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

Anthony Powell - Barclays.

Greetings, and welcome to the Chatham Lodging Trust's First Quarter 2018 Financial Results Conference Call. At this time all participants will be in a listen-only mode and a brief 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 Chris Daly with Daly Gray. Please go ahead..

Thank you, Rob. Good morning everyone and welcome to the Chatham Lodging Trust first quarter 2018 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 1, 2018, 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 with some insight into Chatham's 2018first 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?.

Thanks, Chris. Good morning everyone. Thanks for being with us today. Earlier today, we reported our results for the first quarter and while most key metrics finished to the upper end or higher than the upper end of our guidance range. RevPAR declined 2.4% compared to our guidance of minus 2% to minus 3.5%.

Adjusted EBITDA of 26.4 million is slightly above the upper end of that guidance range due to better than expected hotel EBITDA margins of 36.3% compared to our guidance range of 35.4% to 36%. So adjusted FFO per diluted share was $0.36 compared to guidance of $0.33 to $0.35.

We placed some RevPAR costs to the prior year and of course we had talked about that this last year and particularly when we put our guidance out for this year. Having benefited last year from the Super Bowl, in Houston where we have the four hotels and inauguration in D.C. last year where we had three hotels. Our D.C.

hotels were also hit by the temporary government shut down earlier this year. Additionally we had some large corporate businesses in Silicon Valley that simply shifted from March to April this year. Looking at our more significant markets in the quarter, RevPAR of our four Silicon Valley Residence Inns was down 5% to $177 due to a shift in business.

Demand remained strong on Silicon Valley outpacing new supply by 100 basis points. We got to [bounce] back in April, I'm happy to report where RevPAR of our four Silicon Valley hotels rose 10%.

San Diego represents our second largest market where RevPAR slipped 3.1%, but that was impacted rather slightly due to renovation of our Residence Inn in Mission Valley, in addition to a new Homewood Suites that opened within a couple of blocks of that hotel.

Downtown San Diego performance has been really good and RevPAR at our Downtown San Diego Gaslamp Hotel has been strong and is projected to grow approximately 10% this year, as the impact of new supply over the last few years is absorbed to [balance] the strong convention and events calendar for this year.

Another significant market for us is L.A., which posted strong first quarter RevPAR growth of 4.3%.

It's also encouraging that our Residence Inn Anaheim which had really [set] the last year and half going down, is showing positive growth after absorbing a tremendous amount of new supply and stands to perform much better when the [indiscernible] Residence Inn within that market leaves the system in the third quarter of this year.

Our Florida hotels continue to outperform with RevPAR gains of almost 7%, some of the gains relate to some leftover [FEMA] business in the hotels, but most of the gains are attributable to much improved quality demand, benefiting from disruption in the Caribbean and Key West and a little bit of an easier comp of course as others have noted with Zika last year.

We are seeing some improving market conditions across various locations within our portfolio. It's interesting to look and see that one-third of our portfolio saw RevPAR growth more than 5%, some of the hotels are in markets that have absorbed most of the competitive new supply, such as our markets in Westchester County and Brentwood, Tennessee.

We have markets where demand growth is strong such as Farmington, Connecticut, Exeter, New Hampshire, and Marina Del Rey. The price of oil has risen approximately 35% in the past six months and we are seeing our oil markets come back to life such as our Washington PA hotel where RevPAR was up over 40%.

We are also seeing some increase in oil related business come back into our Houston hotels and some other markets within our JV hotels. Year-to-date lodging supply growth was 2% industry wide which doesn't sound high but most of all new supply has been concentrated in extended-stay and limited-service hotels with which we directly compete.

Year-to-date new supply in the upscale segment rose 5.6% and this was offset by demand which rose 6.1% in the quarter. New supply is certainly driving our performance in markets such as Route 128 in Boston, Dallas including Madison and Denver as well as [San Miguel], California.

We believe rising construction costs as well as our entire lending requirements should mitigate some of the planned new hotels as we move forward. So our second quarter has gotten off to a good start with April RevPAR rising approximately 3%.

Strategically we're going to continue to diligently execute on all four parts of our strategy, our balance sheet is in great shape and we are at our lowest leverage levels since 2010. We're well positioned to deliver further on our strategic approach at accrete value.

