per share outperformance.

Our first quarter same-store operating margins were down 260 basis points year-over-year. Payroll and benefits represent approximately 35% of our total operating expenses and approximately 20% of our revenue.

For the quarter, on a per-occupied-room basis, payroll and benefits were up approximately 7% and impacted our margins by 170 basis points. Industry-wide, especially in urban areas, margins are under pressure due to rising wages and benefits caused by low unemployment. We can either raise wages to where we are competitive or lose well-trained employees to other hotels or other industries, such as fast food and warehousing.

Unfortunately, in these same markets, temporary casual labor rates can be up to 50% more than market wage, so we can't afford to go that route. As we move forward as owners and not only as operators, we need to continue to find ways to reduce labor costs by maximizing the efficiency of our staffing model.

The only other item that had a major impact on our margins adversely was weather-related increases in utility costs, snow removal and maintenance, which impacted margins by 60 basis points in the quarter. These are primarily onetime weather-driven variances.

Guest acquisition costs were up 2.5% year-over-year due to increased -- basically in guest reward costs. These are actually offset by lower GA commissions that as a percentage of revenue were actually down approximately 10 basis points in the quarter, so a little bit of a pop to our margins.

Hotel EBITDA margins were off 360 basis points in the quarter as we benefited from approximately $0.5 million of multiyear or prior year profit refunds that we received in the 2017 first quarter.

Along with Island Hospitality, we are pushing harder than ever to maximize our revenue management strategies and controlling costs as much as possible. We are aggressively implementing additional revenue opportunities and working with our franchisors to implement new measures that will help owners regain some of the lost margins. For example, at our 36 comparable hotels, we increased other revenue by almost 18% in the quarter, driven by parking revenue, which was up 20% in the quarter, and improved our revenue $200,000.

The cancellation fee policy that was adopted by basically Marriott and Hilton with the adopted 48-hour policy, actually, we collected fees in the quarter of about $50,000.

Additionally, we're rolling out amenity packages in certain room types, which are also adding to our top and bottom lines.

On the expense side of our margins, we're already very lean from a staffing perspective, but we continue to look for ways to further improve efficiency and reducing minutes. Can we have -- are we able to hire part-time labor in certain markets and eliminate the equivalent full-time position which comes with incremental costs or benefits? We're challenging the brands to address the operating model of select-service and extended-stay hotels and limited-service hotels without sacrificing today's traveler experience.

We're reducing amenities such as newspapers, which saved us approximately $15,000 in the quarter. We're beta testing tweaks at hospitality at our select hotels, trimming offerings and focusing our guest service contact. We were able to reduce those costs by approximately $10,000 in the quarter.

Obviously, these savings are just on a limited-trial basis, but initially, they are encouraging. We have to be cognizant of our guest expectations and their experience -- experience within the hotel, so we may decide not to implement some of these initiatives or at least alter those initiatives at certain hotels.

On the CapEx front, during the quarter, we converted some empty space into 2 additional guest rooms at our Marina del Rey Hilton Garden Inn, creating approximately $800,000 of value. We continue to look at our existing assets and find ways to enhance value, whether that's the continued conversion of alternative space into guest rooms or enhancing our guest experience by adding, for example, small bars, while delivering an attractive return.

I'm going to go ahead and turn it over to Jerry.

Thanks, Dennis. Good morning, everyone. For the quarter, we reported net income of $2.9 million or $0.06 per diluted share compared to net income of $4.6 million or $0.12 per diluted share in Q1 2017.

The primary differences between net income and FFO relate to noncash costs, such as depreciation, which was $12 million in the quarter, onetime gains or losses, and our share of similar items within the joint ventures, which were approximately $1.7 million in the quarter.

Adjusted FFO for the quarter was $16.5 million compared to $18.1 million in Q1 2017, a decrease of 8.8%. Adjusted FFO per share was $0.36 compared to $0.47 per share generated in Q1 2017.

