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

Gaurav Mehta - Cantor Fitzgerald Patrick Scholes - SunTrust Robinson Humphrey Anthony Powell - Barclays Capital.

Greetings and welcome to the Chatham Lodging Trust announces Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today, Mr. Chris Daly. Thank you, sir. You may begin..

Thank you, LaTonya. Good morning, everyone and welcome to the Chatham Lodging Trust third 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 and described in our 2015 Form 10-K and other SEC filings.

All information in this call is as of November 3, 2016 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 some insight into Chatham's 2016 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. Jeff..

Thanks, Chris. Good morning, everyone and welcome to our third quarter earnings call. Like many others, we've experienced a continuing sequential slowdown with RevPAR declining 2% for us to $143 driven by an approximate 3% drop in occupancy to a still very strong 84% for this portfolio.

We were able to increase ADR 2% to $170, which I think is very encouraging. In hindsight, and we need to focus on our last-year third quarter number because occupancy was very strong at 87% and of course, that's a pretty difficult number to maintain year-over-year.

A key driver behind the RevPAR decline for us was the weakening oil industry-influenced Houston and Western Pennsylvania markets that we've all talked about and I guess we’re going to have to continue to talk about it for some time here. We have six hotels in those markets.

That equates to about 9% of our EBITDA and those properties experienced a 21% drop in RevPAR. Those markets negatively impacted our overall RevPAR performance by approximately 200 basis points, so almost the entirety of our RevPAR decline.

And I think that's the way we need to look at the company here in the ensuing quarters and really we will talk a little bit more about that, but implicit, of course, in our guidance is the continuation of the substantial 20% to 22% RevPAR decline until we start lapping over those numbers later in 2017, particularly Houston hotels.

In fact, if you remove the impact from those six hotels for the quarter, our ADR was up 2.4%, while our occupancy was down 2.5% to 86%. As a comment on the industry, occupancy was flat for the industry, but, in the upscale and upper mid-scale segments where our hotels are, occupancy was down 0.6% in the quarter.

Given the fact that the overall economy remains weak with only moderate GDP growth, business transient travel as most have commented has been lackluster.

Similarly, while industry supply growth looks at a headline number at 1.6%, within the upscale segment where most of our hotels are like our Residence Inns, our Homewoods, etc., Courtyards, new supply rose 6% in the quarter. I’ll talk a little bit more about the effect of that new supply in a minute or two.

Looking at some of our individual markets, I think it's important to do that so we don't lose sight overall here of the positives of our hotels and our locations, but, again, looking at Houston, the four hotels saw RevPAR decline 22%.

Two-thirds of that decline was attributable to a decrease in occupancy, but as is normally the case, especially when new supply is involved as well, you've got to get some ADR drops, so one-third attributable to ADR drop. This trend continued throughout October as well with RevPAR down 23%.

Our reliance on the Medical Center as we have talked earlier in the year has held up our performance through the first quarter of this year.

But since then, citywide supply additions and of course, the overall weakened demand in the market has caught up to us in a pretty big way, as these numbers exemplify, and as I said, we expect those trends to continue on a comp basis for the next - well, I would say at least two or three quarters.

By the way, as a footnote to all this, in Houston, there is a 1,000 room Marriott Marquis opening downtown sometime - it was supposed to open, what, this month? We will see where they are, but sometime before the end of this year.

So, although our portfolio results are clearly being dragged down by exposure to the energy-related markets, it's important to look at many of our other markets where results are positive. RevPAR in our four Silicon Valley hotels rose just over 1%, but within that growth, we were able to drive an over 7% increase in ADR to $235.

Occupancy fell to still a very strong 86% for those hotels compared to a tough, tough comp of 91% in the 2015 third quarter. We haven't seen signs really of slowing demand in Silicon Valley, but we've absorbed lots of new supply.

And specifically in and around our two hotels in Sunnyvale, San Mateo and Mountain View, there's been about an 8% increase in supply in 2015 and two Sunnyvale locations absorbed about a 7% growth in its market track with another 3% as well in 2016 moving into 2017.

So, I think, overall, as we look at that kind of supply growth, to be able to put up RevPAR gains and particularly ADR increases is really a testament, I think, to our management team and our experience and focus in that market.

