Chris Daly - President of Daly Gray Public Relations Jeff Fisher - Chairman, CEO and President Dennis Craven - Executive Vice President and COO Jeremy Wegner - Senior Vice President and CFO.

Gaurav Mehta - Cantor Fitzgerald Anthony Powell - Barclays Bryan Maher - FBR Capital Markets.

Greetings and welcome to the Chatham Lodging Trust Second Quarter 2017 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Chris Daly, President of Daly Gray Public Relations. Thank you, sir. You may begin..

Thank you, Christine. Good morning, everybody and welcome to the Chatham Lodging Trust 2Q 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 August 2, 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 at our Web site at chathamlodgingtrust.com.

Now to provide you with some insight in Chatham's 2017 second quarter results, allow me to introduce Jeff Fisher, Chairman, President, Chief Executive Officer; Dennis Craven, Executive Vice President, Chief Operating Officer; and Jeremy Wegner, Senior Vice President, Chief Financial Officer. Let me turn the session over to Jeff Fisher.

Jeff?.

Great. Good morning, everyone.

While we are certainly happy to report what I consider to be a quarter that was well within our guidance on the upper end more positive news on a few different firms here and rather than have me this call walk through some of those numbers, I think we will do things just a little differently because in the release we mentioned that we are going to -- that we have some hotels under contracts to sell, and I just wanted to talk about a little more of the bigger picture and that is Jeremy will further elaborate on the rest.

But, first and foremost, we are in the process of recycling capital to sell two hotels and redeployment of that capital into want we expect will be three acquisitions. I do want to emphasize that whether it’s the sale of the hotels where there is contingencies as there is always our and relative to the acquisitions.

We have to say that they are not closed and they may not close but we fully expect to be able to accomplish our capital recycling goals in 2017 and going forward in 2018, one way or the other.

We have a very focused and high quality portfolio as you all know hotels and diverse set of markets around the country and although the buyer universe is not deep, we do have hotels and markets that were specifically selected for a variety of reasons and one of which is where we think cap rate for the individual asset and the buyer cap rates are low and buyer pool is a little broader to both domestic and particularly foreign capital.

So, we have entered into agreement to sell to hotels for gross proceeds as I said of approximately $80 million. These will be the first asset sales since our inception in 2010. But, I want to be clear we are certainly not interested in shrinking the size of the company.

We are going to take those proceeds and reinvest them in fact we have identified hotels that will fully reinvest the proceeds from the sale and the hotels are located in exactly the kind of coastal markets, in this case East Coast markets that match up with our strategy of acquiring premium branded upscale extended stay hotels like Residence Inn and Marriott Courtyards.

In markets that really have a higher demand growth quotient than the norm and we really specialize in understanding where those markets are and that's not by reading Smith Travel Research and look at a city or a MSA and saying that one has got 6% demand growth and that one has got 4.2% is by utilizing our knowledge of asset managers and our management companies specific market knowledge and operating over 160 hotels around this country to understand where businesses are relocating, what factories are being built, where and looking at an understanding of course the supply quotient in those markets.

So, we feel pretty good about her ability to kind of select and kick the hotels purposely, if we are going to acquire and that we are going to growth with. And we think and certainly redeploying the capital always if we can into younger assets is a very important criteria for us as well and with higher cash on cash returns.

So selling at a lower cap rate and getting the spread relative to where we see the acquisition in a market that should enhance our NAV because the underlying market growth will have greater market growth than the overall portfolio growth. That's the goal and that's how we are going to opportunistically recycle capital over the next year or two.

So, secondly, we are going to leverage our existing assets where there is an opportunity to add significant value where we already own the land and have invested in the infrastructure and already own a hotel there.

Two or three of our hotels as we've talked about before you have some extra land that we can add and in some time cases redevelop and we are working still towards our Sunnyvale expansions and looking still at particularly our Cherry Creek, Colorado and Portland Main on fire market in Portland Main to build in the parking lot there.

But, even little opportunities we have taken advantage of like taking meeting rooms out in limited service hotels or upscale extended stay hotels that would just not being used very often since we really do that kind of business and original developer overbuilt the hotel.

We return some of those rooms in some cases into five additional sleeping rooms and that's a very accretive and positive move and we got those kind of things going on or completed here at three hotels in 2017. So, we think and we know that will add value and payoff down the road.

Thirdly, as we also have mentioned, we are going to develop a hotel or two on a very select and limited basis. I started in the industry well over 30 years ago building hotels. We've got the internal expertise to do that.

