Greetings, and welcome to the Chatham Lodging Trust Third Quarter 2019 Financial Results 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 Daly Gray. Thank you, Mr. Daly. You may begin.

Thank you, Devin. Good morning, everyone, and welcome to the Chatham Lodging Trust third quarter 2019 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 October 31, 2019, 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 into Chatham's 2019 third quarter results, allow me to introduce Jeff Fisher, Chairman, President and Chief Executive officer; Dennis Craven, Executive Vice President and Chief Operating Officer; Jeremy Wegner, Senior Vice President and Chief Financial Officer. Let me turn the session over to Jeff Fisher. Jeff?

Alright, thank you, Chris. Good morning, everybody. Glad to be here again. Earlier today, we reported our third quarter results and RevPAR finished at the upper end of our guidance range and adjusted EBITDA and FFO beat consensus in the upper end of our guidance due to very strong margin performance that we will talk about here. With our two 2018 acquisitions ramping up, our third quarter adjusted EBITDA rose over 3% and adjusted FFO rose over 2% after accounting for the sale of our two Western PA assets earlier this year. Our improved performance in the third quarter is driving our raised guidance for the full year which is nice to deliver to our shareholders. As we initially guided at the beginning of the year and as reminded everyone since then, we do have a very tough fourth quarter RevPAR comp due to the significant amount of revenue we earned in 2018 from the gas explosions in North Boston, as well as a huge quarter in San Diego. Our 2018 fourth quarter RevPAR grew 4.1% as a reminder, that was driven by a whopping 36% gain at the four hotels, which benefited from the gas explosions and 34% RevPAR gain in San Diego last year. Turning back to our third quarter. This year, I'm particularly proud of our ability to increase operating margins in the quarter as I said, when comparable RevPAR was down 30 basis points. Even when you look at our year-to-date performance, our comparable operating margins are only down 10 basis points, while RevPAR has declined 50 basis points. This performance of course is not typical, nor what you should expect from us going forward when RevPAR declines, but I will say that we have invested and are continuing to invest a tremendous amount of energy…

Thanks, Jeff. Good morning everyone. RevPAR declined 30 bps to $145 in the quarter for our 40 comparable wholly owned hotels. ADR rose 0.5% to $173 while occupancy declined 80 basis points to a very strong 85%. We had some nice RevPAR gains in four of the top six markets. Houston continues to be weak and LA is underperforming our expectations by a little bit. October RevPAR is forecast to be down a little over 5% for our portfolio with most of all of that decline due to the four Boston gas explosion hotels that helped us in 2018 as well as the San Diego market from 2018. And we've also got a little bit of an extended renovation going on at our San Mateo Residence Inn that's carried into the fourth quarter. Looking into our six largest markets. So starting with Silicon Valley, which is by far our largest market contributing approximately a fourth of our EBITDA. RevPAR was up almost 5% to $194. ADR was up 3% to $245 and occupancy was up 2% to 90%. Our hotels did a fantastic job with some of our key corporate accounts, including welcoming our largest group of interns earlier this summer. San Diego represents our second largest market and RevPAR was up 1% in the quarter to $180 over a pretty tough comp in the third quarter of '18. Our Mission Valley Residence Inn had a solid quarter with RevPAR up 3% as it continues to battle and absorb new supply over the last couple of years in that market and our Gaslamp Residence Inn was down 1% as Downtown San Diego as Jeff alluded to a bit earlier had a pretty big second half of 2018. Washington D.C. experienced a RevPAR gain of 5.4% to $152 driven by strong…