And as occupancy levels come off 90% plus levels, I think we are going to see on a comp basis better results going forward because, of course, more supply has been already absorbed than what's expected to come in Silicon Valley.

As a matter of fact, I want to talk a little bit more about having this kind of ADR growth because I think it really does show the benefit of having Island Hospitality as our primary manager here.

As we looked at the supply additions in the market and others and anticipated the drop in occupancy that obviously occurs, our revenue management strategy was really focused and refocused on ADR growth and of course, the resulting diminution of loss in margins with a goal to preserve margins and so pushing ADR and seeing success in driving ADR to us is very important because once you drop rate, it takes a long time to get that rate back, especially when new supply is present and continuing in some cases to be built.

And of course, the new supply is trying to secure their own base of business and ramp up and therefore cutting rates.

So, our strategy here, I think, is going to bode well, particularly as supply increases start to diminish because we are going to have held on to our ADR and cut our margin loss that otherwise would have occurred if we had gone down the deep discount road.

Turning to some other markets here, our Denver hotels continue to perform strongly with RevPAR growth of almost 6%, all driven by increased ADR. Our Cherry Creek hotel has been particularly strong in that market and is performing well across all segments, whether corporate, leisure or group travel.

And that's, again, despite pretty healthy supply growth of about 4% in the quarter. In Southern California, our San Diego gas plant Residence Inn and our Hilton Garden Inn Marina Del Ray experienced a 5% increase in RevPAR in the quarter.

San Diego benefited from a strong convention calendar and the Marina Del Ray market remains strong as we benefited from an upper single digit rate increase from one of our larger corporate customers.

Dallas has been a strong market for us for the entire year, but our third quarter was impacted adversely somewhat due to our finishing up renovation on the Courtyard in Addison Texas, but for the year, RevPAR at our two Dallas hotels is up approximately 4% and of course, the Dallas Metroplex and overall market has done a nice job over the years in diversifying away from oil and gas and we continue to look at that market as a fairly strong market going forward.

One thing people are beginning to talk about a little more as you look at other folks' earnings conversations is new supply. I thought I just would set, at least for us, the record straight here.

We’ve highlighted the markets all year long in our company that we see a real negative effect from new supply and I think it's important to be realistic about where we are heading. As an industry, we’re definitely looking at supply increasing in 2017 into 2018.

Where it goes after that is anyone's guess, but I’ve heard anecdotally and otherwise from people that build hotels for a living that it is getting more difficult to get construction financing, particularly as obviously RevPAR is flattening out, if not showing signs of a slight decrease as we move forward here.

So, as for us, we talked about the supply impact already on an overall basis and specifically just as some examples, in Anaheim, we saw RevPAR decline 10% in the quarter. There's a brand new Residence Inn that was approved to be - had opened closer Disneyland's main gate and a convention center, so we've seen definitely an impact from that hotel.

Even up at Mall of America, it seems like everybody wants to build there and Hilton, remember we have a Homewood Suites there, which is a Hilton product. Hilton approved a 200-room rebranding of a Radisson to a Hilton Garden Inn. That's open. In addition to that, 107 room Home2 opened up, as well as various other hotels in the market.

We saw our RevPAR drop 15% in the quarter. Again, not that unusual for having five hotels open up in the market. But, again, we've refocused, obviously saw those hotels coming and we've actually concentrated our direct sales efforts there, secured some longer-term extended-stay business through the end of the year there.

So, I think we've got to cut that RevPAR decrease hopefully in half as we look at least the balance of this year.

So, being proactive, recognizing where these hotels are affected and going to be affected, I think, is important and that means early and fast adjustments to revenue management and direct sales strategies really to mitigate those negative effects and position, I think, most importantly the hotels properly for the future.

I think we, as a company, have had a little, what I would call earlier-cycle impact because of the urban focus to the portfolio and top MSA impact here, but, as we move forward, our efforts in maintaining ADR, increasing market share, and we will report more on that, I think, as we move forward in the next few quarters is going to be key.

And in the end, I think Chatham recovers earlier from the overall softness in demand as some of the new supply impact and comes out of the current scenario stronger and actually earlier and with more growth because of where our hotels are, where they are located and the kind of demand generators that exist in the markets.

