Chris Daly - President, Daly Gray, IR Jeff Fisher - Chairman, President and CEO Dennis Craven - EVP and COO Jeremy Wegner - SVP and CFO.

Gaurav Mehta - Cantor Fitzgerald.

Good day, and welcome to the Chatham Lodging Trust Third Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Chris Daly. Please go ahead, Sir..

Thank you, Sabrina. Good morning, everyone. Welcome to the Chatham Lodging Trust third quarter 2015 results conference call. This morning, before the opening of the market, Chatham released results for the third quarter 2015, and I hope you've had a chance to review the press release.

If you did not receive a copy of the release or you would like one, please call my office at 703-435-6293, and we'll be happy to email you a copy. Or you may review the release on line on Chatham's website, chathamlodgingtrust.com.

Today's conference call is being transmitted live via telephone and by webcast over Chatham's website and at www.streetevents.com. A recording of the call will be available by telephone until 1 PM Eastern on Thursday, November 12th, 2015, by dialing 1-888-203-1112, reference number 714928.

A replay of the conference call will also be posted on Chatham's website. As a reminder, this conference call is the property of Chatham Lodging Trust, and any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of Chatham is prohibited.

Before we begin, management has asked me to remind you that, in keeping with the SEC's Safe Harbor guidelines, today's conference call may contain forward-looking statements about Chatham Lodging Trust including statements regarding future operating results and the timing and composition of revenue, among others.

Except for historical information, these forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially, including the volatility of the national economy; economic conditions generally; and the hotel and real estate market specifically; international and geopolitical difficulties or health concerns; governmental actions, legislative and regulatory changes; availability of debt and equity capital; interest rates; competition; weather conditions or natural disasters; supply and demand for lodging facilities in our current and proposed market areas; and the company's ability to manage integration and growth.

Additional risks are discussed in the company's filings with the Securities and Exchange Commission. All information in this call is as of November 5, 2015, 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.

During this call, we may refer to certain non-GAAP financial measures such as EBITDA and adjusted EBITDA, which we believe to be common in the industry and helpful indicators of our performance.

In keeping with SEC regulations, we have provided, and encourage you to refer to, these reconciliations of the measures to GAAP results in our earnings release.

Now, to provide you with some insight into Chatham and 2015 third quarter results, allow me to introduce Jeff Fisher, Chairman, President, and CEO; Dennis Craven, Executive Vice President and COO; and Jeremy Wegner, Senior Vice President and CFO. Let me turn the session over to Jeff Fisher.

Jeff?.

Okay Chris, thanks. Morning, everyone. Thanks for being on the call. It's certainly been a very interesting 2015 for lodging companies. Lodging equity markets have been volatile, to say the least, over the past few months and lodging stocks, for the most part, are down significantly from lodging highs earlier in the year.

Conversely, industry fundamentals remain very healthy, with year-to-date RevPAR growth of 6.7%, demand up 3%, and new supply up only 1%. Some of the largest full-service lodging companies have been reporting RevPAR growth in the low single digits, while many of the REITs with more select service characteristics are experiencing better growth.

We certainly seem to be at a point where investor perception is different from reality and we certainly aren't pleased with our current share price given the strength of our assets and growth in our markets.

But one thing we learned a long time ago was not to lose focus of our goal to own the very best, select service assets in the United States that will generate long-term returns and dividends for our investors.

Chatham's fundamentals remain strong, our high-quality portfolio of premium branded upscale extended stay and select service hotels is generating and bringing attractive RevPAR growth driven entirely through increased rates without sacrificing any occupancy.

Our hotels are perfect for the corporate traveler who demands a quality room in a great location.

With an average rate of almost $160, we are able to continue to drive margins higher, especially considering how hotel cost structure isn't saddled with the burdens of food and beverage departments and other nonessential amenities that erode profits in addition to rising labor costs resulting from ever-increasing union issues.

Chatham's outlook remains one of the best in the lodging REIT space; we're proud of that.

In 2014, we invested approximately $500 million into new hotels, including two joint venture investments, and earlier this year we raised $120 million in a follow-on equity offering and used those proceeds to fund the acquisition of four hotel gems for approximately $190 million, $90 million in the first quarter and $100 million in the third quarter.

With a substantial external growth as well as our strong underlying operating results, we are projected to grow FFO per share another 20% in 2015, and our cumulative FFO per share growth rate since 2011 is a whopping 27%, which is the highest among all lodging REITs but for two significantly leveraged hotel REITs.

