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

Gaurav Mehta - Cantor Fitzgerald.

Welcome to the Q1 2017 Chatham Lodging Trust Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Daly, owner of Daly Gray Inc. Thank you. Mr. Daly, you may begin..

Thank you, Doug. Good morning, everybody and welcome to the Chatham Lodging Trust First Quarter 2017 Results Conference Call. Please note that many of our comments today are considered forward-looking statements as defined by federal securities laws.

These statements are subject to risks and uncertainties, both known and unknown, as described in our most recent Form 10-K and other SEC filings. All information in this call is as of May 9, 2017, 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 chathamlodgingtrust.com.

Now to provide you with some insight in Chatham's 2017 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.

Jeff?.

Thanks, Chris. Good morning, everyone. Our results for the first quarter outperformed our expectations across-the-board. RevPAR growth of 1.2% was 70 basis points higher than our mid-point of our guidance range of flat to plus 1%.

Additionally, our operating margins were up 40 basis points over last year and our hotel EBITDA margins were up 70 basis points over 2016, exceeding our guidance by 50 basis points. Given the modest growth in RevPAR, we're very pleased to improve our operating margins which helped us produce a good quarter.

Working alongside Island Hospitality, we've been hyper focused on our revenue management strategies. And in the first quarter, we outperformed our market's average RevPAR growth by 90 basis points which is admirable considering the tough comparison, given RevPAR growth for us in the first quarter 2016 was almost 3%.

We were very pleased with the mix in ADR growth as we were able to grow ADR 2.5% to $163. That strong ADR is a testament to the quality of our portfolio. I think when most people think of select service hotels, they don't think of an average daily rate of $163.

Our long-term goal is to be the best pure-play select service and limited service hotel REIT. With [indiscernible] targeting a different asset class for most of its acquisitions and once ROJ closes on the acquisition of BelCor Chatham will possess the highest RevPAR, ADR and margins among all select or limited service hotel REITs.

Today's traveler is very much in tune with the quality and value of hotels such as ours provide which enables us to grow our top line, similar if not better than other hotel classes, while our margins significantly outperform and so does our cash flow. Our guidance for the quarter was a RevPAR increase of flat to 1%, up 1%, as I said.

And we finished with RevPAR growth of up 1.2%. Within the first quarter, January RevPAR was up 0.3%; February, up 1.9%; and March was up 1.7%.

Excluding Houston and the 2 hotels in Western Pennsylvania, RevPAR was up 2.3% for the company, all attributable to ADR increases, a much better mix as we would much rather gain ADRs since our hotels already run at a very high occupancy levels and of course, that's the most profitable mix of RevPAR.

Looking at some of our key markets, we did have a couple of markets that benefited from special events. Of course, Washington, D.C. Hotels benefited from the inauguration and those are the 2 hotels that experienced a RevPAR increase of 8% up in the quarter. Houston was the host of the Super Bowl in February.

And since we own 4 hotels from a short distance to the stadium, including 2 hotels within walking distance. So those hotels saw RevPAR decline of only 3.6%.

And of course, we have to keep in mind what the declines have been and will be probably in the second quarter again as they resume a double-digit RevPAR decline until we start comping over some easier numbers in the second half of the year. Earlier, I mentioned the hyper focus on revenue management and the Super Bowl is a perfect example of that.

Starting approximately 2 months out from the event, our management teams held regular sessions to discuss the strategy surrounding pricing in groups. These meetings increased in frequency and detail leading up to the Super Bowl.

The results were fantastic in that the despite our tough comps, we were able to gain market share by approximately 7% across the 4 hotels in the 2 weeks leading up to the game which is outstanding. Within Silicon Valley, RevPAR was essentially flat with ADR growth of 1%, offset by a slight decline in occupancy. That trend continues in April.

