Chatham Lodging Trust (CLDT) 2018 Q2 法說會逐字稿

Greetings, and welcome to the Chatham Lodging Trust Second Quarter 2018 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

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

Thank you, Melissa. Good morning, everybody, and welcome to the Chatham Lodging Trust Second 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 August 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 contain reconciliations to non-GAAP financial measures referenced on this call on our website at www.chathamlodgingtrust.com.

Now to provide you with some insights of the Chatham's 2018 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, and good morning, everyone. Thanks for being with us today. Earlier, we reported our results for the second quarter, and by most key metrics, finished at the upper end of the guidance range.

RevPAR improved 0.8% versus our guidance of flat to up 1.5%. Adjusted EBITDA of $37.6 million and adjusted FFO per share of $0.59 finished at the upper end of our guidance range, driven by improving performance at our JVs. Our RevPAR performance was right in line with our midpoint, and it was a pretty clean quarter from a comparison perspective. Our guidance factored in the impact from renovations at our Residence Inn in Mountain View at Silicon Valley and Homewood Suites in Billerica. We did have a big roof leak at our Dallas Market Center Homewood Suites after a rainstorm. And it caused us to have up to 35 rooms out of order for a portion of the quarter, and that displacement impacted our RevPAR performance by 25 basis points in the quarter.

Looking at our more significant markets in the quarter. RevPAR in our 4 Silicon Valley Residence Inns was up 0.5% to a strong $190, driven by an increase in ADR of almost 3% on occupancy of 81%. But those numbers would have been much better considering that we completed a major upgrade to our guestrooms in Mountain View, as I mentioned. But that renovation adversely impacted our portfolio RevPAR overall by almost 50 basis points for the quarter. And RevPAR at our 4 Silicon Valley hotels, when you look at them all together, would have jumped 4%, excluding the displacement from the Mountain View renovation. So I think that's pretty telling just in terms of how strong demand remains in Silicon Valley. Obviously, companies are doing well, growing and hiring. At the same time, we've talked about the significant supply additions in Silicon Valley, which does put a little bit of a lid on our ability to grow RevPAR because I think RevPAR growth would be in the upper single digits without a doubt without all the new supply.

San Diego represents our second-largest market where RevPAR rose 2%. Our Downtown Gaslamp Residence Inn rose significantly, up almost 9%, while our Residence Inn in Mission Valley saw RevPAR decline 7% due to the impact of new supply, which was primarily the new Homewood Suites that opened within a block or 2 of our Residence Inn that started out anyway by undercutting the market.

Downtown San Diego performance has been strong as the impact of new supply has waned, combined with a strong event calendar this year.

Southern California continues to be strong for us with RevPAR at our Los Angeles hotels rising almost 4% in the quarter. Our Residence Inn in Anaheim was down slightly, but our Marina del Rey hotel continues to outperform, up 10% in the quarter. Our operating team, I think, has done a great job with our key corporate accounts at that hotel.

Our third-largest market in the -- is the D.C. area, and RevPAR rose 4% there across our 3 D.C. area hotels. All 3 hotels posted solid RevPAR gains on higher demand.

Houston was one of the best-performing markets with RevPAR up approximately 10%. We have no hurricane business in our hotels. The significant jump was due to increased corporate demand attributable to rising oil prices, some of those companies getting back to business again as well as the normal active medical center and a couple of citywide events that also helped during the quarter.

As we look to the balance of the year, of course, we've discussed the really tough comps starting at the end of this month that we'll face as the hotels in August and September and through that quarter benefited from Hurricane Harvey occupancy. And it's tough to forecast what RevPAR is going to look like in Houston in the last 4 months of this year, but considering that uncertainty, that dictates where our guidance is, I think, which is pretty conservative.

Our Florida hotels continue to outperform with RevPAR gains of almost 10%. Florida has been a strong market, and we're continuing to benefit from increased travel.

Some more good news is that the economy, as we all know, was up a healthy -- GDP was up 4% in the quarter, the highest pace in 4 years. This has bode well for the industry and our hotels with really the only headwind at this point being new supply. Industry-wide, lodging supply growth remains 2%, which is not concerning. However, the bulk of the new supply has been within the upscale, chain scale and, of course, select-service focused. There is some good news, though, within upscale supply is that it seems to have peaked in 2017. If you look at the supply numbers, it was up 4.1% in '15, 5.6% in 2016, 6% in 2017, and now down to 4.4% projected for this year. We've been talking about this trend for a while, but it is certainly nice to see it show up in the numbers because upscale new supply has certainly dragged on our performance in markets such as Route 128 in Boston, in Dallas, specifically Addison and Denver.