And again, operating over 160 hotels around the country, I think the market knowledge allows us to cherry pick and select a market or two where there would be tremendous opportunity but we are looking for yields that are honestly 10% unlevered and better in order to undertake that kind of activity.

So, again, we will work on these strategies and we will be able to grow our portfolio and our earnings even during times when the acquisition pipeline overall is spend, you don't see a lot of trades out there again this year.

But, I do think that we are able to as I said be selective and take advantage of our overall contacts and market knowledge and franchise or relationships that we have been utilizing forever.

Finally, we're going to continue to invest in our existing portfolio throughout the cycle to not only renovate but to upgrade and provide the experience today's traveler wants.

Obviously, we are cognizant and are looking at whatever the new brands are that particularly Marriott and Hilton have rolled out and we certainly want to make sure that even if we have 10-year Residence Inn that we are absolutely competitive, for example, an element that may or may not be built down the road.

So, we will invest in our assets; we will continue to upgrade them to remain competitive throughout the cycle and in the future. So, I think this four-prong strategy and approach really exemplifies what we are doing here and on a go forward basis.

And our long-term goal is really to be the best pure play select service and limited service hotel REIT with the highest RevPAR and highest margins. And we know we have been the highest margin company for quite sometime.

We continue and I think with some of the other companies that have limited service or that had been limited service companies either merging with companies that have other assets that absolutely would not be characterized as limited service hotels and/or companies that have been acquiring hotels over the last two years in their capital recycling efforts that have not been limited service or upscale extended stay hotels but more boutiquee or resorty.

We know that's not our game.

So, our focus is in the brands and in the markets that we know, and that we love and that we have experience in and we will continue to upgrade this portfolio is a tough one to upgrade as we noted but we will particularly in age so that we are competitive and younger to deal with whatever the supply that comes down the road.

Well, with that, I would like to turn it over to Dennis to talk a little more specific..

Thanks Jeff. Good morning. Our second quarter was a good quarter with FFO per share of $0.65 finishing at the top-end of our range. RevPAR declined 0.5% for the quarter, which was slightly better than the midpoint of our guidance range of flat to minus 1.5%.

Excluding the six hotels in our oil and gas influence markets RevPAR would have increased 1.7% for the quarter. Like many April was the weakest month of the quarter for us with RevPAR down 3.7%, May RevPAR grew 1.2% and June RevPAR rose to 0.6%.

The continuing theme for us is that we have aggressively been pushing ADR, which jumped almost 3% in the quarter to a very strong $169 certainly an impressive ADR and a testament to the quality of our portfolio as Jeff alluded to just prior.

Although occupancy was down a little over 3%, absolute occupancy levels remain a very healthy 83%, which is noteworthy given the substantial increase in new supply across the industry and within our markets.

Working with Island Hospitality, we remain hyper focused on our revenue management strategies and in the second quarter we outperformed our markets average RevPAR growth by 162 basis points which is a phenomenal result. Popping ADRs, which also comes into play when we talk about our ability to generate high operating margins.

Looking at few of our specific and key markets within Silicon Valley in Sunnyvale where we have almost 500 rooms year-to-date demand has grown 0.7%, while our new supply has grown 1.5%. Given that dynamic we are pleased that RevPAR was essentially flat but we are able to grow ADR by really impressive 5.2% in the quarter.

As Jeff mentioned earlier we have strong relationships with some of the largest companies in the world and although it's difficult at times to manage the demands of some of those companies, our teams on the ground do a fantastic job managing inventory during peak events such as product launches or global training initiatives.

Residence Inn is the brand of choice in that market given the long-term nature of many of the guest traveling to the Valley. Like Silicon Valley our Residence Inn Bellevue, Washington is well positioned within the market in terms of location and brand.

We are host to many tech travelers with our largest account being Microsoft and have excellent relationships with other tech companies such as Ericsson, LG, SAP and Accenture. And additionally, the hotels benefits from the spending in the Greater Seattle area related to Boeing.

RevPAR to our three San Diego hotels advanced almost 8% in the quarter, even though was under renovation our downtown Gaslamp Residence Inn was able to grow RevPAR 1.1% which is encouraging given the amount of new supply that has come into that market over the last two years including another Residence Inn within walking distance of our hotel.

