Chatham Lodging Trust (CLDT) 2018 Q3 法說會逐字稿

Greetings, and welcome to the Chatham Lodging Trust Third Quarter 2018 Financial Results Conference Call. (Operator Instructions) As a reminder, the conference is being recorded.

It is now my pleasure to introduce your host, Chris Daly, President of Daly Gray Inc. Thank you, Mr. Daly, you may begin.

Thank you, Doug. Good morning, and happy Halloween, everyone, and welcome to the Chatham Lodging Trust Third 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 more recent Form 10-K and other SEC filings. All information in this call is as of October 31, 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 on Chatham's 2018 third 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. We appreciate you being with us today. Earlier, we reported solid results for the third quarter and updated our fourth quarter forecast, raising the full year midpoint of our guidance, we're certainly pleased to be able to do that.

Looking at our third quarter, RevPAR at our 40 comparable hotels rose 1.1% versus our guidance of down 1% to up 0.5%. Adjusted EBITDA of $38.6 million and adjusted FFO per share of $0.61 finished towards the upper end of our guidance range, driven by our RevPAR outperformance but offset a little bit by operating margins at the lower end of our guidance range.

Our 6 largest markets contributed approximately 60% of our hotel EBITDA, and I want to spend a few minutes talking about each of those.

First off, RevPAR at our 4 Silicon Valley Residence Inns was up 1.5% to a strong $205, driven by an increase in both ADR and occupancy. Occupancy was 88% for the quarter in those hotels with an ADR of $234, pretty strong absolute numbers, and one of our Residence Inns in the valley was still under renovation, Mountain View Hotel, for some period of time during the quarter.

Obviously, tech remains one of the fastest-growing sectors in our economy in terms of new hire and ability to grow, which really drives business into our extended-stay hotels. Additionally, the impact of new supply is trending in a more positive direction for us with less new supply and more absorption of the supply as the year has progressed this year.

San Diego represents our second-largest market, and we saw RevPAR rise 2.2%. Our Downtown Gaslamp Residence Inn, RevPAR rose significantly, up almost 7%. Downtown San Diego performance has been strong as the impact of new supply Downtown has waned combined with a good strong convention and event calendar this year.

Our Residence Inn in Mission Valley saw a RevPAR decline 3%, so the overall San Diego numbers would appear better. But our new Homewood Suites opened within a block of our Residence Inn, and, of course, a Homewood would be, at least at the beginning, a very direct competitor to our Residence Inn, and this particular Homewood decided to come in and undercut most of the corporate and government business rates that exist in the market to get some penetration. So as that stabilizes, we expect that hotel to pop right back again as business is strong there.

Our third largest market is the D.C. area and our 3 D.C. area hotels experienced RevPAR growth up 2.5%. Our Foggy Bottom Residence Inn had RevPAR growth of 2.4%, and our RevPAR at our Embassy Suites acquired last year at Springfield jumped almost 5%. Supply-demand mix was a bit upside down in the overall core, but kudos to our team at Island Hospitality, as they were able to grow market share in the quarter in order to drive that kind of RevPAR growth.

Our 3 Northeastern coastal market hotels had a great quarter with RevPAR advancing over 4%. These leisure markets are in high demand, obviously during the summer given their proximity to major urban areas and providing the unique experience that they do with great locations. Our results were led by our Hampton Inn Downtown Portland, Maine historic district, where RevPAR was up 10% to a company leaving $272 in the third quarter. I think there is some certainly full-service upper upscale hotels that had never seen a $270 RevPAR number. So pretty pleased with that performance.

Going into the quarter, we knew predicting Houston's performance was going to be difficult due to the tough comps from Hurricane Harvey in the third quarter last year, RevPAR at our 4 Houston hotels was up though 2.5% for the quarter versus our guidance of down 6.5% for those hotels. Within the quarter, RevPAR was up 42% in July, 11% in August and down 23% with that hurricane comp in September.

Our 2 Medical Center hotels were the better performers during the quarter with RevPAR up 5%. Having hotels tied to the Medical Center, as we've said, is a long-term advantage.

In addition to San Diego, the LA market continues to be strong for us with RevPAR in our Los Angeles hotels rising 3% in the quarter. Our Anaheim Residence Inn was up 5%. It's nice to see that market on a rebound with RevPAR up 2 of the last 3 quarters this year after being down 8 consecutive quarters, primarily, because of new supply and lots of it in and around Disney in the Anaheim market.