By the end of the quarter, we expect to close on the acquisition of the new Ballou Residence Inn, Charleston, Summerville in an area that is bustling with development across all property types. With that, I'd like to turn it over to Dennis..

Thanks, Jeff. Good morning. Our RevPAR declined to 2.4% in the quarter and was driven equally by a decline in ADR and occupancy. Our reported first quarter gross operating profit margins were 44.4% and our hotel EBITDA margins were 36.3%, slightly above the upper end of our guidance range of 36% and the driver behind our FFO per share outperformance.

Our first quarter same store operating margins were down 260 basis points year-over-year, favorable benefits represent approximately 35% of our total operating expenses and approximately 20% of our revenue. For the quarter on a per occupied room basis, favorable benefits were up approximately 7% and impacted our margins by 170 basis points.

Industry wide especially in urban areas margins are under pressure due to rising rates and benefits [comped] by lower employment. We can either raise wages where we are competitive or loose well trained employees to other hotels or other industries such as fast food and warehousing.

Unfortunately in these same markets temporary or casual labor rates can be up to 50% more than market wage, so we can't afford to go that route. As we move forward as owners and not only as operators, we need to continue to find ways to reduce labor cost and maximizing the efficiency of our staffing model.

The only other item that had a major impact on our margins adversely was weather related increases in utility costs, snow removal and maintenance which impacted margins by 60 basis points in the quarter. These are primarily one-time weather driven variances.

Guest acquisition costs were up 2.5% year-over-year due to increase primarily -- basically in guest reward costs. These were actually offset by lower TA commissions and that is a percentage of revenue, we're actually down approximately 10 basis points in the quarter. So, a little bit of a positive on our margins.

Hotel EBITDA margins were off 360 basis points in the quarter, as we benefited from approximately $0.5 million of multiyear over prior year profit refunds that we received in the 2017 first quarter. Along with our own hospitality we're pushing hard with an effort to maximize our revenue management strategies and controlling costs as much as possible.

We're aggressively looking for any additional revenue opportunities and working with our franchise owners to implement new measures that will help our owners regain some of the loss margins.

For example in our 36 comparable hotels we increased other revenue by almost 18% in the quarter driven by parking revenue which is up 20% in the quarter and improved our revenue $200,000.

The cancellation fee policy that was adopted by basically Marriott and Hilton with the adopted 48 hour policy, actually we collected fees in the quarter of about $50,000. Additionally we are rolling out amenity packages in [hotel] room tax which are also adding to our top and bottom lines.

On the expense side of our margins we are already very lean from a staffing perspective but we continue to work away to further improve efficiency and reducing limits.

Again we have -- we were able to hire part time labor in certain markets and eliminate the equivalent full time position which comes with incremental cost of benefits, we are challenging the brands to address the operating model of select-service and extended-stay hotels and limited-service hotels without sacrificing today's traveler experience.

We are reducing amenities such as newspapers for staying guests by approximately $15,000 in the quarter, we are beta testing to increase the hospitality hours to [collect their bills], turning off offerings and focusing on our guest service contact, we were able to reduce those costs by approximately $10,000 in the quarter.

All of these savings are just on a limited trial business but initially they are encouraging. We have to be confident about our guest expectations and their experience, experience with similar hotels, so we may try and offer some of these initiatives or at least alter those initiatives at certain hotels.

On the CapEx front during the quarter we converted some empty space into two additional guest rooms at our Marina Del Rey Hilton Garden Inn creating approximately $800,000 of value.

We continue to look at our existing assets and find ways to enhance value whether that's through continued conversion of alternative space into guest rooms or enhancing our guest experience by adding for example small bars while delivering an attractive return. I'm going to go ahead and turn it over to Jeremy..

Thanks, Dennis. Good morning, everyone. For the quarter, we reported net income of $3.9 million or $0.6 per diluted share compared to net income of $4.6 million or $0.12 per diluted share in Q1 2017.

The primary differences between net income and FFO relate to noncash costs such as depreciation which was $12 million in the quarter, onetime gains or losses in our share of similar items within the joint ventures was for approximately $1.7 million in this quarter.