So we are feeling - although I’m not thrilled with our numbers today, we are feeling pretty good about where we are headed in terms of our market share and in terms of our setting the stage for, I think, better times ahead after we ride through a few more quarters of some of these tougher comps and particularly need to lap over the Houston scenario because, in and of itself, those hotels really account for any of the underperformance here in RevPAR.

And with that, I’d like to turn it over to Dennis..

Thanks, Jeff. Hello, everyone. Jeff spent quite a bit of time talking about top line, so really the only thing that I'm going to chime in on the revenue side is related to what we’re seeing in terms of the mix of the travelers out there, at least in the third quarter.

And a trend we've seen for most of 2016 is that the business traveler production continues to be down a little bit.

Our national corporate and local corporate traveler’s production for the year and that accounts for about 25% of our room revenue is down approximately 5% year-over-year with ADR basically flat to down slightly for that segment of business.

Some of these travelers could certainly be rolled up within the brand reporting systems in certain retail channels if they’ve decided to book themselves. We can't necessarily track that, but within our retail segment, which accounts for approximately 50% of our room revenue, we've seen that production increase about 6% year-to-date.

And the third business, government business, which accounts for approximately 10% of our revenue, we've seen production increase 20% this year 2016 year-to-date versus 2015. From a margin perspective, our same-store third quarter operating margins were down 180 basis points.

Still it's a very impressive overall absolute number at 50.6%, basically in line with our second-quarter margins of 50.7%. As Jeff mentioned, the 2015 third quarter was very strong and has certainly proven to be a very tough comp for not only Chatham, but also the industry.

Compounding the weaker RevPAR performance was higher expenses related to wage and benefit costs, as well as guest acquisition costs. The entirety of our operating margin decline was basically due to higher wages and benefits, which brought down margins 120 basis points and guest acquisition costs rose 50 basis points year-over-year.

The continuing trend for us in the industry is the growing cost to acquire guests. Online travel agent booking conditions and brand loyalty program fees, discounts and expenses are continuing to increase. After significant increases in 2015, we continue to experience a pretty big jump in costs this year.

For the third quarter, guest acquisition costs were up approximately 16% or almost $500,000 and reduced our margins by about 50 basis points in the quarter. Certainly, this is going to be a continuing concern for hotel owners and we’re hopeful that our franchise owners will find more ways to recapture travelers and drive brand loyalty even higher.

Hotel EBITDA margins as reported were down 310 basis points to 43.7%. Part of this is due to the inclusion of the Hilton Garden Inn Marina del Rey for the full quarter, which is subject to a ground lease.

On a comparable basis, hotel EBITDA margins were down 250 basis points taking out the year-over-year impact in our as-reported property tax insurance and ground lease line item. The incremental 70 basis point reduction from the GOP margin decline of 100 basis points was due entirely to increased property taxes at certain of our California hotels.

With respect to the Silicon Valley expansion, the 32-room tower in Mountain View opened on October 5 and we were immediately sold out that night.

For the balance of October, the hotel ran occupancy of approximately 80%, so as expected the ramp-up was immediate and when you compare the actual rate performance to our pro forma model, we were actually about $6 or $7 higher in ADR from the returns that we talked about earlier this year.

In Mountain View, we took a vacant piece of land that we were able to acquire at a reasonable price and add 32 rooms or approximately 29% of our existing inventory in that market in one of the most desirable lodging markets in the country and at an all-in cost of less than $300,000 per room, which is much lower than today's market value.

Limited-service hotels have been trading in that market at greater than $500,000 a key, so this relatively minor addition of 32 rooms alone created more than $6 million of value for our shareholders.

This is the first of three development opportunities in Silicon Valley that we believe are going to drive significant incremental shareholder value over the next couple of years.

The remaining two Silicon Valley expansions remain a great long-term investment and will provide our customers in the Sunnyvale area with additional rooms in the brand of choice for lodging in Silicon Valley, which is Residence Inns.

Some of the most valuable companies in the world are our key customers at these hotels and like them a lot, so we are going to continue to invest in our assets in the Valley to provide them the lodging they desire.