The excellent growth doesn't stop at 2015, as our acquisitions in 2015 will help fuel double-digit FFO per share growth again in 2016 as most industry experts believe RevPAR growth in 2016 will continue to be in the mid-single-digit range.

Looking out even further, to 2017, we will have our Silicon Valley expansions coming on line and fully ramped up, providing another key factor to our growth story that is unique among all lodging REITs.

New supply is projected to continue to grow slowly over the next couple of years, but with demand continuing to rise and occupancies continuing to climb, we believe pricing power will benefit the hotel owner.

Of course, we have a fantastic competitive advantage given our unique relationship with Island Hospitality that allows us to move quickly and optimize revenue and profitability, which is very important at this phase of the cycle, where growth is profit. At this point, we are 65 months into a cycle, which is longer than the last cycle.

But given the fact that new supply is still fairly well contained for the next couple of years, most industry experts believe this will be a longer cycle, similar to the cycle that lasted 111 months which began in the mid-1990s.

Switching gear to our third quarter results, all key metrics, whether RevPAR, EBITDA, and FFO per share, were in line with our guidance.

As many have discussed, the shift in the Labor Day holiday impacted our portfolio performance within the quarter, and RevPAR growth fluctuated as we saw RevPAR increase 7% in July, 4% in August, and 5% in September, for an overall growth at 5.3% for the quarter, all driven by an increase in rate, while maintaining occupancy at an impressive 88%.

At that level, our hotels are full six days of the week, which is a testament to the quality of the hotels we own. If you look across our portfolio, the top performers were diverse, as these hotels experienced RevPAR growth of 10% or higher.

When you look at our key markets, 55% of our wholly owned hotel investments are located in Denver, Seattle, that's Bellevue; Los Angeles, San Diego, and Silicon Valley, all markets where job growth has been strong and the outlook remains strong. RevPAR at our Denver hotels rose over 7%.

The Denver Tech Center continues to benefit from corporate development in the area, and occupancy at our hotel at the Tech Center was 83%, while the Cherry Creek area remains one of the top destinations in the metro Denver area and our gains there, again, were all rate driven against an occupancy rate of approximately 90%.

Our Bellevue downtown Residence Inn Hotel was renovated in the first quarter and looks great. We invested some incremental dollars building out a bar in the hotel to serve its guests, and the profit generated to date has already paid for the cost of the bar.

With an average daily rate of almost $200 and an occupancy rate of almost 95%, this hotel is doing great and saw RevPAR rise 5% in the quarter, benefitting from the significant corporate demand from technology companies in the market.

Our two Los Angeles hotels in Anaheim and Marina del Rey saw RevPAR increase over 8% and our Anaheim Residence Inn does a great job capturing business from Asia during the summer months. And despite only owning the Hilton Garden Inn Marina del Rey for a short time, we're excited about the growth prospects for that hotel as the area is thriving.

RevPAR in our three San Diego hotels advanced 5% and the occupancy remained high in those extended-stay hotels that are perfectly branded for what drives that market.

Finally, Silicon Valley continues its rise as one of the top lodging markets in the country and our four Residence Inns, as we've said many times, are really the perfect brand for the corporate travelers in Silicon Valley. RevPAR rose over 8% to just about $200 in the quarter.

Tech companies continue to invest significantly in their campuses, including Oracle, which just announced it would be building a high school on its campus. In our opinion, the strength of the business base in the valley has never been healthier.

Touching briefly on our acquisitions, we were thrilled to be able to add three fantastic hotels in the quarter, investing approximately $100 million; the Boston and Fort Lauderdale Residence Inn Hotels; great hotels in markets that are among the fastest growing in the United States.

And the Hilton Garden Inn Marina del Rey, as I said, is in a great location. High barriers to entry there, and the marina area is bustling with activity and new development. These three markets should be some of the strongest as we move into 2016. And finally, for me anyway, our balance sheet remains strong and relatively low leveraged at 41%.

We believe now is the time to double down on asset management and continue to explore all options to enhance revenue and profits with our manager, Island Hospitality. With that, we'll turn it over to Dennis for some more detail.

Dennis?.

Thanks, Jeff. Good morning, everyone. I'm going to start by just walking through our earnings for the quarter compared to our guidance that we had issued back in August. Our RevPAR guidance for the quarter was 5% to 6% for all hotels and we ended up seeing growth of 5.3%, all attributable to an increase in rates.