Our 2 Florida hotels faced tough comps in the third and fourth quarter due to Hurricane Irma business gained in 2017. For the third quarter, our 2 hotels experienced a RevPAR decline of 2%. Another weak market in the quarter was Boston where RevPAR at our 3 hotels was down 4%, mostly due to the impact of new supply and some renovated supply as well.

We are encouraged though by our results overall and raised our outlook. Looking at the bigger picture, GDP rose a very healthy 3.5% in the third quarter and of course, there's a strong correlation between GDP growth and RevPAR growth. And of course, RevPAR and -- excuse me, GDP growth forecasts are expected to remain healthy and we expect lodging demand, at least in the near term, to continue to be strong.

Strategically, we are going to continue to diligently execute our strategy because we have acquired hotels in solo acquisitions or very small portfolio acquisitions. We don't have a bunch of noncore hotels, so any capital recycling for us is limited or opportunistic based on price, but of course we are still working on that basis, and we discussed our acquisition pipeline. We know the market is difficult with a fairly wide spread between bid and ask, our pipeline is pretty thin on that front, but we have managed to apply our 4 outstanding hotels over the last 13 months and invested $153 million. We're hopeful that we can acquire another hotel by the end of the year. We've been working hard to do that, and we would use any proceeds from any hotel sales to acquire other hotels. Our balance sheet, as Jeremy will discuss, is in great shape with leverage level of less than 33%, and we will continue to work on that capital recycling, although on a limited basis, and acquiring hotels that can create value for our shareholders.

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

Thanks, Jeff. Our RevPAR increase of 1.1% in the quarter was driven by a 2.3% increase in occupancy to a healthy 86%, while ADR declined slightly down 1% to $171. Our RevPAR growth beat the upscale industry RevPAR growth of 0.8% in the quarter. I think reiterating something a point that Jeff made, we think it's due to 2 things. One is the improving supply-demand dynamics in our markets as well as some really outstanding efforts by our revenue management team at Island Hospitality. We are very excited to acquire during the quarter, the brand new 96-suite Residence Inn, Charleston Summerville, which is adjacent to Courtyard at a price, we believe, was below current replacement costs at the time we closed the deal. The market is going to be a good long-term market as the Volvo plant opens this year, and with Volvo already announcing a second production line scheduled to open in 2020, the growth outlook remains pretty positive. And having that Residence Inn is going to allow us to maximize revenue opportunities by placing longer-term extended-stay guests at the Residence Inn and yielding higher ADR at the Courtyard.

For our portfolio, booking trends remain pretty short term. Growth this year has been primarily on the corporate side, which is up 2% in terms of revenue dollars. Island Hospitality has done a great job during the quarter maximizing revenue on shoulder and weekend nights, which is requiring to be a little bit more nimble with respect to pricing changes and looking at -- looking carefully at reservation system recommendations and also making sure that we hit certain thresholds on particular nights.

We're continuing to aggressively implement additional revenue opportunities. For example, at our 37 comparable Island-managed hotels, which exclude any hotels that were acquired in 2017 or 2018, we increased our other revenue by 14% in the quarter driven primarily by parking revenue, which was up $376,000 or 28% year-over-year. Our hotel EBITDA margins were 41.3%, down 110 basis points, but within guidance range of 41% to 42%. At our 37 comparable Island-managed hotels, operating margins were down a mere 60 basis points to 48.4%. And our hotel EBITDA margins were down 80 basis points to 41.5%.

For the quarter, favorable benefits were up in absolute dollars approximately 5%, but on a per occupied room basis, costs were up 3.6%. This accounted for basically the entire margin impact in our quarter as it reduced our margins by 70 bps.

Breaking down this number into a bit more detail on a per occupied room basis, the payroll component was up 2.9% in the quarter and benefit costs were up 6% in the quarter. As we talked about back in August, we have implemented changes to our benefits program during the quarter, which should save us at least $100,000 a year -- or excuse me, $100,000 per quarter as we move forward.

Rising claim costs is the primary driver behind the jump in benefits, and at least we're able to make these adjustments during the middle of a policy period to reduce these rising costs. Again, just another example of the benefits of our close working relationship with Island Hospitality.

Our hotel EBITDA margins remained the best of all lodging REITs and our closest peer is a distant 250 basis points below our levels. Our margins are a whopping 23% higher than the average of all lodging REITs. We attribute this certainly to our superior quality of our portfolio combined with the best-in-class operating platform.