Thanks, Dennis. Good morning, everyone. For the quarter we reported net income of $10.1 million conversion netting from a $14.7 million in Q3 2018, $3.3 million of the decline was related to impairments recorded on three hotels and the JVs in Q3 2019. The primary differences between net income and FFO relate to non-cash costs such as depreciation, which was $12.9 million in the quarter, other charges which were $0.3 million, and our share of similar items within the joint ventures, which were approximately $5.3 million in the quarter. Adjusted FFO for the quarter was $28.6 million compared to $28.4 million in Q3 2018, an increase of 1%. Adjusted FFO per share was $0.60 compared to the $0.61 per share generated in Q3 2018. Adjusted EBITDA for the company increased 2.1% to $39.4 million compared to $38.6 million in Q3 2018. In the quarter our two joint ventures contributed approximately $5 million of adjusted EBITDA and $2.6 million of adjusted FFO. Third quarter RevPAR was down 0.3% in the Inland portfolio and down 1.5% in the Innkeepers portfolio. Our balance sheet remains in excellent condition. At the end of Q3 we had $86 million drawn under our revolving credit facility and $164 million of remaining availability. Our reasonable leverage and significant credit facility availability will enable us to fund the remaining $50 million of costs for our $65 million Warner Center California hotel development entirely with our credit facility. At the end of Q3 we had $574.9 million of debt. Our weighted average cost of debt was 4.5%, and our weighted average debt maturity is 4.2 years. Transitioning to our guidance for Q4 and full year 2019, I'd like to note that our Q4 guidance takes into account the renovations of the Residence Inn San Mateo and Residence Inn Sunnyvale…

Thank you. We will now be conducting a question-and-answer session. [Operator instructions]. Your first question comes from the line of Ari Klein with BMO Capital Markets. Please proceed with your question.

You mentioned EBITDA margins are holding up a little bit better despite the RevPAR declines. But you also mentioned not to necessarily expect that kind of performance going forward. How should we think about the trade off between RevPAR and EBITDA as we look to next year?

Hey, Ari, this is Dennis. Thanks for joining the call. Appreciate you being with us and with Chatham. So listen, I think specifically when we look at the fourth quarter obviously with RevPAR down 5% to 6.5%, there's no way in heck we're going to be able to maintain our margins for the fourth quarter. But as you asked as we look ahead to 2020, we've been pretty consistent in saying that for our portfolio it's going to take somewhere around the 2% RevPAR gain on a stabilized basis to be able to maintain our operating margins. I think as we've continued to make things a little more efficient and really driving the other revenue over the past kind of six quarters or so and we still got some ramp in that, that number comes down a little bit as we move into 2020. So, I think we still got some run rate for year-over-year growth there. So maybe that comes down into the zero to 1% RevPAR gain and we can possibly maintain margins. But I think certainly we believe that it's a little bit less for our portfolio than that 2% as we move into 2020, but I think that's pretty encouraging compared to a lot of our peers.

And then the four hotel renovations for next year, was that always part of the plan or you pulled back a little bit given the current environment?

We actually -- it's -- we originally scheduled for -- it's a great question. We originally scheduled for five hotels. The one that we pushed into 2021 from 2020 is our Hampton Inn in Portland, Maine, which is just due to condition and performance we were able to -- I think we can competitively push that off 12 months. So it was five, we pushed that down to four.

Okay, and then just last one from me. To what extent has the parking fees been rolled out across portfolio. How much opportunity you think is left in that?

There is a couple of different opportunities related around. So we still have a few hotels that we are not charging for parking yet. So ultimately we'd like to say that we will roll out something there. But there is two other parts to it, which is; one, is continuing to find markets that can absorb rate increases; and two is and what I alluded to in my prepared comments is the execution of charging and collecting those parking revenues whether that be for a transient customer or in the essence of a corporate customer where we're negotiating a rate for next year. In the past we might have waived parking charges or we might not have had parking charges. So as we move forward into 2020 we have to analyze for the total revenue for a corporate customer to say, hey are we going to be able to get the right rate out of this customer A or customer B, depending on whether we're going to be able to include parking or charge for parking for that customer. So, we still have some ramp as we get into 2020 to grow that revenue line item.