Strategically, we're going to continue to diligently execute on our 4-pronged, strategy. Our balance sheet is in great shape, and we had our low -- we're at the lowest leverage level since 2010. We are well-positioned to deliver further on our strategic approach and accrete value and will remain opportunistic if we divest hotels. And we still want to be a net acquirer in 2018. Although as we've said, it's a tough time to acquire hotels. Prices are high. Our pipeline is thin, but we do have one. And we are looking forward to closing on the acquisition of our beautiful new Residence Inn in Charleston, Summerville, at the end of this month.

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

Thanks, Jeff. Good morning. Our RevPAR increase of 0.8% in the quarter was driven by a 0.6% increase in ADR to $172 and a 0.2% increase in occupancy to a solid 83%. For our portfolio, booking trends remained very short-term, and growth this year has been primarily on the corporate side, up 1% in terms of revenue dollars.

As I mentioned on our last call, along with Island Hospitality, we are aggressively implementing additional revenue opportunities. For example, at our 36 comparable hotels, we increased other revenue [won] by almost 12% in the quarter, driven by parking revenue primarily, which is up $300,000 or 22% year-over-year. We've also rolled out some in-room amenity packages that are proving fruitful, and we've seen an increase in the 48-hour cancellation revenue as well as other revenue related to no-shows of approximately $75,000 in the quarter.

On the room revenue side, we're working very closely with Island Hospitality's team to ensure that we are maximizing revenue on shoulder and weekend nights, which involves being more nimble with respect to pricing changes, overriding reservation system recommendations and other items like that. Today's pricing environment is very sensitive, requires much effort to stay on top of your markets and your competitors.

These are great examples of the benefits of having the relationship that we have with our operator and why we believe our platform with Island Hospitality is the best model, especially in select-service and extended-stay asset classes.

Our reported second quarter GOP margins were 48.9%, down 50 basis points year-over-year. And our hotel EBITDA margins were 41.5%, down 70 basis points and within our guidance range of 41.4% to 41.8%.

Despite the modest RevPAR gain, we were able to maximize -- or minimize our margin loss due to pushing harder than average to maximize not only revenue but also controlling costs as much as possible.

For the quarter on a per-occupied-room basis, payroll and benefits were up approximately 3.8%. And on a CPR basis, up 3.5%, and this impacted our margins by 30 basis points. It's down from the 7% impact in the first quarter.

On a CPR basis, payroll dollars were up 2% in the quarter, and benefits in taxes were up almost 9%. We are implementing some program in deductible changes for the last half of the year as well as changing the employer/employee allocations in the last half of the year, which should minimize the increased benefits costs that we experienced through the first 6 months. Again, this is just another example of the benefits of our relationship as we're able to make these changes during the middle of a policy period.

The only other item that had major impact on our margins in the quarter adversely was really maintenance costs, which impacted margins by about 20 basis points in the quarter, primarily onetime maintenance costs.

Guest-acquisition costs were up 4% year-over-year due to increased production, but as a percentage of revenue, the costs are actually down approximately 20 basis points. Reduced GA commissions are being offset by higher guest reward costs for our portfolio.

As Jeff alluded to, the JV performance in the quarter was strong and ahead of our original expectations for the quarter, with JV RevPAR up 3.3% comprised of RevPAR growth of approximately 2% in the Innkeepers portfolio and 5% in the Inland portfolio. Certainly pleased to see the joint ventures performing well, and it's nice to see the Inland portfolio rebounding nicely after having invested significant amount of money renovating that portfolio.

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

Thanks, Dennis. Good morning, everyone. For the quarter, we reported net income of $13.5 million or $0.29 per diluted share compared to net income of $5.1 million or $0.13 per diluted share in Q2 2017. In Q2 2017, we recorded a $6.7 million impairment on our SpringHill Suites Washington, Pennsylvania, property. The primary differences between net income and FFO relate to noncash costs, such as depreciation, which was $11.9 million in the quarter; other charges, which were $300,000; 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 $27.4 million compared to $25.2 million in Q2 2017, an increase of 8.7%. Adjusted FFO per share was $0.59 compared to the $0.65 per share generated in Q2 2017.

Adjusted EBITDA for the company increased 7.1% to $37.6 million compared to $35.1 million in Q2 2017. In the quarter, our 2 joint ventures contributed approximately $5.1 million of adjusted EBITDA and $2.8 million of adjusted FFO. Chatham received $1.8 million of cash distributions from the JVs in Q2 2018.