The most meaningful component of lodging REIT returns over time is driven by dividend income, which we well know. Our margins are high relative to others so we can generate meaningful cash flow after CapEx and of course, we're able to pay the strong dividend. Our annual dividend of $1.32 equates to 69% of our AFFO per share based on the midpoint of our guidance, so it's pretty well covered.

Within our JVs, RevPAR was up 1% in the quarter with both portfolios producing RevPAR growth in that range. And just a few things to note on our fourth quarter RevPAR guidance, October RevPAR, we projected is up approximately 3% for the month, which is certainly encouraging. As we look out for the balance of the quarter, November is expected to be down in that 3% range, again due primarily to tough comps from the hurricane-related business in 2017. And December is expected to be relatively flat. RevPAR of the 4 Silicon Valley hotels is expected to rise 0.2% in the fourth quarter, this is for all 4 hotels. We are beginning a significant renovation at our Residence Inn -- one of our Residence Inns in Sunnyvale, and if you exclude that renovation from our quarterly projections, RevPAR growth is projected to be up somewhere between 2% and 3%.

With that, I will turn it over to Jeremy.

Thanks, Dennis. Good morning, everyone. For the quarter, we reported net income of $14.7 million or $0.31 per diluted share compared to net income of $14.5 million or $0.36 per diluted share in Q3 2017. The primary differences between net income and FFO related to noncash costs such as depreciation, which is $11.9 million in the quarter; other charges 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 $28.4 million compared to $27.0 million in Q3 2017, an increase of 5.2%. Adjusted FFO per share was $0.61 compared to the $0.68 per share generated in Q3 2017.

Adjusted EBITDA for the company increased 3.8% to $38.6 million compared to $37.2 million in Q3 2017. In the quarter, our 2 joint ventures contributed approximately $4.9 million of adjusted EBITDA and $2.5 million of adjusted FFO. Third quarter RevPAR was up 1.4% in the Inland portfolio and up 0.5% in the Innkeepers portfolio. Chatham received $1.4 million of distributions from the JVs in Q3.

In Q3, we issued $13.7 million of equity through our ATM and direct stock purchase programs at an average price of $21.46. This further strengthened our balance sheet and will provide us with additional capacity to pursue attractive growth opportunities.

Our net debt was $525 million at the end of the quarter and our leverage ratio was 32.6%.

Transitioning to our guidance for Q4 and full year 2018, I'd like to note that it takes into account the anticipated renovations of the Residence Inn Sunnyvale 1, Residence Inn Tysons Corner and Homewood Suites Farmington in Q4. We expect Q4 RevPAR growth to be minus 1% to plus 1% and full year 2018 RevPAR to be minus 0.5% to flat. As a reminder, our 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 in September 2017.

Our 4 hotels in Houston generated RevPAR growth of 23.5% in Q4 2017, which increased Chatham's overall RevPAR growth by 1.6% in Q4 2017, and we expect the 4 hotels in Houston to be down approximately 15% in Q4 2018, which would have an impact of approximately 1.3% on our overall RevPAR growth in Q4 2018. Our full year forecast for corporate cash G&A is $10.1 million. On a full year basis, the 2 JVs are expected to contribute $16.4 million to $16.6 million of EBITDA and $6.9 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 Tyler Batory with Janney Capital Markets.

So just a couple of questions for me here. First, I just want to ask a little bit more -- on the third quarter, obviously the RevPAR growth is very strong, obviously Houston looked like a big variance versus what you guys were expecting, but could you talk a little bit more about how the quarter played out? What's your expectations in some of your other markets? I mean, do you see any significant outperformance or is it kind of broad-based across the portfolio?

Tyler, this is Dennis. It's a little bit broad-based across the portfolio. But certainly, Houston was one of the major contributors to the outperformance. If you look at a few of our other major markets, Washington, D.C, which I think some other peers have been, third quarter was relatively weak for us. We had -- we were expecting RevPAR to be down slightly in that market and obviously it finished up. And then when you look at our San Diego market, we were expecting that market to be relatively flat and that came in up 2 plus percent. So really when you look at -- those are 3 of our top 6 markets, those are really where the outperformance came.

Okay, great. That's helpful. And I did want to follow up a little bit on Houston. Obviously, really tricky with the comps and whatnot, but could you talk a little bit more about what you're seeing there on the corporate side, on demands, if you exclude the weather and then I don't know if you have any thoughts on supply in Houston as well?

