Chris Daly - Investor Relations, Daly Gray Public Relations Jeff Fisher - Chairman, President and Chief Executive Officer Dennis Craven - Executive Vice President and Chief Operating Officer Jeremy Wegner - Senior Vice President and Chief Financial Officer.

Gaurav Mehta - Cantor Fitzgerald Anthony Powell - Barclays.

Greetings and welcome to the Chatham Lodging Trust Announces First Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [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. Thank you, Mr. Daly. You may begin..

Thank you, Audrey. Good morning, everyone, and welcome to the Chatham Lodging Trust first quarter 2016 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 2015 Form 10-K and other SEC filings.

All information in this call is as of May 5, 2016 and unless otherwise noted, and the company undertakes no obligation to update any forward-looking statements 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 referred to on this call on our website at www.chathamlodgingtrust.com.

Now, to provide you with some insight into Chatham's 2016 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?.

Okay. Thanks, Chris. Good morning, everyone. Good to be here with you as always. I'd like to start by spending a few minutes on our first quarter results, which produced RevPAR growth of 2.6% in line with industry performance and within our guidance range of 2% to 4% for the quarter.

During the quarter, RevPAR grew 4.3% in January, 3.1% in February, and 0.9% in March. Of course, everybody talks about the March Easter impact and the shift to April, but for us anyway, which is part of the premise of our guidance sort of view for the rest of the year, April only finished up 2.1%. So not particularly strong either.

We were able to increase RevPAR 2.6% through an increase in occupancy of 2% despite industry wide occupancy declining 0.5%.

High quality select service and upscale extended stay hotels are the most flexible hotels in the industry to appeal to a diverse group of travelers at various price points and that really allows us to maximize RevPAR at various stages of the lodging cycle by changing our customer mix if necessary in the hotels.

The industry certainly feeling the effects of weakening demand and rate challenges as a result of online rate transparency and brand loyalty discounts. This is the first time since the fourth quarter of 2009 where new supply, which grew 1.5%, outpaced demand growth at a low 1%.

So we've got a backdrop of a more moderating environment brands, it's interesting, have issued guidance, which implies over 5% growth for the balance of the year when you consider what they did in the first quarter and they cite strong group trends and compression caused as a result of that.

Of course, our hotels don't, A, don't have that kind of business generally, and B, as select service and upscale extended stay hotels, we don't have that kind of longer-term visibility. We've always been and these hotels are always short booking cycle hotels. So we have to consider that as we look forward to the rest of the year.

But looking at individual markets, RevPAR in our four Silicon Valley hotels was up 4.3% all driven by increased rates.

While others saw a boost from Super Bowl related business, most of those were all in the city of San Francisco and I think most travelers if given the choice certainly showed that they would rather stay in the city as opposed to the more business like environment of Silicon Valley.

But unfortunately, we had saved a bunch of rooms for Apple, for a very large piece of business for two of the Sunnyvale hotels that actually canceled about two weeks prior to the Super Bowl. So we were kind of left a little bit high and dry there.

Of course, given the customer, there were no cancellation fees and given the timing and the preference of travelers to stay in San Francisco, it was tough to replace that block of business. So in February actually, RevPAR was essentially flat for those two big hotels, which really are drivers, each being approximately 250 rooms in our portfolio.

By the way, as a footnote to that, Apple did ultimately rebook the business, but of course, that will shift into the second quarter of this year.

But our normal other top 20 and top 10 accounts and key corporate accounts, it's good to report in Silicon Valley remain productive and are looking forward to continuing with their growth plans through at least 2016. We're also encouraged by the growth we're seeing at all four hotels we acquired in 2015.

We were very bullish with those acquisitions and our view towards what we can accomplish when we acquired them, and as a group, RevPAR for those hotels was up 6% in the quarter with a gas lamp hotel in San Diego, the Marina Del Rey Hotel, leading the group.

The Hilton Garden Inn Marina Del Rey and other folks have talked about the strength in the Los Angeles market, and we experienced very strong double-digit, actually 13% RevPAR growth in the first quarter for that hotel. So good trends there, strong, and frankly looking to continue to be strong.

We've got RevPAR at our four Houston hotels, just to preempt the question, because it always comes up, was up – so this kind of steals Dennis' thunder, sorry about that – was up 5.4% due primarily to a 12% gain in market share at the Resident's Inn and Courtyard West University Hotels that we acquired last year that sit side by side.

Under the prior ownership, these hotels were run by two separate management companies and it was little cooperation between the hotels in terms of revenue management.