Second quarter RevPAR was up 5% in the Inland portfolio and up 1.9% in the Innkeepers portfolio. We've completed a substantial amount of renovations in our joint venture portfolios over the last couple of years and the results are being to show in the strong RevPAR performance. Both of our JVs should have very limited capital requirements for the next several years.

Our balance sheet remains in excellent condition. Our net debt was $525 million at the end of the quarter, and our leverage ratio was 33.3%. Transitioning to our guidance for Q3 and full year 2018, I'd like to note that it takes into account the anticipated renovations of the Homewood Suites Dallas in Q3 and the Residence Inn Sunnyvale I, Residence Inn Tysons Corner and Homewood Suites Farmington in Q4.

Our guidance assumes that we close the $21 million acquisition of the Residence Inn Summerville, South Carolina, at the end of August and finance the purchase using our credit facility.

We expect Q3 RevPAR being minus 1% to plus 0.5% and full year 2018 RevPAR to be minus 1.5% to flat. 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 2018. As a reminder, our Q3 and Q4 RevPAR growth will be impacted by difficult comps for our 4 hotels in Houston and 2 hotels in Florida, which benefited from increased demand after hurricanes Harvey and Irma starting at the end of August 2017.

Our full year forecast for cash G&A is $9.7 million. On a full year basis, the 2 JVs are expected to contribute $16.3 million to $16.7 million of EBITDA and $6.7 million to $7.1 million of FFO.

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 Bryan Maher with B. Riley FBR.

Maybe this is a question for Jeremy. At the end of the quarter, what was your acquisition capacity when you factor in your credit facility?

I think it was about $125 million to $150 million to kind of get us back to the leverage level we were before we raised it -- the equity and completed the acquisitions we've done sort of over the last year.

Okay. And then, and I apologize if I missed this, but I don't see it, did you guys issue any shares under the ATM in the quarter?

We did not.

Okay. And then lastly for me, did I hear correctly that property taxes were up about 9% in the quarter?

Yes, I think you saw that in our numbers. We did have a onetime correction to -- as with our Marina del Rey hotel that we're certainly appealing and going to work through. But we had a onetime adjustment there for prior year property taxes.

Yes. I mean, we've seen that a couple of times now, both in the first quarter and in the second quarter, not just with Chatham but with a number of lodging REITS posting some pretty meaningful property tax increases. Where do you think that, that stops? Or should we just get used to it other than the lengthy period of appealing and, hopefully, getting some back?

Yes, listen, I think for us Marina del Rey was an acquisition a few years ago. The state of California is certainly very slow in getting out any type of supplemental types of property tax bills. We budget for it when we make an acquisition in states like that. In this case, a little more aggressive related to how the state and, specifically, the city is looking at the ground lease value there in addition to the hotel value. So we're appealing it, but we try and factor those in when we acquire the hotel into our guidance and into our model. But certain states -- and California really is one of the worst as far as trying to be timely at all on that. So I think for us, it's really driven by acquisition-type activity. And we did have a few last year, but we think those are in states that we're pretty comfortable with. So we'll see what happens. But I think for us, at least, all the California stuff is behind us.

And maybe just one more for Jeffrey. You said that the pipeline is thin, but that you do have one. When you say you do have a pipeline, would you consider just a handful of properties? And can you give us a color where you're focusing at this time?

I would say a handful is a proper description, if not even a touch on the generous side. Because we're really looking right now at this part of where we are in the cycle, I think, for more of a value-add kind of an acquisition because we think steady-state select-service hotels or any hotel for that matter, look, it's just expensive out there. You've got costs that we've all talked about that are rising. So we certainly don't want to buy something that we think is at whatever cap we buy it at, call it, 7.5 or something and have it turn into a 7 or 6. So we want value add, that makes it more difficult, and that's where we rely on our management company to help heavily through this process and try to find deals that have some opportunity for upside. Keeps the pipeline a little bit thin however. And you know that we don't really compete in heavily brokered deals. So that part is not something that we believe in and nor do we think really creates shareholder value.

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

Just a question on the RevPAR guidance. You took down the top end by, I think, 50 basis points. What drove that change in the guidance relative to where you were last quarter?

Well, a piece of it was second quarter performance. So second quarter, we basically kind of came in right above the midpoint of the 0 to 1.5. So that alone itself for the quarter brought it down at least about 25, 30 basis points. And really, the next half of the year is really just a little bit of protection when we're looking at the Florida and Houston markets. Right now, we have Houston projected down like 37% in August and 21% in the fourth quarter -- sorry 37% in September and 21% in the fourth quarter. So we believe that those are fairly conservative. The impact of that to the overall guidance for the rest of the year from where we were before is another kind of 10 to 20 basis points. So those are your 2 things.