San Diego CBD market has been quite resilient and demand growth is outpacing supply growth so far in 2017 5% growth versus 3% in the supply growth. Also benefiting our three San Diego hotels was a fairly easy comping Carlsbad Homewood Suites was undergoing renovation for a part of the second quarter in 2016.

As we all know Houston has been a challenging market for everybody in terms of lodging. For us, our four hotels started to quickly deteriorate in the second half of 2016.

Since then RevPAR four Houston hotels was down 22% in the second half of 2016 down 4% in the first quarter of 2017 as it benefited from the Super Bowl, and then, 20% in the 2017 second quarter. For the balance of 2017, we still see RevPAR declining approximately 9%.

Despite this market suffering from the impacts of oil and gas, the market continues to absorb more and more new supply and it's still under construction. Again, on the weak side, our two small hotels in Western Pennsylvania continue to taken on the chin with RevPAR down 22% in the quarter.

The Dual Brand and Marriott hotels opened in Altoona, Pennsylvania this year which competes directly with our Courtyard. And then, Washington, Pennsylvania that market has been berserk with not only new supply in the past couple of years but significant reductions in fracing in the area.

Updating industry-wide supply/demand for the upscale chain -- chain scale, year-to-date room supply increased 6% which is significant but demand almost offset this growth by growing 5.3%. This 70 basis point spread is essentially unchanged from 2016 when upscale supply outpaced demand by 60 basis points.

We are certainly feeling the effect of new supply and market such as Anaheim, downtown Dallas, Pittsburgh, PA and New Rochelle, but encouraging for us this is the third consecutive quarter in which direct supply growth in our markets has declined.

In addition to revenue management, we are dedicating more time and resources to analyzing profitability and determining ways to reduce cost or minimize increases in certain categories. For the quarter, our operating profit margins declined a 130 basis points to a still very strong 49.4% which was the upper end of our guidance range for the quarter.

Excluding some one time adjustments related to our workers compensation reserves between the 2016 second quarter and the 2017 second quarter, our operating margins were actually only down 40 basis points which is encouraging given that RevPAR declined slightly in the quarter.

A combination of the increased ADR as well as very tight expense controls helped us to maintain our operating margins of over 50% on a recurring basis which is exemplary.

Our biggest challenge is finding and keeping qualified labor especially in housekeeping and this is not just a Chatham-issue, but certainly an industry issue on a per-occupied room basis, our rooms labor cost have risen approximately 4% in the quarter and year-to-date.

The issue of increasing cost being driven by not only the minimum wage requirements but also new supply in terms of hotels that's causing operators to offer what we believe is above market wages in certain locations to entice employees away from our hotels.

As we've talked about in the past few quarters for us, it seems as if the rising pressure related to Guest acquisition costs TA commissions and loyalty cost seem to be abating for the third consecutive quarter, our acquisition costs were flat year-over-year at approximately 4% of revenue.

Again, we have a tremendous amount of information in our fingertips given our relationships as asset manager as well as Island Hospitality, we are able to analyze revenue daily and especially forecast what that means for the rest of the month. And we use that information to control and minimize expense creep within the month, for the month.

On the CapEx side, our renovations are ongoing and on-budget. For the year, our 2017 capital expenditure budget of $27 million is still applicable as we are planning on renovating six hotels during the year. I think at this point, that concludes my remarks. I will turn it over to Jeremy..

Thanks Dennis. Good morning everyone. For the quarter, we reported net income of $5.1 million or $0.13 per diluted share compared to net income of $12.3 million or $0.31 per diluted share in Q2 2016, $6.7 million of the $7.2 million decline as related to an impairment we took on our SpringHill Suites located in Washington, Pennsylvania.

The primary differences between net income and FFO relate to non-cash costs such as depreciation which was $11.7 million in the quarter, one-time gains or losses which were $6.7 million and our share of similar items within the joint ventures which were approximately $1.8 million for the quarter.

Adjusted FFO for the quarter was $25.2 million compared to $26.8 million in Q2 2016 a decrease of 6%. Adjusted FFO per share was $0.65, which represents a decrease of 5.8% from the $0.69 per share generated in Q2 2016. Adjusted EBITDA for the company declined 4.9% to $35.1 million compared to $36.9 million in Q2 2016.

In the quarter, our two joint ventures contributed approximately $4.8 million of adjusted EBITDA and $2.7 million of adjusted FFO. Second quarter RevPAR was up 2% in the Inland portfolio and down 3.1% in the Innkeepers portfolio.