Jeff spent some time talking about our strong markets. I'm going to spend just a couple of minutes talking about a couple of the weaker markets for us, one of which was really our Pennsylvania hotels.

The two western Pennsylvania hotels in Altoona and Washington, Pennsylvania, are primarily oil and gas-driven, and those two hotels are down approximately 12% in the quarter.

RevPAR at our Hyatt Place in Pittsburgh -- again, not necessarily oil and gas-driven, but there certainly is some influence to the Pittsburgh market that was flat year over year. Across the three hotels we didn't lose any market share in terms of RevPAR index, but the market's certainly not the strongest at this point.

One other weak market for us, which is a little bit of a change from the first six months of the year, was the DC market, where RevPAR at the Foggy Bottom and Tyson's Corner hotels was down about 2% in the quarter, and our comp sets RevPAR was down similarly. Again, no loss in market share but general market weakness.

The two hotels were impacted by a loss of about 200 government room nights due to lost travel resulting from shutdown rumors, especially in the latter part of the third quarter.

Our four Houston hotels are driven primarily by medical center business given that two of them are located directly at the medical center, and the other two are about two to three miles away from the West University section of Houston. These hotels fared well in the quarter, with RevPAR for all four up for the quarter.

And if you look at actually the hotels for -- the three hotels, one of the hotels was under renovation, the Residence Inn Houston West University. When you exclude that hotel, the other three hotels actually had RevPAR up 4.4% for the quarter.

The two assets, the Courtyard and the Hampton Inn and Suites that are directly at the medical center, saw RevPAR rise almost 5%. When you look at the performance for the entire year of Houston MSA, RevPAR was down 3.7% in the quarter and was down 2.4% for the year. So all in all, our portfolio is significantly outperforming the market.

Again, all related to the fact that our hotels are generally tied into the ever-growing MD Anderson Medical Center area. Adjusted EBITDA rose almost 40% and was $39.4 million in the quarter versus the guidance range of $38.7 million to $40 million.

Our hotel EBITDA margins finished the quarter at a very strong 46.7%, at the low end of our guidance range of 46.5% to 47.5%. The primary driver behind the lower-margin growth performance was simply due to the lower-than-expected ADR growth in the quarter as ADR was the only expected component of RevPAR growth.

Some incremental brand-related expenses for guest rewards costs and one-time credit card fees due to a change in processor at certain of our Marriott branded hotels was offset by incremental parking revenue.

Parking revenues initiative that we have underway at many of our properties, and we've been pretty successful either raising or implementing charges where it's warranted.

We remain encouraged by our ability to continue to drive comparable margins higher, especially when you consider that our gross operating margins were 53% and 51% for the three and nine months ended September 30, by far the best in the industry.

We certainly don't believe comparable margins have peaked so we do expect to continue moving margins higher. Next year the ADR will continue to be the sole driver of RevPAR growth in our portfolio. Adjusted FFO jumped 46% and adjusted FFO per share came in at $0.76 per share versus our guidance range of $0.75 to $0.78.

At the end of the day, our FFO per share was right in line given the fact that RevPAR growth was toward the low end of our guidance range, and for the full year we're currently projected to grow FFO per share, as Jeff said, a little over 20% in 2015.

Switching gears to our joint ventures, the third quarter results were pretty similar to the second quarter. In the aggregate, the joint ventures generated approximately $53 million of EBITDA and our $5.3 million share of that was right in the middle of our guidance of $5.2 million to $5.4 million.

The Innkeepers portfolio remained strong, while the Inland joint venture is performing slightly below our expectations. It's interesting to compare RevPAR across the three Chatham portfolios. When you take a look at them, you can see that Chatham's third quarter RevPAR with $146; Innkeepers was $121; and the Inland portfolio was $100.

And as you dig deeper and look at the comp set market, that's market occupancy in all those markets, Chatham's markets ran at 83%, Innkeeper's at 73%, and Inland at 75%, which I think is a pretty good look into the underlying market quality and ultimately the ability to drive rate and RevPAR increases in those hotels where demand is high and occupancies, of course, remain high.

The Innkeepers portfolio is really performing well. RevPAR growth is strong, up 8.2% for the quarter with rates comprising 75% of that growth. These results on a standalone basis would make it one of the best-performing lodging REITs as far as who's reported to date.

