Chatham Lodging Trust (CLDT) Q1 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, welcome to the Chatham Lodging Trust First Quarter Results Conference Call on the May 8, 2012. [Operator Instructions] I will now hand the conference over to Jerry Daly. Please go ahead sir.

Thank you, Patricia, and good morning to everyone, and welcome to the Chatham Lodging Trust First Quarter 2012 Results Conference Call. Yesterday, after the close of the market, Chatham released results for the first quarter ended March 31, 2012 and I hope you've had a chance to review the press release. If you did not receive a copy of the release or you would like a copy please call my office at 703-435-6293 and we will be happy to email one to you or you may view the release online of Chatham’s website www.chathamlodgingtrust.com. Today's conference call is being transmitted live via telephone and by webcast over Chatham’s website and Streetevents.com. A recording of the call will be available by telephone until Midnight on Tuesday May 15, 2012 by dialing 1-800-406-7325 with a reference number of 4532674. The replay of the conference call will be posted on Chatham’s website. As a reminder, the conference call is the property of Chatham Lodging Trust and any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Chatham is prohibited. Before we begin, management has asked me to remind you that in keeping with the SEC Safe Harbor Guidelines, today’s conference call may contain forward-looking statements about Chatham Lodging Trust, including statements regarding future operating results and the timing and composition of revenues among others. Except for historical information these forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially including the volatility of the national economy, economic conditions generally and the hotel and real estate market specifically. International and geopolitical difficulties or health concerns, governmental actions, legislative and regulatory changes, availability of debt and equity capital, interest rates, competition, weather conditions or natural disasters, supply and demand for lodging facilities in our current and proposed market areas and the company’s ability to manage integration and growth. Additional risks are discussed in the company’s filings with the Security and Exchange Commission. All information in this call is as of May the 7, 2012 unless otherwise noted and the company undertakes no obligations to update any forward-looking statements to conform the statement to actual results or changes in the company’s expectations. During this call, we may refer to certain non-GAAP financial measures such EBITDA and adjusted EBITDA which we believe to be common in the industry and helpful indicators of our performance. In keeping with SEC regulations we provided and encourage you to refer to the reconciliation of these measures to GAAP results in our earnings release. Now to provide you with some insights in Chatham’s 2012 first quarter results, I would like to introduce Jeff Fisher, President and Chief Executive Officer and Dennis Craven, Chief Financial Officer. Now let me turn the session over to you Jeff.

Thanks, Jerry good morning everyone. We’re excited to be here this morning to talk you about our solid first quarter results and equally as excited to announce a 14% increase in our quarterly dividend. We know dividends are the key driver of lodging REIT returns over time and our commitment to shareholders at our IPO was to provide and maintain an attractive sustainable dividend over time. We’ve delivered on that commitment every quarter since our first full quarter following our IPO. Our confidence to increase the dividend was based on Chatham’s strong operating results for the first quarter and our expectation for a strong 2012 together with very favorable underlying supply and demand fundamentals for the industry. Our business plan is to build a high quality portfolio of premium branded select service and upscale extended stay hotels in great markets with high barriers-to-entry that will provide industry leading cash flow and strong revenue and EBITDA growth. The investments we’ve made with our 18 wholly owned hotels as well as our investment in the joint venture with Cerberus in the Innkeepers portfolio are right in line with our plan. A very important component of our original investment decision was how and when to complete the improvements that were needed to position our hotels for optimal success. We made the conscious decision to expedite the renovations during the early phases of the lodging recovery and we are seeing those benefits now. We believe Chatham is well positioned to benefit handsomely in 2012 and beyond with minimal renovations needed through 2016. Displacement will be the de minimis, margins will continue to outperform and thus cash flows and cash returns to our shareholders will be strong. I want to talk about our strong first quarter results for a few minutes. For the quarter, we generated adjusted FFO per share of $0.21, $0.02 ahead of consensus and $0.01 above the range we provided on a RevPAR growth of 12.5% and strong hotel EBITDA margins of 35.1%, that’s up 440 basis points. Both our core hotel portfolio and our JV portfolio generated impressive RevPAR growth with our owned-hotel portfolio generating RevPAR growth of 12.5%, as I said in the first quarter, record growth for Chatham and our joint venture portfolio seeing RevPAR growth of 9.1% well ahead of the 7.9% growth in the industry. Part of the reason for Chatham’s RevPAR growth results from easy year-over-year comparisons but what is very encouraging is that the 8 hotels under renovation in the first quarter of 2011 gained significant incremental market share this year in the first quarter and continue to do so. These incremental gains allowed us to produce RevPAR growth above the range we provided to you. With incremental RevPAR improvement and aggressive asset management, our EBITDA and GOP margins grew a healthy 440 basis points and 390 basis points respectively. We are very pleased with these improvements in the first quarter, further bolstering our position as the industry leaders in margin performance. Of course, one of the thesis of our business plan is that the operating leverage in the select-service model is very powerful. We've talked about that a lot. We were able to generate an increase in EBITDA of 29.1% for the 18 comparable hotels on RevPAR growth of 12.5%. This equates to a 2.3x flow-through multiple, which is very encouraging given that 2/3 of our first quarter RevPAR growth was attributable to occupancy. This bodes well for the performance of this portfolio as the cycle matures and a larger component of the RevPAR increase will be driven by ADR increases and not occupancy increases. Before Dennis jumps in, I would like to provide an update on the 6 hotels operated by Hilton. Those were 6 Homewood Suites. As we noted in February, we were not pleased with the overall performance of the hotels managed by Hilton in 2011. Having said that, I would be remiss without pointing out that these 6 hotels performed much better in the 2012 first quarter. Hilton’s management of these hotels was set to expire in April 2013 and after discussion with Hilton we mutually agreed to transition the management of these hotels from Hilton to Island Hospitality beginning in the second quarter. Management for 2 of the 6 hotels moved on April 1 with another 2 transitioning on May 1 and the remaining 2 transitioning this summer. No termination fees or other costs were incurred by Chatham, and as a result of the transition, Island will be managing these hotels under the same general fee structure as Hilton would with base fees of 2%. With that I would like to turn it over to Dennis for more details.