Well, we certainly don't like the supply outlook. And certainly, it's still one of the more punitive markets going forward, and there is more supply not only at the Downtown, but especially at the Medical Center where we are. There is a couple of decent size hotels that are projected to open up within the next year or slightly over a year at the Medical Center, so this might hurt a little bit. And then as far as the market itself, we're very surprised with the July and August health of that market, especially at the Medical Center with our Medical Center assets where we have a Courtyard there at the Medical Center where RevPAR was actually up 7% in the quarter, and our Hampton Inn at the Medical Center, RevPAR was up 2.5%. So I think just the proximity to the Medical Center, there were a lot of events than prior -- than as we went into 2018 around the area that helped the market. So listen, I think business is generally a little bit better, but it's still going to be a headwind in terms of supply around the Medical Center.

Okay. That makes sense. Then last question from me, more of a big-picture question, I think. You're commentary, definitely very positive, RevPAR up 2% in October, definitely paint some bullish picture as well. I think there is certainly a lot of investors out there that are concerned about maybe slowing economy, maybe slowing growth within lodging. I mean, just to be clear, when you guys look out at your portfolio and your business, I mean, do you see any indications that things might be slowing generally, as does it look like things probably maybe even picking up a little bit for you guys?

This is Jeff. I think it's important to look at, number one, at some of our absolute ADR and occupancy numbers because people, I think, get lost in always looking for RevPAR growth, and it's important that we know to have RevPAR growth because it drives earnings growth and that's directly tied to how people view you and your multiple. But when you got hotels, for example, in Silicon Valley, that are select-service hotels that run 88% and $234, I think that's something to pay attention to, I think, when you look at the overall portfolio with its, depending upon the season, 84% to 26% occupancy rate and a strong ADRs that we've got and RevPAR numbers. This is not a weak part of the lodging cycle. What it is, is just a part of the lodging cycle that has a fairly normalized amount of supply that's coming in based upon historical averages but a little more tilted or a lot more tilted towards no full-service hotel development for the most part, lots of select-service hotel development because that's where the customers want to put their dollar and where they want to say, as evidenced by the success of the brands that we're in, and then further focus in the urban areas and the big markets, which is where our hotels are. So I think that we're in some of the best demand growth markets in the United States and that's why our RevPAR is still moving and a flat to up direction, and I would expect that to be the momentum as we move forward into 2019. I don't see any reason for that to change. And I think that we've commented a few times on the fact that even going back to the end of 2016, we were seeing some supply in our downtown markets and therefore hit a little bit earlier than some of the other hotel companies that you may follow. But we're going to -- we're starting to see that they, and of course absorption of those new rooms in the markets that we're in, which I think bodes better for us in terms of some RevPAR growth as we look forward. Long answer, sorry for that.

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

Your occupancy was up given now in the quarter for the first time I think in couple of years. Was that a deliberate strategy to kind of just add more demand to the system? Or was that just lapping of supply growth comps? Or why was that up so much in the quarter?

I think it's 2 things. I think it's the diminishing impact of supply on our portfolio, but secondly, in one of -- what we have in our -- in my prepared remarks as well is that Island Hospitality has spent a lot of time and really has reallocated some resources internally, examining and analyzing shoulder nights and weekend nights to ensure that we maximize our revenue dollars, and some of that I think you are seeing in that occupancy number for the quarter where we as we took a look at the performance of our hotels over those shoulder nights and weekends that we left a little bit on the table there, so.

And again, I think -- this is Jeff. When you got a portfolio of hotels that runs above the upper 70s, let's say, in occupancy, certainly at 80. By definition, it means you're full midweek. And we're really looking for opportunities -- the beauty you have as a management company in here is to be able to sit down with them and the revenue managers and look at star reports by day of week and really look and analyze where the opportunity is and of course, it's in the shoulder nights and it's on the weekends. And so we shifted our focus because the corporate direct sales efforts for this company I think are excellent and those results in that midweek business. And therefore, the shift needed to be made towards weekend business and I think you're seeing the results and I would expect you'll continue to see those results.

Got it. And we're having more developers are hanging to their hotels as they finish them because they're not able to, I guess, start the construction or it's harder for them to backfill their pipeline. Are you seeing that in the transaction market? And is that making it harder for you to find deals?