Tech companies continue to drive our economy and our 4 hotels in Silicon Valley are the perfect brand, that being Residence Inn, with great locations for the market. But our RevPAR growth has been limited by new supply that came in 2016 and continues to open in 2017. Being flat, I think, compared to some of our competitors is a good number.

Despite our renovation at our Gaslamp Residence Inn, our 3 San Diego hotels were able to advance RevPAR 3.4% in the quarter, with ADR growing approximately 8%. Again, spot-on revenue management throughout our renovation has paid off as we were able to grow ADR at our Gaslamp Hotel by 13% in the quarter.

Other markets which experienced more than double-digit RevPAR growth in the quarter were our Homewood Suites in San Antonio and our Hilton Garden Inn in Burlington, Mass. which benefited from revenue displacement in 2016 as well as our Homewood Suites in Maitland, Florida where demand was driven by winning back corporate business.

Again on the weak side, our 2 small hotels in Western PA continue to take it on the chin, with RevPAR down 22% in the quarter. Island Hospitality took over the management of those 2 hotels on January 1 as the management contracts with Concord had expired.

And we're getting a strong handle on the hotels and revenue management forum, but market conditions there are still really tough. And of course, that will continue to be negatively impacted and our EBITDA will be as our 6 hotels, as I mentioned, with Houston and Western PA, equates to about 9% of our EBITDA.

When you look at the upscale chain scale, year-to-date room supply increased 6.1% which was almost entirely offset by increased demand within that segment of 5.8%.

So to my earlier point, travelers are on board with the influx of hotels in our brands and they're filling them up and are choosing to stay in them which will pay off long term as the supply growth subsides.

We're certainly feeling the impact of new supply, as we mentioned, starting around this time last year, particularly in Anaheim where our new Residence Inn was built closer to Disneyland main gate. And just about every other brand that was not represented has opened.

In Anaheim, we'll get some good news though when a third Residence Inn that is in the market, one of the older Residence Inn, actually loses its flag the beginning of next year.

As I mentioned before, we believe Chatham recovers earlier than most because our hotel -- where our hotels are located and the fact that we've been hit a little bit earlier being mostly urban, particularly as we look back to 2016. So we think that as we move forward through 2017 and into 2018, that supply will get absorbed.

Our revenue management strategies will hold on to ADR and will be able to move forward, as I suspect supply will, of course, subside. Before I turn it over to Dennis, I want to spend a few minutes on market activity and where we see ourselves going from here with respect to our capital allocations.

On the hotel sales front, there are markets that are very attractive to investors who have been looking at our hotels. Some investors backed primarily by foreign funds are looking at certain markets and we think might pay a strong cap rate, a strong number for some of those hotels.

And if we were able to do some capital recycling in 2017 and successfully sell 1 or 2 hotels, we would use that money for either current acquisitions of hotels that are in the kind of markets that we want to be in.

Our pipeline is not deep and others have commented availability of hotels are expensive, particularly as you look at them compared to replacement cost. But we're out there working hard on a recycling strategy.

Of course, we look at hotels -- and we've talked about this before where we've got room to either build a new hotel or expand on land that we already own. And in some of those markets, those returns can be double-digit returns unlevered.

So given where we think we might be able to sell a hotel or 2, we think that's a strong possibility for a pretty accretive opportunity in recycling our capital.

So we're going to look at those opportunities and a new development opportunity or 2, again, if that works in the context of trying to build some accretion here as RevPAR is in the flat zone, so to speak, for 2017. With that, I'd like to turn it over to Dennis..

Thanks, Jeff, good morning. In addition to revenue management, we, as well as Island Hospitality, have dedicated more time and resources to analyzing profitability and determining ways to reduce costs or minimize increases in such -- certain categories. This is a niche that we started talking about a bit over 6 months ago.

We saw wage pressures developed early on and saw some other incentives, such as guest acquisition costs and TA commissions inching up. We felt that we needed to get out in front of this and see what we could do to clamp down on the expense creep. We obviously take pride in the fact that our operating margins are the highest of all lodging REITs.