Got it. And just generally on RevPAR, I mean, it seems like you had some good demand growth in some of the markets that you highlighted. But RevPAR is still just generally in this 0 to 1% range. What has to happen for RevPAR to kind of get closer to the, at least, the upscale average of roughly 2-ish percent that we're seeing?

Yes, listen, I think for us, we continue in even -- as we talked about, with the industry and new supply coming down, for us, again, this is another quarter where if you look at it on a trailing 12 basis now, the impact of new supply for us is in the 2.5% to 3% range now. So certainly, as those numbers continue to trickle down, we'll be able to drive a little bit more RevPAR growth. The great example of Silicon Valley where we've absorbed a ton. Demand is strong. And again, outside of that Mountain View renovation, our RevPAR would have been up almost 4%. But as Jeff alluded to, we do have some markets, such as Boston. The Route 128 corridor, we have 3 hotels. Boston has been a pretty lackluster market the entire year, and again, a lot of that's supply driven. So for us, it's -- as that continues to leak off, we'll be able to drive it higher.

And in some of these cleaner months where we don't have the sort of hurricane comps or the Super Bowl comps, RevPAR has been not too bad. Like June, for Chatham, RevPAR was up 2.5%. And I think we said in the press release that July RevPAR is up about 3%. So we're in months where there isn't weird comps, we're doing okay.

And I want to add to that too that I can think of 4 hotels really that drive the disparity that you're talking about between sort of the average, let's say, for this kind of hotel that are down upper single digits or double digits in RevPAR, and that -- they're driving the result. We are seeing, as you -- as we've talked about here, some very good performance in more markets than we firstly started the year at or ever anticipated when we did our budgets for 2018. So we don't want to come away by saying there that we don't see some of what everybody else sees, which is some decent demand and demand growth in the markets. But if you look at a hotel like Downtown Bellevue or you look at Billerica or you look at Burlington, Mass, I mean, I could just name them real fast, they are suffering some deep declines as brand-new hotels open up. And as many times an operator will do, just starts with very low rates and grab some of your business at the get-go. That always comes back as we indicated. Downtown -- you look at Downtown San Diego, you even look at Silicon Valley as we're absorbing that supply, and the numbers start gravitating back towards low to mid-single-digit RevPAR growth. So I'm optimistic from that perspective. We've got 3 hotels, at least, that we really need to absorb some more of that supply.

That's very helpful. And then just looking out maybe to the next year and even the year after, are any hotel that aren't seeing that supply impact going to be impacted by new properties? If you could just look at your portfolio, what hotels you think may be at risk due to some supply growth that you know that's coming or opening soon?

Well, listen, we -- for us, there's still new supply coming in the Houston market over time.

It's probably Houston and Denver, I would think.

Houston and Denver are fairly -- again, they're 2 of the top markets. So even though Nashville has a tremendous amount of new supply coming, we're -- our hotels in Brentwood, it does have a little bit of impact on kind of the citywides that are occurring Downtown. But that hotel in Brentwood has actually done a pretty good job despite all the new supply. So it's really Denver, it's really Houston, and there's still some in Dallas as well.

Got it. And maybe just one more. As you look for acquisitions, are there markets where the supply growth is not really -- is better than kind of the others? Because some of the markets that you've described are markets where you've bought recently. So how do you avoid these competitive supply issues as you look to buy new hotels?

Look, the biggest and best way to avoid it is to do your due diligence and make sure you understand what's coming. We can all do that in a variety of different ways. But I think understand what's coming and then do an accurate or the best that you can do pro forma and account for that supply opening. But there are, as you well know by looking at the list, lots of markets that still are penciling, anyway, lots of supply for 2019 and 2020. I mean, I think Lodging Econometrics came out with something about 2020 recently this week. I'm not sure I believe all the numbers because you have significant -- and everyone has been talking about construction cost increases, but now you look at some of the tariff-related cost increases. Labor has always been the issue. I was just talking to a developer yesterday about a couple of deals, and he was telling me that, "Look, we've fought the labor battle forever, Jeff, here. And that's been incrementally negative to -- for our returns. But material costs, lumber costs, aluminum costs, way, way up, record prices." So I'm not sure that, that really doesn't kind of also help in so far as what the supply picture looks like as you go out. But it does make it a little bit harder to buy hotels if you want to have a growing return and a growing cash flow such as we and our board want when we make an acquisition.

(Operator Instructions) Our next question comes from the line of Tyler Batory with Janney Capital Markets.