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

Our balance sheet remains in an excellent condition. Our net debt was $563 million at the end of the quarter and our leverage ratio was 39%. In Q2, we issued 648,000 shares under our ATM program after we were added to the S&P Small Cap 600 Index, which generated $12.9 million of net proceeds.

We have also entered into agreements to sell two hotels which will further strengthen our balance sheet when the transactions close.

While the sales prices are higher than our tax bases in these hotels, we do not anticipate paying a special dividend for utilizing a 1031 exchange because our current dividend exceeds our expected retaxable income enough to absorb the anticipated gain.

We intend to use the proceeds from the ATM share issuance and pending asset sales to help fund acquisition and development opportunities that we are currently pursuing. In Q2, we work with Colony NorthStar, our partner in the two JVs to refinance the debt on both JVs.

The $840 million CMBS loan on Innkeepers JV was refinanced with a new $850 million [loan] [ph]. The Innkeepers refinancing extended the maturity by three years to June 2022 and reduced the rate by 60 basis points to LIBOR plus 279 basis points. The $817 million CMBS loan on the Inland JV portfolio was refinanced with a new $780 million CMBS loan.

The Inland refinancing extended the maturity 2.6 years to July 2022 and reduced the rate by 30 basis points to LIBOR plus 330 basis points. Transitioning to our guidance for Q3 and full year 2017, I would like to note that it takes into account the anticipated completion of the renovation of the Homewood Suites Miatland, which commenced in Q2 and Q3.

The commencement of renovations of the Homewood Suites Bloomington, Minnesota and Homewood Suites Brentwood, Tennessee in Q3 with anticipated completion in Q4 and the renovation of the Residence Inn Mission Valley starting in Q4. Since the timing of potential assets sales and acquisitions is uncertain, we have not included these in our guidance.

We expect Q3 RevPAR growth to be minus 1% to plus 1% in full year 2017 RevPAR growth to also be minus 1% to plus 1%. For the full year, our RevPAR guidance assumes the current trends of modest GDP growth combines above average new supply in the upscale segment will continue for the rest of the year. Our full year forecast for cash G&A is $9.1 million.

On a full year basis, the two JVs are expected to contribute $15.8 million to $16.2 million in EBITDA and $7.6 million to $8 million of FFO. As a result of our share issuance in Q2, our weighted average fully diluted share count and unit count is now expected to be $39.8 million in Q3 and $39.4 million for the full year.

The incremental shares from the equity issuance is expected to reduce our FFO per share by approximately $0.01 per quarter until we deploy proceeds in the acquisitions and development opportunities. I think at this point operator that concludes our remarks and open it up for questions..

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Gaurav Mehta with Cantor Fitzgerald. Please proceed with your question..

Thanks. Good morning.

So couple of questions, first on asset sales, you talked about these being first asset sales since 2010, so I was wondering why you deciding to sell now and how many more assets should we expect to be sold after the two assets?.

Yes. I will address that Gaurav. It's Jeff. How are you doing today? And then, Dennis and Jeremy, you could follow on. But, I think the rationale here is not to simply sit still at a time when we all know RevPAR kind of best case is flat or up a little bit or down a smidgen.

In the current environment we're looking for ways to make money, I mean pure and simple.

And we see some of our West Coast assets particularly are kind of in markets where foreign capital is very attracted to be there and to pay cap rates that really as I said would allows us to achieve a good positive spread on something that we might be able to buy.

And if we are looking at assets that we think either or little bit older or maybe haven't upcoming even if it's just soft goods, renovation and not having to take the downtime, the displacement and the capital to do that and fell at a pretty attractive number then we think that's our job..

Okay.

And I guess on the acquisition side, could you talk about what you are seeing in the market? And then, would be acquiring more asset only if you are able to sell more assets or that's not dependent on that?.

Yes. I mean it's -- that's the general idea, as we did issue just a little bit of stock on an opportunistic basis because we knew we had couple of interesting things in our pipeline. The market is no different overall in terms of number of hotels that are out there to buy or folks that even really want to seriously talk about it.

But, nonetheless, we are able to kind of get in there with some direct relationships and as we always have here and there make a few interesting deals and we will continue to try to do that subject to being able to and you can never match perfectly obviously the timing of selling something and buying something but we will do the best we can on that front..

Okay.

And then, lastly, you talked about decline in supply growth rate in some of your markets, are they any specific markets where you are seeing that?.