Our same-store hotel operating margins advanced 40 basis points to 47% in the quarter. And our hotel EBITDA margins expanded 70 basis points to 39.9%. The incremental improvement in our hotel EBITDA margins of 30 basis points can be attributed to about $0.5 million property tax refund related to one of our hotels.

In the quarter, we were able to hold expenses basically flat, with an increase of less than $100,000 which is noteworthy given the significant wage pressures occurring in most markets. We have a tremendous amount of information in our fingertips.

Island Hospitality is able to analyze revenue daily versus forecast and determine whether 8 weeks expense levels are necessary within the month, for the month. This could be related to labor thresholds or even things such as supplies for housekeeping. One of the benefits of our working relationship with Island is the ability to move quickly.

We can drive profits to the bottom line which translates into enhanced value of our real estate. For the second consecutive quarter, first quarter guest acquisition costs were flat year-over-year at $2.7 million or 4% of revenue.

During the quarter, we did see a reversal in booking patterns with local negotiated production up 7%, but those were driven primarily by a sizable group in Silicon Valley. This was offset by a 4% decrease in production from our retail segment which includes our e-channels.

And we're still projecting, in our guidance, a little over 10% or almost 30 basis point increase in those costs in 2017 as we expect booking patterns will revert back to the retail e-channel segments gaining share on a pro-rata basis.

The industry is facing wage pressures across several fronts, whether it's trying to find qualified labor, whether it's the state raising the minimum wage or even new supply that's causing hotel operators to offer what we believe is above-market wages in order to entice employees to switch from our hotels to others.

With aggressive asset management and very diligent measures by our operator, we were able to minimize these effects in the quarter.

With respect to the remaining 2 Silicon Valley expansions, we continue to work with the city and our architects, designers and engineers as planned, but certainly, it's been a long and tedious process and we still have further cost-cutting analysis to do before we begin construction.

Until we can come up with a final budget that provides double-digit returns that we're expecting, we'll continue to value engineer in both of the projects.

Our guidance at this moment does not assume a certain construction date for either of those 2 projects, nor any disruption related to taking those rooms out of service for the buildings that we will be tearing down in the meantime. Our renovations are ongoing and on budget.

Our 2017 capital expenditure budget of $27 million is still applicable as we're planning on renovating 6 of our hotels during the year. At this point, I'll turn it over to Jeremy..

Thanks, Dennis. Good morning, everyone. For the quarter, we reported net income of $4.6 million or $0.12 per diluted share compared to net income of $3.3 million or $0.08 per diluted share in Q1 2016.

The primary differences between net income and FFO relates to noncash costs such as depreciation which was $12 million in the quarter; onetime gains or losses; and our share of similar items within the joint ventures which were approximately $1.5 million in the quarter.

Adjusted FFO for the quarter was $18.1 million compared to $17.7 million in Q1 2016, an increase of 1.9%. Adjusted FFO per share was $0.47 per share which represents an increase of 2.2% from the 46% -- $0.46 per share generated in Q1 2016. Adjusted EBITDA for the company rose 1.8% to $28.1 million compared to $27.6 million in Q1 2016.

In the quarter, our 2 joint ventures contributed approximately $3.2 million of adjusted EBITDA and $1.4 million of adjusted FFO. First quarter RevPAR was up 5.7% in the Inland portfolio and down 2.7% in the Innkeepers portfolio.

The strong performance in the Inland portfolio is largely attributable to the significant amount of renovation that was completed on those hotels in 2016 and the weaker performance in the Innkeepers portfolio is primarily due to the disruption being caused by renovation occurring in that portfolio in 2017.

Our balance sheet remains in excellent condition. Our net debt was $575 million at the end of the quarter and our leverage ratio was 40%. We're currently working with Colony NorthStar, our partner in the 2 joint ventures, to refinance the debt on both joint ventures.