We expect to begin the redevelopment of the first of the two Sunnyvale hotels by the end of the first quarter as we continue to work through entitlements and approvals. Additionally, in order to maximize our operating performance in the Valley in 2017, we’re going to defer the start date on one of those two Sunnyvale hotels by six to nine months.

That way, we will be able to continue to provide our key customers the room inventory they desire. Even when you look outside of Silicon Valley, we do have some opportunities to hopefully succeed in adding some more value to the portfolio.

We can develop on existing land that we own, for example, in places like Cherry Creek, Colorado and Portland, Maine. Both markets have continued to perform very well and been some of the better-performing assets in our market.

Using existing available land to build, whether it's another hotel or add rooms in these strong markets, is very accretive, not only to earnings, but also to our NAV over the long term. So, with that, I’ll turn it over to Jeremy..

Thanks, Dennis. Good morning, everyone. For the quarter, we reported net income of $13.4 million, or $0.34 per diluted share, compared to net income of $14.4 million, or $0.37 per diluted share in Q3 2015. Adjusted FFO for the quarter was $27.4 million, compared to $29.3 million in the 2015 third quarter, a decrease of 6.5%.

Adjusted FFO per share was $0.71 per share versus $0.76 per share in Q3 2015, a 6.6% decrease year-over-year. Adjusted EBITDA decreased $2.2 million to $37.2 million, compared to $39.4 million in Q3 2015.

In the quarter, our two joint ventures contributed approximately $5 million of adjusted EBITDA and $3.1 million of adjusted FFO, in line with our guidance of $4.8 million to $5 million for EBITDA and $2.8 million to $3.1 million for FFO. During the quarter, we received distributions of $2.5 million from the JVs.

Our balance sheet remains in excellent condition. Our net debt was $573 million at the end of the quarter; our weighted average cost of debt was 4.5%; our weighted average maturity was 7.1 years and our leverage ratio was 40%. In Q3, we used free cash flow to reduce our debt by $14.3 million.

Transitioning to our guidance for Q4 and full-year 2016, I’d like to note that it takes into account the completion of the 32-room expansion of the Residence Inn Mountain View in the first week of October. We have amended our full-year RevPAR guidance to reflect actual performance in the third quarter and current business trends.

We are lowering the bottom end of our full-year 2016 RevPAR growth range by 70 basis points and the upper end of the range by 100 basis points and lowering our hotel EBITDA margin guidance by approximately 85 basis points. We now expect Q4 RevPAR growth to be minus 3.5% to minus 1.5% and full-year RevPAR of minus 0.7% to flat.

As a result of our RevPAR and margin adjustments, we are trimming the midpoint of our adjusted EBITDA guidance range by 3% and FFO per share range by 3% as well. Operator, at this point, we’ll open up the call for questions..

Thank you. [Operator Instructions] Our first question comes from Gaurav Mehta with Cantor Fitzgerald. Please proceed with your question..

Thanks. Good morning. A couple of quick questions. So, you talked about using your free cash flow to lower debt in the quarter.

I was wondering if you could comment on how you think about using your free cash flow for share repurchases?.

Yes, Gaurav I think, at this point, we do have - as we look forward into not only the balance of 2016 but 2017, we have a pretty good use of free cash flow at the moment, which is to fund - when we are not paying down debt is to fund the expansion of the two Silicon Valley assets that are certainly going to require about $70 million over the next couple years.

So with double-digit returns on that money, it's our belief that our cash is much better used and served at this point to fund those expansions..

Okay.

And then following up on Silicon Valley, are you still expecting an annual run rate of $10 million on EBITDA and $6.5 million on FFO per share from those expansions?.

Yes, once all three of them are open, yes, we do..

Okay. Thank you..

Thank you..

Thank you. Our next question comes from Patrick Scholes with SunTrust. Please proceed with your question..

Hi, good morning. .

Hi Pat..

Just another question on the Silicon Valley market, any concerns you have about transient corporate business going into next year?.

No, we don't at this point. Actually, demand is still pretty strong.

We do have obviously some pretty big companies out there, whether it's Google or Apple, LinkedIn, you name it, that we've talked about for next year in terms of demand requirements and room inventory, as well as rate negotiations and quite frankly, those have all been pretty good so far..

Okay. Thank you.