Well, I mean in terms of declining growth rate for us that really talks about Houston and the fact that it's been down on average 20% in terms of RevPAR for the last year and that is mitigating in the second half of the year to down approximately 9%. So, we are certainly haven't seen the bottom there yet.

But, on a relative basis, it has gotten a little bit better.

If you are talking about supply as well?.

Yes.

I think you mentioned that for three consecutive quarters, yes, you are seeing decline in the growth rate of the supply?.

Yes. Across our entire portfolio, yes..

Okay.

So, it's not in any specific market?.

Yes. Looking to specific markets, the Seattle Bellevue area has absorbed a tremendous amount in new supply over the last few years that's coming down a little bit.

In terms of growth rate of new supply, obviously, even if you look at Houston market, new supply is still coming but on a growth rate basis relative what it has happened in the last couple of years, it's down, similar stories in even Pittsburgh, Pennsylvania as well where -- there are still new supply coming and it's still going to impact us.

But, the growth of that new supply is down from what it was. So, it's just an encouraging trend that it has gotten a little bit better, but it doesn't mean that it's over..

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

Thank you..

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

Hi. Good morning, guys.

In terms of your acquisitions, you talked about some of the demand characteristics you are looking for -- what about supply in some of these new markets?.

Yes. I mean I think listen in each instance we look at new supply and what's coming in terms of market demand and what we believe is market growth and listen it's -- none of the markets are without new supply coming.

But, certainly we believe that the demand growth is there and the corporate demand in terms of not only just this year, but as you look out one, two or three years in terms of what expansions are happening in these areas, whether that be corporate relocations are government spending or shipbuilding, whatever it maybe that we believe that just very similar to other acquisitions we made that we'll be able to absorb that and still have [outsize] [ph] growth..

Got it. Thanks.

And could you give an update on the CapEx in Silicon Valley, Guest House and just overall what's maybe slowing up the expenses there and generally, if you do more development there or elsewhere in your portfolio, how would you finance new development?.

Sure. Specifically with respect to Silicon Valley, there is really no update in terms of CapEx or time from there. We are still working on those projects. We've still been spending a lot of time value engineering, the demand, the construction cost and the build out of those expansions and redevelopment.

So, no specific timetable yet and no -- I do believe that we will start to go back out to bid on one of those locations within the next few months and we will have a better handle on it probably as we talk to you guys in November.

And then, if you look at -- the second question was related to, what again?.

General financing of portal in there any development given you have slightly levers than peers, so would you issue more equity, cash flow, how would you finance these types?.

Yes. Listen, generally it's going to be mixture of either asset sales on balance sheet and then if the markets allow and the pricing is right given especially relative to what we believe we are going to earn on those developments we maybe over the years capacity within our ATM.

But, it's going to be a mixture of all three of those things to determine how that works. I mean obviously developments can take up to couple of years. So, in terms of a significant one-time cash requirement that usually developed over a period of time.

So, it's not something that all of a sudden you are stuck with the -- yes, we got to raise $50 million to be able to fund these developments for the next couple of years..

Right. Great. That's it for me. Thank you..

Thank you..

[Operator Instructions] Our next question comes from the line of Bryan Maher with FBR Capital Markets. Please proceed with your question..

Good morning, guys.

So, Jeffrey you teased us a little bit with the East Coastal markets for the new hotels, are you unwilling to get any more specific than that? And then, as a second question to that, are those purchases already signed and are they contingent upon you selling the two hotels?.

First, I think you know the answer to the first part of your question Bryan..

I had to ask..

Right. We've been around this a long time. So, we know, we are not in a position to tell you that now. But, just as soon as we can -- we are still excited about them absolutely will be out there with the information. Secondly, the acquisition of the hotels are not in anyway tied to the sale of the hotels or contingent on those.

So, there is CBMS assumption process relative to the hotels for sale, otherwise fire is hard and that's the current status..

Okay. Thank you..

Thanks Bryan..

Thank you. It appears we have no further questions at this time. I would now like to turn the floor back over to management for closing comments..

Well, we appreciate everybody being on the call this morning.

And as you could tell or we are pleased in the kind of environment particularly with regard to RevPARs we will be able to make our numbers and get the kind of flow through particularly that we are getting and frankly get the ADR increases that we are getting with a company that for example had an 86% occupancy rate to drop to 83% to 84% to me is a good job on the revenue management department side of things.

So, we will continue to try to get that flow and enhance this -- these earnings with some recycling efforts as I mentioned and we look forward to talking to you on the next call or sooner. Thank you..

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