Thank you. Our next question comes from the line of Tyler Batory with Janney Capital Markets. Please proceed with your question.

So I wanted to follow up a little bit more on the third quarter specifically. Can you just talk a little bit more about some of the markets that showed some variants versus your budgets? And I'm also curious, I know you called out some weaknesses in Houston, Los Angeles and Boston. How did performance in those three markets come in versus what you guys were originally budgeting?

Hey Tyler this is Dennis. I mean especially compared to our expectations, I think, Silicon Valley was better to the tune of a few hundred basis points better than what our third quarter expectations were. Houston was pretty much spot on our expectations for the quarter. I think maybe it was -- our expectation was down 16 and it was down 17, it was pretty darn close. And the same for Boston. So generally we were right on top of what our expectations were. The biggest outperformer compared to what we -- in our guidance was Silicon Valley with -- and that was an outperformer to the positive.

Okay. And then how about the Houston, Los Angeles and Boston?

Houston and Boston were spot on, basically very close to our expectations for the third quarter. LA was weaker. And I don't have the number on it but it was definitely weaker by 100 or 200 basis points compared to what we had built into our guidance for the third quarter. And that's primarily due to our Anaheim market, which is just still weaker than what we thought with the Star Wars opening in June.

Okay, that makes sense. And then switching the guidance here, if you could talk a little bit more about what you're seeing early in the fourth quarter? Has is your view on how the fourth quarter is going to shape up changed since the last time you guys reported?

No, it's basically in line. For October, right now, obviously we’re at October 31, but our expectation is for RevPAR to be down kind of in the 5 to 5.5 range for October. And if you actually look at the three kind of main disruptors for us in the fourth quarter, which is the four gas explosion hotels, the few San Diego hotels, and the San Mateo extended renovation, you back those out and our October RevPAR is down -- it's either flat to down kind of 50 basis points in that range. So those, obviously -- four -- those three different items have about a 500 basis point impact on where our October performance is.

Alright, and last question from me. If you could talk a little bit more about the 2018 acquisitions, how the ramp up is going at those assets?

Yes, I mean, I think consistent with what we talked about last call, Tyler, the acquisitions are, I think underperforming in terms of total revenue, especially at our Summerville Residence Inn. I will say that as we've kind of gotten through October, Summerville is doing a little bit better than what we -- what has been the run rate for the last few months. The Dallas Downtown hotel, even though it's underperforming our original model, I think -- listen, I think we're very encouraged by the efforts of our team there. And I think, because it has -- because the Courtyard has not only a tie in given its proximity to the convention center, and getting a handle on that business and bringing it in house, it also has some nice meeting space on the bottom and the top floor. And I think it's taken some time to ramp up those sales efforts to get that business coming in that hopefully we'll see some growth -- some outsized growth in 2020 at that hotel.

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

Just stepping back, others in the industry have reported kind of a deceleration of business in leisure, travel trends in September and October. It seems like you are seeing more stable trends. Is that the case and why do you think that is?

I mean, listen I think part of that Anthony -- good morning to you. I think part of it is we've absorbed a lot of new supply over the last couple of years that has waned in 2018 and 2019. So that's certainly helpful for us especially in our asset classes. And I think that's probably the biggest reason behind that is really just we're, I think, hopefully starting to see the end of that. I mean we've got hotels that are starting to -- that have been hit pretty hard in the past such as Cherry Creek, Savannah, which had pretty decent quarters with mid to upper single-digit RevPAR gains. So I think a little bit difference this year versus last year is we're starting to see a little bit of a change there.

And I do think -- Anthony, it's Jeff, that sometimes management the teams or others will just comment on slowing demand and attribute frankly in my view new supply to -- well not attribute the new supply to what they say is just slowing demand, let's put it that way. In reality most of the issue seems to be new supply, very competitive pressures particularly on ADR that we're all familiar with in these markets because occupancy for the most part is stable or down 50 basis points max. So that kind of tells you that there's still plenty of people out there wanting to travel.