We've got a great team in place at both hotels now with Island Hospitality running those hotels, and in the first quarter we gained some very nice corporate business that we housed in the Residence Inn, which allowed us to optimize transient retail rates at both hotels.

And in downtown Washington D.C., The Foggy Bottom Residence Inn had a strong quarter with RevPAR up 7% in the quarter, benefiting from special corporate business related to the expansion of the Kennedy Center and of course leveraging that business to drive midweek rate increases.

On the weak side, because obviously there is some, we've got our two Western Pennsylvania hotels that are highly reliant on oil and gas, and those hotels saw RevPAR decline 16% in the quarter. Other weak hotels were our Residence Inn in New Rochelle.

It's been a great hotel since we acquired it, this year being impacted somewhat by a new Residence Inn that opened in the Bronx and our Farmington, Connecticut Homewood Suite, which faced a real tough comparison from a very large piece of business that we had in the first quarter last year.

So as we move through the rest of the year, our relationship with Island Hospitality will allow us to maximize RevPAR, especially in a moderating demand kind of environment that we see and that most others have talked about. And the way we do that is quickly adjusting the travel or mix and keeping of course our usual tight control over expenses.

When you look at our upscale extended stay hotels, especially of course the Residence Inns and the Homewoods, we've always liked those hotels for a lot of different reasons, but as a brand or brands, one is when things do get a little tougher, you could take that hotel and you can maximize your extended stay business.

You could take 30-day – we call 30-day plus business in those hotels. Of course, it's going to be at a lower rate than your transient one to four business, if the transient business is running a little bit weak as it is now.

So that still allows us to grow RevPAR in this kind of environment, and as we talked to our Island folks and particularly the revenue managers, we see that in certain of these markets that kind of rate mix and customer mix is absolutely required. So that's already going on.

With that, I'd like to turn it over to Dennis to give a little more detail on the results..

Thanks, Jeff. Good morning, everybody. Our RevPAR guidance for the quarter of 2% to 4% was for all the hotels and we end up seeing growth at 2.6%.

The primary driver behind the underperformance, as Jeff spoke to, was the soft February in Silicon Valley and I know he also mentioned the Western Pennsylvania hotels that are managed by Concord Hospitality, which saw RevPAR decline of 16% in the quarter. In the first quarter, we did see a shift in business mix.

Our corporate and local negotiated revenue was down about 17% in the quarter, but rate for those accounts was up approximately 4%.

The tradeoff was that production was way up in our retail segments, especially those booked through our OTAs, but rate was flat to down slightly with the business transient traveler that most of us hoped would be stronger this year hasn't quite been there to date through the first quarter.

From a margin perspective, our operating margins were down 70 basis points to 46.6% and hotel EBITDA margins were down 90 basis points to 39.2%, which 39.2% was at the lower end of our guidance range.

During the quarter, our margins were impacted 80 basis points due to a one-time adjustment to some worker's compensation self-insurance reserves related to prior year, so just over $500,000.

And if you had excluded that item, GOP margins would have risen 10 basis points in the quarter, which is not so bad given the fact that occupancy accounted for about 75% of our RevPAR growth.

A continuing trend for us and the industry is the growing cost to acquire guests, whether that is OTA booking commissions or brand loyalty program fees, discounts, and expenses. We saw significant growth in these areas in 2015 and it hasn't slowed through the first quarter.

During the first quarter, those expenses were up almost $500,000 or 27% and impacted our year-over-year margins by approximately 70 basis points.

To counteract the OTA booking volume that comes with higher commissions and fees, brands have been and are implementing rate discounts for loyalty members, which supposedly is tracking significant new member enrollments.

However, as they say, the proof's in the pudding and we'll have to wait and see if those booking patterns on the brand.com site increased over the long-term or if it's just a short term change of behavior.

Excluding the one-time adjustment for worker's compensation reserves, our flow through of total revenue to total hotel EBITDA was a solid 50% for the quarter for the comparable operating results of the hotels regardless of ownership. Again, that's pretty strong given that the occupancy was the primary driver of our revenue growth.

Offsetting the one-time adjustment in higher guest acquisition costs were lower utility costs and hotel G&A costs. 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 early in the 2016 third quarter.

We've experienced some delays due to the massive amount of rain that has been received in the area. We'll begin redevelopment of the gatehouse in the Mountain View location later this year.

With respect to the two Sunnyvale locations, we expect to begin those expansions in the fourth quarter and expect that process to take approximately 12months to 15 months. Based on the reduction in the number of rooms that we're going to be able to add in San Mateo, we're tabling that project for now.

Costs remain unchanged from the estimates provided on our last call in that we're expected to spend approximately $70 million to $75 million for the Mountain View and two Sunnyvale expansions.