19 of the 47 hotels in the Innkeepers portfolio produced RevPAR growth of 10% or higher, which is very impressive. Like the Chatham portfolio, the Innkeepers portfolio is primarily bicoastal, and it's the coastal markets that have been the top performers this year.

We were just recently in Seattle and California, and the corporate demand drivers in those markets are still growing and the outlook remains bullish. A brand that performed within the Innkeepers portfolio very well was our five Hyatt House hotels, which on average saw RevPAR growth over 10% across the five hotels.

Over the past 18 months, we've invested approximately $3 million per hotel in the Hyatt Houses, upgrading the quality of the rooms, building out the H Bars and the public space, and it's certainly great to see the return on those investment dollars coming in to those hotels.

Leveraging off the strong RevPAR performance, gross operating margins within the Innkeepers portfolio advanced 280 basis points to 46.3%. Again when you actually compare that to the Chatham portfolio of over 52%, still about a 600 basis point difference between the two portfolios.

All 47 hotels in the Innkeepers portfolio are operated and owned and they were able to hold hotel G&A, R&M, and utilities flat year over year in the quarter. So over all, contributed to a great quarter for the Innkeepers portfolio.

As has been the case for most of the year, top line RevPAR growth in the Inland portfolio remained sluggish when compared to the Chatham and Innkeepers portfolios. RevPAR was up 2.6% in the quarter, comprised of about a 50/50 split between rate and occupancy themes.

10 of the 48 hotels produced double-digit RevPAR growth in the quarter, but when you actually, and this is a little bit of a difference between the Inland and Innkeepers portfolio, taking out hotels under renovation, 12 of the 48 hotels actually saw RevPAR decline in the quarter.

Again, as we talked a little bit earlier about just the overall market quality of the portfolio. Operating margins were flat at 42.2%, which is about 10 percentage points below the Chatham portfolio and 6 percentage points below the Innkeepers portfolio.

The portfolio suffered from overall weaker and softer markets as well as some unexpected displacement caused by room conditions on the top line; and on the bottom line, much higher than expected R&M expenses impacted margins by approximately 50 basis points in the quarter as we had to correct some moisture issues and problems that were not addressed by the prior owner.

The good news is when you look at our joint venture investment returns, they remain strong. The joint ventures are delivering high teen actual cash returns. The portfolio is producing strong free cash flow.

And again, a reminder that those two portfolios, all the CapEx essentially for the first two years was funded up front when we closed those transactions, so those portfolios will continue to be able to produce strong cash flow as we move through 2016 and 2017.

With respect to the Silicon Valley expansions, work continues on the 32-room tower addition in Mountain View and we expect to complete that project in the 2016 second quarter.

With respect to the other three projects, we're still on basically the same time line for the two Sunnyvale locations as well as the San Mateo location, which will commence expansion later in 2016.

During the fourth quarter 2015, we'll be renovating our 160-room SpringHill Suites in Savannah, Georgia, and we accelerated the renovation of the 146-suite Homewood in San Antonio, Texas, just by a couple of months in order to complete that renovation prior to some business in 2016.

Overall, our portfolio's in great condition and we certainly don't have to take a significant amount of rooms out of inventory over the next couple of years. So all good news from the renovation standpoint. Before I turn it over to Jeremy, we will be hosting meetings in Las Vegas at NAREIT in a couple of weeks.

We look forward to seeing many of you there. If you are going to be there and have any interest in meeting with Chatham and its executive team, please reach out to me and we'll definitely try and slot you into our schedule. I think with that, I appreciate your time and we'll turn it over to Jeremy..

Thanks, Dennis. Good morning, everyone. For the quarter, we reported net income of $14.4 million, or $0.37 per diluted share, compared to net income of $8.8 million, or $0.31 per diluted share, in Q3, 2014.

The primary differences between net income and FFO relate to noncash costs, such as depreciation, which was $12.5 million in the quarter; hotel acquisition costs of approximately $0.6 million related to the acquisitions of the Dedham and Fort Lauderdale Residence Inns and Hilton Garden in Marina del Rey; and our share of similar items within the joint ventures, which were approximately $1.9 million in the quarter.

Adjusted FFO for the quarter was $29.3 million compared to $20.1 million in the 2014 third quarter, an increase of 46%. Adjusted FFO per share was $0.76 per share versus $0.73 per share in Q3 2014. Adjusted EBITDA for the company was 38%, to $39.4 million, compared to $28.5 million in Q3 2014.