Just a few questions for me here. Could you talk a little bit about some of the recent hotels that you've bought? How those have been performing versus your expectations and your underwriting?

Yes, so really, we bought 3 hotels last year. The Springfield Embassy Suites, the Hilton Garden Inn in Portsmouth and the Courtyard in Summerville. 2 of the 3, so the Summerville asset and the Springfield asset are outperforming our original expectations for this year. The Hilton Garden Inn in Portsmouth is underperforming our expectations. But when you roll all 3 up, they're a little bit better than what we originally underwrote for this year. Not significantly, but top line performances is doing okay there. With the Hilton Garden in Portsmouth, listen, it's a -- it's going to be a great long-term market. I think as kind of the business shifts around within that market, we'll be fine there. So I think we have made some adjustments to the management team at the hotel this year in the last few months, and we're starting to see things get a little bit better there. But all in all, the 3 acquisitions are doing slightly ahead of what we underwrote them at.

Okay, great. And then I think you mentioned this a little bit in your opening remarks, but any more details on what you're seeing with the OTA business? And then just given the pretty strong demand environment here, any change to how you're thinking about revenue management and your mix of occupancy and ADR?

Yes, listen, I think we've spent a lot of time over that within the last few months. Revenue management and especially examining pricing is at an all-time high in terms of how often and how much you got to be involved in the process. I think the Island Hospitality has done a great job getting a handle on that on the last few months. And listen, we've implemented -- they've implemented structural changes in how they treat -- they look at stuff on shoulder nights and weekends that we believe is providing a little bit of differentiation for us. And I think as, and we talked about it in our prepared remarks, the volume of our online business and online bookings is up a little bit, but certainly, as a percentage of our revenue is down. But it is more important than ever to be as flexible and as nimble as possible. And what we found, Tyler, on our ADR and occupancy split is that especially on those shoulder nights and weekend nights, the brand revenue management systems are, listen, they're there to, hopefully, drive as much ADR growth as possible. But in some cases, we found that they're too aggressive, and we've got to do a little bit of a better job of overriding those recommendations to benefit the Hotel. And that's really been kind of one of the main focal points for us over the last few months.

Okay, great. And then just last question for me, maybe for Jeff. I mean, you talked about the acquisition pipeline being a little bit thin. I mean, can you share some additional thoughts on what you're thinking with maybe some of the hotel expansions you've touched on in the past? Or maybe building properties on some of the excess lands you guys have?

Yes, well, we certainly think, and evidenced by our actions, we're halfway through the year, we haven't bought a hotel. Last year, we bought 3. We announced that we were interested in doing some development and are, in fact, pursuing that. But anywhere we do that, by definition, is going to be in a market with some pretty significant and lengthy entitlement periods of time and processes. So that takes a little bit of time. But I think the returns from those kind of activities are significantly better than what we're looking at in the market right now for most existing acquisitions. Again, I'm not completely bearish on our ability to buy. But we're picky, and we're very picky. And we want a return, and we don't want to see a return go south from what we think is accretive or at least nondilutive. And we look at our implied multiple through our share price every day, if not a few times a day, and we're pretty focused on being ahead of that number. So that's the way we're looking at the world, and we do have a couple of development deals that are in the entitlement process. We look for 10% unlevered returns when we do those deals, and we know we can get them because they're in markets that we already own or operate hotels in. So therefore, I think we, through the management company, understand the possibility and capabilities with those projects. When we look at expansion, and we were very bullish on an expansion for Portland, Maine, that hotel has continued to be on fire. Market is strong. Market has absorbed 3 or 4 new hotels downtown in historic Waterfront district where we are. But also, there's been some zoning changes in the last 9 months that have made it now, I think, very difficult to expand or build another small hotel on our parking lot site that we thought we could. Now that's good news and bad news, right? I mean, good news is there'll probably be less hotels built Downtown, but I think we may, at least for the time being, not have an opportunity to do that expansion. But we'll keep working. And I think as the year progresses, we will make an acquisition or 2.

Gentlemen, there are no further questions at this time. I'll turn the floor back to you for any final comments.

We appreciate the questions. We appreciate the interest. And we look forward to reporting some continuing better numbers as we move through the third quarter. And I think that as you look at Houston, particularly, we certainly covered ourselves for what we saw as an enormous amount of displacement type from hurricane business room nights that were added in the third quarter last year. But on the other hand, the underlying demand in Houston and the underlying corporate demand has certainly surprised us in its strength as it built from the first quarter to the second quarter.

So with that, we look forward to coming back to you shortly. Thank you.

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