These three projects are going to have an incremental 220 rooms in Silicon Valley and we still expect those three expansions to add approximately $10 million of EBITDA and $6.5 million of FFO on a full year basis in 2018, which is very meaningful, almost $0.17 a share.

We're going to spend approximately $7 million on the redevelopment of the Gatehouse in Mountain View in 2016 and 2017. With that, I'll turn it over to Jeremy..

Thanks, Dennis. Good morning, everyone. For the quarter, we reported net income of $3.3 million or $0.08 per diluted share compared to net income of $1.4 million or $0.04 per diluted share in Q1 2015. The primary differences between net income and FFO relates to non-cash costs such as depreciation, which was $12.4 million in the quarter.

Adjusted FFO for the quarter was $17.7 million compared to $15 million in the 2015-second quarter, an increase of 18%. Adjusted FFO per share was $0.46 versus $0.40 per share in Q1 2015, a 15% increase year-over-year. Adjusted EBITDA increased 13% to $27.6 million compared to $24.4 million in Q1 2015.

In the quarter, our three joint ventures contributed approximately $3.3 million of adjusted EBITDA and $1.3 million of adjusted FFO, in line with our guidance of $3.2 million to $3.3 million for EBITDA and $1.2 million to $1.3 million for FFO. During the quarter, we received distribution of $800,000 from the JVs.

Our balance sheet remains in excellent condition. Our net debt was $594 million at the end of the quarter, our weighted average cost of debt was 4.4%, our weighted average maturity was 7.4 years, and our leverage ratio was 41.4%.

Transitioning to our guidance for Q2 and full year 2016, I'd like to note that it takes into account renovations at the Hilton Garden in Boston Burlington, Homewood Suites Carlsbad, and Courtyard by Marriott Addison in Q2, and the Residence Inn San Diego Gaslamp in Q4, and the completion of the 32 room expansion of the Residence Inn Mountain View tower in early Q3.

We've amended our full year RevPAR guidance to reflect actual performance in the first quarter and current business trends. We are lowering slightly the bottom end of our RevPAR growth range by 100 basis points and the upper end of the range by 50 basis points, and lowering our hotel EBITDA margin guidance by approximately 50 basis points.

We now expect Q2 RevPAR growth of 2% to 3% and full year RevPAR growth of 2% to 3.5%. As a result of our RevPAR margin adjustments, we are trimming slightly the midpoint of our adjusted EBITDA guidance range by 2% and FFO per share range by 3%. Operator, at this point, we will open up the call for questions..

[Operator Instructions] Our first question comes from Gaurav Mehta with Cantor Fitzgerald. Please go ahead..

Yeah, thanks. Good morning. A couple of quick questions.

First, as you think about the year 2016 and you talked about demand weakening across the board, I was wondering if you could talk about which markets have sort of surprised you the most with the down side so far this year?.

Good morning, Gaurav. I don't think it's been a surprise and certainly, the Western Pennsylvania Hotels were certainly underperforming. The Hyatt Place that's in Pittsburgh, which certainly is -- at Pittsburgh market is seeing some new supply, but it's also experienced some good corporate growth in the oil and gas space.

It performed pretty weakly in the quarter. I don't think again outside of the New Rochelle hotel, I mean, I would say that DC, on the positive side was good, but we haven't that compression go out to the Tyson's Corner market yet. Its RevPAR was up 3% in the quarter, so it's performing okay.

The one other market that certainly isn't a great market for us at the moment, which is the Anaheim market, has got a significant amount of new supply in it, not only just within the Marriott brands that are located a little bit closer to the entrance of Disney World, but it also just opened up a massive 600 plus rooms Great Wolf Lodge down the street.

So that market has definitely got some challenge to it. But not surprising, but certainly one of the weaker performing markets for us..

Okay. And then the second question on the Silicon Valley expansion.

You're going to deliver many rooms for perhaps one to three years from now and given that we are in a softening demand environment, how confident are you that you will be able to achieve the returns that you underwrote initially when you talked about the expansions?.

Listen I think for the three that we're – the Mountain View obviously one is pretty close to completion. The two Sunnyvales are in the almost – there's not much of a better market in that location from a corporate client perspective.

So we still see even with demand softening a little bit, but as Jeff alluded to, the corporate especially the major corporate accounts that are out there still have significant plans for growth over the next multiple years. So they have long-term plans.

We still feel pretty confident or very confident that those rooms are going to get filled up and will be absorbed into the market. And for the franchises themselves, those are going to be nice assets for the long-term..

Okay, great. Thank you for taking my questions..

Thank you..