Adjusted EBITDA for the company declined 6.1% to $26.4 million compared to $28.1 million in Q1 2017.

In the quarter, our 2 joint ventures contributed approximately $3.1 million of adjusted EBITDA and $900,000 of adjusted FFO. Chatham received $1 million of distributions from the JVs in Q1.

First quarter RevPAR was up 0.9% in the Inland portfolio and up 1.1% in the Innkeepers portfolio.

Our balance sheet remains in excellent condition. Our net debt was $528 million at the end of the quarter, and our leverage ratio was 33.6%. In Q1, we refinanced our $250 million unsecured revolving credit facility, which extended the maturity from November 2020 to March 2023 and lowered our borrowing costs by up to 15 basis points depending on our leverage level.

Transitioning to our guidance for Q2 and full year 2018, I'd like to note that it takes into account the anticipated renovations of the Residence Inn Mountain View and Residence Inn Tysons Corner in Q2, the Homewood Suites Dallas in Q3 and the Residence Inn Sunnyvale I and Homewood Suites Farmington in Q4. Our guidance also assumes that we closed the $21 million acquisition of the Residence Inn Summerville South Carolina on July 1 and financed the purchase using our credit facility.

We expect Q2 RevPAR growth to be flat to up 1.5% and full year 2018 RevPAR to be down 1.5% to up 0.5%. Our RevPAR guidance assumes the current trends of solid GDP growth, combined with above average new supply in the upscale segment will continue throughout the rest of the year.

As a reminder, our full year RevPAR forecast has been impacted by difficult comps for our 4 Houston hotels, which benefited from the Super Bowl in Q1 2017 and increased demand after Hurricane Harvey in Q4 2017, and our 3 hotels in the Washington, D.C. area, which benefited from the inauguration in Q1 2017.

Our full year forecast for corporate cash G&A is $9.8 million.

On a full year basis, the 2 joint ventures are expected to contribute $15.8 million to $16.4 million of EBITDA and $6.2 million to $6.8 million of FFO.

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

(Operator Instructions) The first question comes from the line of Anthony Powell with Barclays.

If you kind of exclude all the comp issues in the quarter, did you see the improvement in business travel across the quarter that many of the other lodging companies reported so far?

Anthony, we have seen some of that. If you look kind of at our special corporate business, it was up kind of in the 3% to 4% range across our portfolio. So we did see a little bit of that, which is encouraging.

Got it. And could you just update us on the acquisition environment? Are you seeing attractive hotels out there for purchase? What's the pipeline look like?

I would say that the pipeline for us right now is pretty thin. But we have our usual, I'd say, 1 or 2 suspects that are direct conversations with owners we're working on. As you could probably see from any purported transactions or otherwise, it's been pretty quiet this year so far.

I think a lot of owners are probably either pricing back up again compared to last year simply because -- or holding on, because (technical difficulty) can still refinance at pretty attractive rates, particularly with the prospect of interest rates going up. So that's our competition more than anything today, is simply the refi market.

Got it. And given that, you guys haven't bought back stock or been repurchasers of your stock in recent years. Is that a more attractive option given some improvement in business travel and the valuation of your stock?

Oh, we never take that off the table. Obviously, that's something that we're always going to measure. The board will look at that and look at our implied cap rate and multiple. But I think that we've been pretty successful in acquiring hotels that not only have a decent going in cap rate, but I think have shown good growth going forward to a cap rate range that, still even with today's stock price at this level anyway, is north of a 7.5 to 8 cap kind of valuation.

Got it. And one more housekeeping for me. I think the net income guidance went down for the full year. What caused that decline?

That was a change in -- a change in depreciation.

(Operator Instructions) At this time, I will turn the floor back to management for further remarks.

Well, we appreciate the time everybody spent this morning, and we're looking forward to a little bit -- continued a little bit better environment as we move through the year. We will see folks at NAREIT in New York, we hope. So please let us know if you want to have a meeting, and I look forward to that opportunity. Thank you all.

Thank you, everyone. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.