Sure. I mean, look, the commentary around the absolute RevPAR numbers really tells the story, because if you build a hotel, your ability to ramp into the ADR and occupancy that you projected is probably pretty strong because the absolute numbers are strong in the markets. And of course, this is just the guys with the existing hotels that are in the markets whose top line growth goes flat or slows down, which is what you're seeing overall. But as long as they can get to that ramp number pretty quickly, I don't think they have a big desire to sell, and as you said, if their pipeline, which it is, is shrinking for new construction because of increased construction costs and the like, then they don't need to recycle their capital and harvest the equity as fast as they otherwise had to over the last few years.

So is that the main reason why it's been harder to do deals or is that just something just -- or pricing acquisition is still a bit wide between you and sellers? Or what's the main impediment to getting deals on these?

Yes, I mean, look, the source of deals is not just the developer. The source of deals is from just existing owners that have and are experiencing good cash flow and good returns and don't have a big incentive to sell and, of course, the refinance market has been really strong, the availability of debt, particularly CMBS debt, for stabilized hotels is still out there and so that is a very strong alternative for an owner because, of course, he gets to harvest his equity, in many cases, tax free. So there's -- really it's the lending environment that provides another problem for us.

Got it. Just one more, do you think that lending environment has changed at all over the past, I guess, few weeks as the equity markets have been more volatile and as there has been more, I guess, a bit more uncertainty regarding the macro picture and the lodging cycle?

We haven't seen a lot of changes in the last few weeks, but we haven't been in the market with refis recently either, but -- I mean, that market overall has been super strong.

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

Sticking with that line of question a little bit on the capital recycling and the bid-ask spread being wide and to your comments earlier, Jeffrey, on not too many strategic -- nonstrategic hotels in the portfolio. How many would you say there currently are that you would consider selling to capital recycle? And are any of those being currently marketed?

Yes, Bryan, this is Dennis. I mean, listen, we do have a few hotels that are out where we're testing the waters. I think that's probably matches what we believe and consider a kind of noncore. So I think we're -- it's not that we're -- we've fallen out of love with them, we certainly have thought a lot about the 2 Western PA assets, at least in terms of their fit within our portfolio, what kind of RevPAR, certainly well below $100 is a little bit out of character for our portfolio. So I think if you had to say -- those were probably 2 noncore assets. Ironically one of those is having a great year in terms of RevPAR growth, but outside of that, I'd say it's kind of 2 or 3 within the portfolio. And yes, listen, I think we'd like to be able to recycle some of that capital and hopefully be able to acquire an asset before the end of the year.

Okay. And then shifting gears to the wages and benefits commentary, I think you said total payroll was up about 5% but 3.6% per occupied room. Do you have the number -- and then you broke it down further with 2.9% being payroll and 6% being benefits. Do you have the total payroll breakdown based upon these metrics handy?

For the -- for what period of time?

For the third quarter.

Total payroll for that -- well, for absolute dollar, it was 5%. And are you talking about for -- because I think the disclosure I gave was for our 37 hotels. What exactly are you looking for?

Yes. You gave the 3.6% increase per occupied room and then you broke that down to 2.9% and 6.0% for the benefits. Do you have the total payroll 5% broken down with those 2 metrics?

Oh, yes. So if you looked at it, of the 5% total increase, benefits cost is about 9% up for the quarter and on a payroll cost, it was around -- I don't remember the exact number to the first decimal point -- but it was in that 3% to 4% range.

That's coming down from 2017, the per occupied room number. Do you believe what you're seeing, kind of, looking out to 2019, that, that could come down even further?

Listen, I think you're still going to be safe with kind of normalized increases in a tight labor market in that 3% range. So I don't see it coming down much further, but coming down from 4.2% to now 3.6% I think, hopefully, it gets a little bit closer to the 3%. We have certainly not seen some of the within-the-year increases that we were approving earlier this year and even last year and in 2016. So I think it at least gives us a little bit of comfort that we are fairly in line with market wages and we should see at least, hopefully, a more normalized inflationary type increase as we move forward, hopefully.

Great. And then just lastly a housekeeping item, and I think, Jeremy, you might have commented to this, but I didn't see it in the earnings release, the issuance of shares under the ATM. Can you give us those numbers again for the third quarter?

Yes, so overall, it was $13.7 million at average price of $21.46, so it was, call it, 637,000 shares.

There are no further questions in the queue. I'd like to hand the call back to management for closing comments.

We thank, everybody, for being on the call. We look forward to continued success on the Chatham side and sharing that with you on our next call. Thank you.

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