Our next question comes from Anthony Powell with Barclays. Please go ahead..

Hi, good morning, guys. Just a question on supply growth. You mentioned a few scenarios where you've seen competitive supply from within the Marriott System impact your hotels.

Are any of the markets at risk from competitive supply growth with any of the Marriott or Hilton brands going forward over the next year or so?.

Yeah, I mean certainly we've got – I think with most others, we do have some new supply issues. There is new supply, again, a significant new supply in Anaheim. Our Mission Valley Residence Inn, both on the Marriott and Hilton side, a lot of new supply going around there.

There's again a lot of demand growth there but still some pretty good supply growth. Generally speaking, we do see it popping up around the country. Obviously, new supply growth is increasing, but I think from a pure market perspective, those two are pretty significant. There is some new supply going up in Silicon Valley as well.

We're not going to be stupid and say there isn't, but the demand and again the long-term prospects for business growth still seem okay..

Got it, thanks. And you mentioned a couple times the impact of some of these brand discounts you're seeing in your system. The brands seem to be implying that they're significant cost savers in the long run.

Do you agree or are you a bit more cautious on the impact of – that the brand has got something on pricing power?.

What's happening there, Anthony, this is Jeff, is just I think in concepts, brands are trying to address the ongoing shift of business out of their distribution channels to the OTAs. So that's been something everyone's talked about and will continue to talk about, in our opinion, even more so over the next few years. It's a dangerous trend.

Dennis talked about and every single quarter we talked about our prime line where we're showing over budget expense increases in our TA commission line. It's all due to OTA business.

It's obviously a very expensive channel and therefore, Hilton's well-publicized reason and Marriott's as well attempts at putting more business direct into the dot com and brand sites I think is a good thing for the long haul. But there is some price to pay in the near term.

And so I think all of us that have Marriott and Hilton branded hotels will see that. Hopefully, it's the right investment to make, though, in the long haul..

So in the short run, you're not seeing enough savings on the OTA lines to counteract the discounted room rates; is that the case?.

For now. I mean, look, we're just a couple of months into this for Hilton and even less for Marriott. So we haven't seen any significant changes yet, but I think you've got to give it a little time to incubate to see exactly how it's going to work out, but ultimately, over the long-term, it should be good..

Got it. And you also mentioned a few times you were trying to shift the mix of your customers as business [indiscernible] falls off a bit.

Besides some of the more 30-day plus stay segments, where else can you find customers outside of OTAs?.

Well, you've got some ability in your [indiscernible] and your courtyards, obviously, to take a little more government business than you took before.

That was something obviously that in double-digit upward -- 8% or 9% up RevPAR environment, we would taking out of the hotels because you just change the mix accordingly on the up side, the same way you do on the downside. So that's one source of business that will stay in these hotels..

Yeah, I mean, I think the other thing, Anthony, is you've got – when you're going into a year and you're negotiating all your corporate accounts and you're making decisions on certain customers that you want to tie up, if you will, for the year, you make decisions based on where you believe demand growth is going to be.

So as that demand softens a little bit, if there's a corporate customer that -- or whether it's government, as Jeff alluded to, that you can go back to and say, hey listen, here's what's going on and try and get them back into your hotel. You go back to those guys as well.

You circle all the ones up that you want to have in your hotel and you reignite those conversations and seeing people win some business..

All right. That’s it from me. Thank you..

Thank you..

Mr. Fisher, there are no further questions at this time.

Would you like to make any closing remarks?.

I will briefly, thank you. Well, we appreciate everybody being on the call today. Again, as industry growth moderates, we're well protected with a very sound balance sheet, no near term maturities. We've got a great high quality and flexible hotel portfolio, as I talked about.

We'll continue to aggressively operate the hotels alongside Island Hospitality, and produce significant cash flow that we can invest in our existing hotels or distribute to investors. We do look forward to the long-term effects of the Silicon Valley expansions.

Again, the original projections we put together there never included a substantial inflation in RevPAR. So we're safe. I don't think RevPAR is going down anytime soon there.

And we are actually hearing real time stories of every single automotive company looking now for office space in Silicon Valley because the next big thing there is going to be the self-driving car technology. So our people on the ground are reporting and thinking pretty bullishly as you move forward in the mid- and long-term in Silicon Valley.

And of course, we've talked about how much FFO those expansions will deliver over the next couple of years. So with that, by the way I'd like to remind folks that we'll be hosting meetings at MaREIT in June and all three of us will be there so if you're going to attend, make sure to reach out to Dennis or Jeremy and schedule a visit.

Thank you very much. Have a great day..

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and you may disconnect your lines at this time..