In the quarter, our three joint ventures contributed approximately $5.3 million of adjusted EBITDA and $3.3 million of adjusted FFO, at the low end of our guidance of $3.3 million to $3.5 million. During the quarter, we will receive distributions of $2.1 million from the Innkeepers portfolio and $1.0 million from the Inland portfolio.

Our balance sheet remains in excellent condition. Our net debt was $587 million at the end of the quarter and our leverage ratio was 41.2%. We're very comfortable at this leverage level and have the capacity to complete additional acquisitions without raising equity, although there are no acquisitions currently in the pipeline.

Transitioning to our guidance for Q4 and full-year 2015, I'd like to note that it takes into account our planned renovations at the SpringHill Suites Savannah and the Homewood Suites San Antonio during the fourth quarter. We have amended our guidance to reflect actual performance in the third quarter and a reduction in RevPAR growth in Q4.

We expect Q4 RevPAR growth to be 5% to 5.5% and the full year 2015 RevPAR growth to be 5.75% to 6%,.

On a pro forma comparable same-store basis, including the Dedham, Fort Lauderdale, and Marina del Rey hotels, 2014 hotel quarter-by-quarter RevPAR was $113 in the first quarter, $131 in the second quarter, $139 in the third quarter, $114 in the fourth quarter, and $124 for the 2014 full year.

Our full-year forecast for corporate G&A is $8.5 million, which represents a $100,000 decrease from our previous guidance. On a full-year basis, the three joint ventures are expected to contribute $17.1 million to $17.2 million to EBITDA and $9.5 million to $9.6 million of FFO.

From a cash flow perspective, capital expenditures are expected to be $4 million in Q4 with $2 million related to our 2015 capital plan and $2 million related to the Mountain View expansion. I think at this point, Operator, that concludes our remarks and we'll open it up for questions. Operator? I think we'll open it up for questions. Hello, operator..

Yes. [Operator Instructions]. Okay, we'll now take the first question from Gaurav Mehta from Cantor. Please go ahead..

Yes, thanks. A quick question on transactions.

As you look into the transaction market, do you expect the pace of acquisition to continue over next -- maybe 2016?.

Hey, Gaurav. Good morning. This is Dennis. No, I think certainly at this point in time were pretty comfortable with our portfolio. I don't think, as far as from an acquisition standpoint, certainly we always would have our eyes open and be certainly looking for some opportunistic deals.

But I think at this point, certainly given kind of where we are with the equity price and -- although we do have some capacity on our balance sheet, we certainly aren't targeting new acquisitions at this point in time. But we're just going to be optimistic.

As we alluded to we may be opportunistic on the sales side, looking at one or two assets to sell, which would be a means of recycling some capital at that point in time..

Of course, we would always look at our own stock and the implied yield there. It goes without saying, we'll measure that against what returns we may find in the market to buy a hotel. And we, given where the world is today, would think our own stock would be a better investment, to be clear, than buying an asset..

Okay.

And then, going back to the Silicon Valley redevelopment, can you remind us, once the additional rooms come on line, how much EBITDA would those expansions add in 2017?.

Yeah, I mean I think, you're talking about total spend for the four hotels of approximately $80 million. We expect to generate still kind of upper teen level returns on those incremental dollars after financing. So it's certainly going to be, and I think we've disclosed in the past around $0.20 accretive on an FFO basis, on a full-year basis.

So that still is the target..

Okay.

And then lastly, going back to the RevPAR growth, can you discuss what you've seen so far in October as far as RevPAR growth is concerned?.

Yes for our portfolio, for the Chatham portfolio, RevPAR was up about 5% for October. I think November and December seem to be, at this point, trending a little bit better than that. So I think that's the basis behind our 5%, 5.5% guidance..

Okay, thanks for taking my questions..

Thank you..

[Operator Instructions]. All right. Mr. Fisher, there is no question. Please continue..

Well, we appreciate, again, everybody being on the call. As I said, and I think Dennis has said, we certainly don't love our stock price here. We think that the fundamentals and RevPAR growth up mid-single digit and EBITDA and FFO growth of double digit certainly warrants a higher multiple for us and probably the group than currently exists.

But we have seen these times before. We know how to make money in all parts of the cycle and we expect to continue to do that for our shareholders. Thank you..

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. You may now disconnect your line, and have a great day..