Adjusted FFO for the quarter was $16.5 million compared to $18.1 million in Q1 2017, a decrease of 8.8%. Adjusted FFO per share was $0.36 compared to $0.47 per share generated in Q1 2017. Adjusted EBITDA for the company declined 6.1% to $26.4 million compared to $28.1 million in Q1 2017.

In the quarter our two joint ventures contributed approximately $3.1 million of adjusted EBITDA and $900,000 of adjusted FFO. Chatham received $1 million of distributions from JVs in Q1. First quarter RevPAR was up 0.9% in the Inland portfolio and up 1.1% in the Innkeepers portfolio. Our balance sheet remains in excellent condition.

Our net debt was $528 million at the end of the quarter and our leverage ratio is 33.6%. In Q1 we refinanced our $250 million unsecured revolving credit facility, which extended the maturity from November 2020 to March 2023 and lowered our borrowing cost by up to 15 basis points depending on the leverage level.

Transitioning to our guidance for Q2 and full year 2018, I'd like to note that it takes into account the anticipated renovations of the Residence Inn Mountain View and Residence Inn Tysons Corner in Q2, the Homewood Suites Dallas in Q3 and the Residence Inn Sunnyvale 1 and the Homewood Suites Farmington in Q4.

Our guidance also assumes that we close the $21 million acquisition of the Residence Inn Summerville, South Carolina on July 1 and finance the purchase using our credit facility. We expect Q2 RevPAR growth to be flat to up 1.5% and full year 2018 RevPAR to be down 1.5% to up 0.5%.

Our RevPAR guidance assumes the current strength of solid GDP growth combined with above average new supply in the upscale segment will continue throughout the rest of the year.

As a reminder a full year RevPAR forecast has been impacted by difficult comps for our four Houston hotels which benefited from the Super Bowl in Q1, 2017 and increased demand after Hurricane Harvey in Q4, 2017, and our three hotels in Washington D.C. area which benefited from inauguration in Q1, 2017.

Our full year forecast for corporate cash G&A is $90.8 million. On a full year basis the two joint ventures are expected to contribute $15.8 million to $16.4 million in EBITDA and $6.2 million to $6.8 million of FFO. I think at this point operator that concludes our remarks. And we'll open it up for questions..

Thank you. We'll now be conducting a question-and-answer session [Operator Instructions] Thank you. First question comes from the line of Anthony Powell with Barclays. Please proceed with your question..

If you kind of exclude all the comp issues in the quarter, did you see that improvement in business travel across the quarter that many of the other lodging companies reported so far?.

Anthony we've seen some of that if you look kind of at our [structured] corporate business it was up kind of in the 3% to 4% range across our portfolio. So, we could see a little bit of that which is encouraging..

Got it. Thanks.

And could you just update us on the acquisition environment, are you seeing attractive hotels out there for purchase? What's the pipeline look like?.

I'd say that the pipeline for us right now is pretty thin, but we have our usual I'd say one or two stuffs that are direct conversations with owners. We're working on as you could probably see from any purported transactions or otherwise it's been pretty quite this year so far.

I think a lot of owners are probably either pricing back up again compared to last year simply because -- or holding on because we still refinance at pretty attractive rates particularly with the prospect of interest rates going up. So that's our competition more than any today simply the refi market..

Got it. And given that you guys haven't bought back stock or have re-purchasers of your stock in recent years.

Is that a more attractive option given some improvement to [travel] and the dilution of your stock?.

We never take that off of the table. Obviously, if you have [bad stuff] then we're always going to measure, the Board will look at that, and look at our implied cap rate and multiple.

But I think that we have been pretty successful in borrowing hotels that not only have a decent going in cap rate but I think have shown good growth going forward to a cap rate range that still even with today's stock price at this level anyway is north of a 7.5 to 8 cap kind of valuation..

And one more housekeeping from me.

I mean the net income guidance was down for the full year, what caused that decline?.

That was just a change in depreciation..

[Operator Instructions] And at this time I'll turn the floor back to management for further remarks..

We appreciate the time everybody spent this morning. And we are looking forward to a little bit to continued a little bit better environment as we move through the year. We will see folks at [Maybury] in New York we hope, so please let us know if you want to have a meeting and look forward to that opportunity. Thank you all..

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