My second question, what is the expected RevPAR and EBITDA impact from the SpringHill Suites Savannah closure due to the hurricane?.

It was only for a week, so it maybe $100,000, $200,000, so it's not that big of a number..

Okay. That's all for me. Thank you..

Thank you. [Operator Instructions] Our next question comes from Anthony Powell with Barclays. Please proceed with your question..

Good morning, everyone. A few on supply growth.

What markets right now have the highest percentage of rooms under construction among your major markets?.

Hi Anthony, this is Dennis. We are just not sure we have all of that data right here in front of us. So we may have to ….

Yes, I think we will circle back to you..

Just generally what markets concern you, I guess, in terms of upcoming supply additions from a broad basis?.

I think that the markets frankly that we have been talking about are the ones that seem to be showing continued new supply in 2017 as well. So it's still Silicon Valley, as I mentioned, where I think there's another 3% roughly on the books to come and I think as you look across San Diego, there's more hotels to come there.

Did you find the sheet with the ….

Yes, again, it's some that are similar to what we've seen and what we've talked about in the press release.

Brentwood is a challenge, a couple that are outside of that where we may have just individual hotels, not necessarily a cluster of hotels, but Savannah continues to see some supply increases, as well as Bellevue, Washington has continued to absorb it and that's been a story by the way for a couple years now is just the fact that the demand has been so strong that we've absorbed that pretty easily.

But Bloomington is still going to be an issue as well and in Anaheim as well. So those are the top ones..

You had mentioned Denver, which is showing, I guess, overall supply growth next year, but you've done well there in that market and is that less of a concern?.

Yes, absolutely. We look at it from the Denver Tech Center, it's actually pretty de minimis. If you look at our Cherry Creek hotel, it's a little less than 1% in terms of our direct market track, so not bad..

Got it. Thanks. I guess medium term, most of your brands, Hilton and Marriott, are aggressively promoting some of their mid-priced flex service brands, Moxy, Tru and whatnot.

Are you concerned that those hotels pop up in your markets over time and potentially undercut you in rate?.

Well, as we look, for example, I think at Mall of America, there is a Tru. We just got a notice for a franchise application there. I think we are going to see, particularly with Tru, more of those than anything. Moxy is supposed to be very focused, as you know, to really big city urban.

So, I think you'll see some of that, for example, of course, we are not in New York City, you will see a Moxy come in San Diego in the gas plant, the downtown area and I think you'll see it in downtown Bellevue, for example and again, so we are in those kind of markets.

But I think we are in a slightly or more than slightly different segment and again hopefully be able to, with good marketing, differentiate ourselves enough to not be as worried.

I would be more worried when, for example, a new AC by Marriott opens up next to one of our Courtyards, or something like that, or even a Residence Inn or a Homewood because they are geared at that upscale same segment, similar traveler even if it's not extended stay.

So you look at something like a SpringHill Suites and if an AC is opening in that end market, you've got to have an impact..

Got it, thanks. Finally, some of the companies that we cover are reporting some strong leisure trends.

Have you seen that in any of your markets and is there a way for you to go after that business?.

Look, we've got a few hotels, of course, that we focus like downtown Savannah in the historic district, etc., for that kind of market..

Portland, Maine, Fort Lauderdale..

Yes, absolutely. So that's one of the reasons why we acquired those hotels because we did not want to be 100% corporate-reliant. So that should give us some diversification and some balance here in RevPAR..

Anthony, if you look at, Jeremy mentioned Portland, Maine, RevPAR was up almost 8% in the quarter and our Residence Inn Lugano in Fort Lauderdale, RevPAR was up almost 9% in the quarter. So, leisure markets have done fairly well. Savannah as well was a pretty decent grower in the third quarter with - so, yes, we would echo those trends..

All right, that's it for me. Thank you..

Thank you..

Thank you. At this time, I would like to turn the call back over to management. There are no more comments..

We appreciate everybody being on the call today and as I said, I think we look forward to better times ahead. We have to survive a few more quarters of this.

We don't see it getting substantially worse unless something happens in the economy or otherwise, but I can assure you that our efforts, particularly on the asset management side, are intense relative to top line and cost savings for the bottom line. And thank you..

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