First quarter RevPAR was up 12.5% on an increase in occupancy of 8.5% to 77% and an increase in average daily rate of 3.6% to $128. We expected occupancy to make up the larger components of the RevPAR gains in the 2011 first quarter because of the renovations that we completed in the 2011 first quarter. We more than made up for the market share we lost last year during the renovations, and as a result our RevPAR growth pleasantly exceeded the upper end of the range we previously provided. As we move through 2012 and beyond, we expect the mix of ADR and occupancy gains to shift to be more driven by rates versus occupancy. Adjusted EBITDA almost tripled for the quarter to $8.6 million from $2.2 million in 2011 due to the significant acquisitions we made in 2011, primarily the 5 hotels that we bought outright from Innkeepers in July 2011, and the $37 million joint venture investment that closed in late October 2011. Adjusted FFO was up 93% to $2.9 million or $0.21 a share, $0.02 ahead of consensus estimates of $0.19 and $0.13 per share in the 2011 first quarter. For the quarter, we reported net loss of $1.7 million or $0.13 per diluted share. Included in this loss is a net loss of $0.6 million related to the GAAP net loss of the joint venture. Non-cash charges for depreciation and amortization of $3.3 million were the primary drivers of Chatham’s net loss in the 2011 first quarter. I do want to point out a new line item within our revenue expenses on our income statement which is cost reimbursements from unconsolidated real-estate entities. It is merely line items that are shown to present on a gross basis, the cost reimbursed to Chatham for employees of Chatham who perform work for the joint venture as Chatham’s role as managing member of the joint venture. These items completely offset, have no impact on net income, EBITDA, or FFO. With respect to the joint venture investment we are very pleased with the results of operations within the joint venture with RevPAR, EBITDA and NOI exceeding our internal expectation. Normally we don’t intend to give out joint venture data but given the fact that this is recently completed investment we did want to give everyone a glimpse of some key metrics for the quarter within the joint venture. RevPAR was up 9.1%, hotel EBITDA margins improved 520 basis points to 34%, hotel NOI advanced 31% on a year-over-year basis. We did close on the sale of one hotel last night, the Boston Bulfinch hotel for over $18 million resulting in $1.8 [ph] million distribution to Chatham today. We do have 12 other non-core hotels listed for sale within the joint venture, 4 of which are under executed purchase and sale agreements with the remaining 8 hotels under various stages of agreement. Net proceeds on the remaining 12 hotels after repayment of debt, we expect will be about $40 million which will be distributed to the partners’ pro-rata. We expect those sales to close within the next 6 months. After the proceeds are distributed to the partners we expect Chatham’s remaining investment in the joint venture to be approximately $18 million after the sales, roughly about 50% of our initial $37 million investment. After the proceeds of the asset sales are distributed, the joint venture will return almost half of the initial equity to both Chatham and to Cerberus. We are using distributions to pay down our line of credit and based on the FFO of the underlying assets that we are selling the impact to Chatham’s FFO is really only about a $0.01 or so dilutive. We closed the quarter with approximately $8.8 million of cash and total assets of almost $450 million. Total debt outstanding was $223 million at a weighted average rate of approximately 5.8%. Included in debt outstanding is $62 million on our $85 million line of credit and our ratio of debt to investment in hotels at cost including the investment in the joint venture was about 51%. As we continue to pay down our line of credit with proceeds from assets sale within the joint venture and free cash flow we will certainly be freeing up a bit of capacity within the line to potentially make acquisitions in the future. Our debt coverage is projected be over 2.0x during 2012 which provides sufficient cushion to pay meaningful dividends and we of course were very excited be able to bring to our shareholders a 14% increase in the dividend to an annualized rate of $0.80 beginning with our 2012 second quarter dividend. Looking at the second quarter briefly RevPAR for the second quarter has gotten off to a good start with April RevPAR up 9.2% excluding our White Plains hotel. In the last weeks of March we did have a fire at our White Plains hotel which took 43 rooms or approximately 1/3 of the hotel out of service. However within a month of incident all, but one of the rooms are back on line and are available for rent. Business interruption insurance is going to cover any of the lost profits at the hotel, so the actual impact from the fire will not impact our second quarter earnings. With respect to our guidance, we provided initial guidance for the 2012 second quarter within the release and increased slightly our full-year guidance based on the first quarter out performance and a slight upward adjustment for improved RevPAR and margins. Our guidance assumes no macroeconomic factors that are out there that are unknown at this point of time which could have a negative effect on the industry. From a capital perspective, we expect remaining capital spend in 2012 to be approximately $5 million for the renovations that are planned for the fourth, $1 million for maintenance CapEx and $1million as we wrap up the final payments for renovation that have been completed. Operator that concludes our remarks at this time and we will turn it over to you for questions

[Operator Instructions] There appears to be no audio questions at this time. Please continue with any other points you wish to raise.

Okay, well we will wrap it up. It is unusual there is no questions, but we will be -- Dennis and I will be of course be in the office here available to anybody that has any follow up. To wrap it up 2012 should be a great year for Chatham. Our operating team is strong and our hotels are well positioned to benefit from our continued surge in RevPAR with industry leading margins, cash flow and dividends which will be strong and meaningful and sustainable. Thank you all for your support and we look forward to talking with you soon.

This concludes Chatham Lodging Trust's First Quarter Results Conference Call. Thank you for participating. You may now disconnect.