We expect that the refinancing will lower the cost of debt for our JVs and extend the maturity of both loans to 2022, including our extension options. We anticipate that both refinancings will close in Q2.

Transitioning to our guidance for Q2 and full year 2017, I'd like to note that it takes into account the completion of renovation at the Residence Inn Gaslamp and Courtyard Houston Medical Center in May, the renovation of the Homewood Suites Maitland in Q2 and planned renovations of the Residence Inn Mission Valley, Homewood Suites Bloomington and Homewood Suites Brentwood during the second half the year.

We expect Q2 RevPAR growth to be minus 1.5% to flat and full year 2016 -- 2017 RevPAR growth to be minus 1% to plus 1%. Our first quarter benefited from the inauguration in Washington, D.C., the Super Bowl in Houston and the timing of Easter relative to 2016.

We do not expect Q2 RevPAR growth to be as strong as Q1, given the positive impact these items had in Q1. In the second half of the year, we faced easier comparisons for our Houston asset which has benefited our RevPAR growth in Q3 and Q4.

For the full year, our RevPAR guidance assumes the current trend of modest GDP growth combined with above-average new supply and the upscale segment will continue throughout 2017. Our full year forecast for corporate cash G&A is $8.9 million.

On a full year basis, the 2 joint ventures are expected to contribute $16.4 million to $16.9 million of EBITDA and $8.4 million to $8.9 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 Gaurav Mehta from Cantor Fitzgerald..

I want to follow up on your comments on potential asset recycling in 2017 and hoping if you could provide more color on what you're seeing in the market as far as pricing.

And if you're going to buy some assets, where would you be buying and looking to sell?.

I think that, as you know, we commented that things are expensive out there. And therefore, I think our focus is clearly going to be on expanding or building on sites that we already own where the infrastructure is there and the ground is flat and the costs are fairly reasonable to do stuff that are produced at double-digit unlevered return.

But for existing assets, really, I think our strategy there is to look at a value-add opportunity, whether it be for something that just really needs capital or rebranding or otherwise; or for Island Hospitality to bring its abilities to look at a market and look at a hotel and increase market share, so enhance the top line and in some cases, enhance margins.

On most cases, we've been successful in enhancing margins in hotels but Island takes over. Therefore, asking cap rates by sellers of 7 to 8 cap, we're not too thrilled about, honestly. And we know that going in yield ought to be 8 plus, given where our stocks trades, so we think the way to get there is probably with a value-add opportunity..

Okay. That's helpful. And again, as a follow-up, you talked about supply impact on your Silicon Valley assets. But I was hoping you could also talk about demand if you're seeing any pickup in demand in 1Q. We know that there were some pickup in venture capital activity in 1Q versus 4Q '16.

So have you seen any impact of that on your hotels? Or are you expecting to see any pickup in demand there?.

You know when you look at our Residence Inns there and you look at who's staying in them, it's primarily engineers, it's training groups, it's kind of new store openings for Apple where they bring Apple or where they bring in folks and other kinds of training. So no, the answer is venture -- demand is strong. Demand, I would say, is steady.

And that demand is getting somewhat diluted by some new select service hotels that have been opening sort of south, let's say, a little bit south of the San Francisco airport down through the heart of Silicon Valley to the San Jose airport. And when you look at that market and just drive up the 101, you'll see things that have opened.

We think we're well positioned, given the strength of our sales team and our kind of long-standing relationships in the market with the demand generators with Apple, with Google, with Applied Materials, with Cisco.

So I think that this supply, looks like most of it abates by the end of this year, maybe there's a little trickle into the first quarter of 2018..

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

So hopefully, it's because we did such a fantastic job that there's no questions or maybe it's because everyone's on the Marriott call. But nonetheless, we appreciate the opportunity to talk to you.

We're pleased with the quarter and we're going to continue to buckle down on all the operating fronts we talked about and on the capital recycling side trying to create some accretion here. Thanks for listening. Talk to you soon..

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..