And just going to Houston, the RevPAR there is $84 I think that's 43% below your portfolio average. At what point does that market become non-core, something that you may want to exit?

Well, it's certainly had a pretty huge decrease from the peak there so far. I think that we're going to still be a believer in Houston as one of the top markets and top cities in the United States and I think stay with the hotels because we're not really fond of exiting something at the bottom. I think growing and diversifying is another way to kind of get out of the Houston problem frankly over time and just have less exposure there by growing as opposed to just cut and run. But we will see where this thing goes.

And on Silicon Valley, demand seems pretty strong there despite some supply growth. Can you update us the plan that you have to expand your hotels in that market?

I think at this point, our table will continue to -- we've got a great real estate and a lot of land there. So as land get sucked up at all these trillion dollar companies and everything we like having that -- those plots of land. But as far as the expansions at the moment, those are tabled.

Thank you. Our next question comes from the line of Bryan Maher with FBR Riley. Please proceed with your question.

Good morning. Shifting gears a little bit. I think you made a comment about unreasonable seller expectations kind of being prohibitive when it comes to making acquisitions. At what point do you consider maybe putting a couple of hotels on the market to play into that high valuation that they're getting?

We're always looking at that, as you know Bryan and we try to see where the real opportunity is to make a good positive spread on a trade. And we'll continue to look at that. And I wouldn't be surprised as we move forward in the next 12 months that we take advantage of one or two of those kind of opportunities.

Okay. And then the Warner Center hotel, when is that scheduled to open again?

It's going to be some time middle of 2021?

And are there thoughts within the REIT to maybe pursue another development opportunity besides that?

Yes, I mean, I think we talked about it previously, Bryan. I think we would certainly be open to doing on a limited basis, whether that's another one or one or two more. But they're probably going to be staggered in terms of timing to some degree. So listen, I think we believe we can generate some good value there. So especially as Jeff just talked about, potentially selling a couple of hotels opportunistically and taking some of those proceeds and putting it into an investment. We believe that delivers a little bit more return.

But there's not a development opportunity kind of imminent in the next quarter or two outside of Warner, correct?

Not in the immediate future, no.

Okay. And then lastly from me on the labor costs. I mean it was good to see that the benefits were coming down as a cost. But can you talk about what specifically in the benefits, was it healthcare? What was it that drove the benefits component down? In which markets are you operating in where labor costs continue to put the most pressure on you?

So yes, so on the benefit side, it's a combination of premiums on the health side, as well as claims on the health side. And the third point is workers’ comp, which is also down year-over-year. So, I think on the premium side, again, going back to the -- our platform and our close working relationship with Island Hospitality to have an owner such as Chatham where we can sit in with our operating partner, and on renewal meetings and talk about plan design, premium allocation, co-pays, availability of drugs, networks, you name it, we've made some tweaks there, and we were a little bit more aggressive in 2018 to reduce those costs. But we have seen a pretty good drop in claims both on the health side and the workers’ comp side. And we've invested some dollars into incremental -- not we but Island invested some dollars on the risk management side that I think have been pretty beneficial in reducing and being a little more active on health and workers’ comp claims as far as addressing, closing and minimizing, keeping a claim open that just incurs additional costs. So, I think those investment dollars have paid off as well already. So, I think that's that. And then I think the second question was wage pressures in key markets. Listen, the main thing for us, obviously we've got a lot of value in California and in Seattle, those are those have clearly been the markets where demand, labor demand is high and the availability of labor has shrunk. So we're certainly still seeing the most pressure out West.

Thank you. We have no further questions at this time. I'd like to turn the floor back over to management for closing remarks.

We appreciate everybody's attendance today. Good questions today and we tried hard to set the expectations straight for the fourth quarter. The overall year results even when you take those results in, we think are pretty much right in line and feel good about where we're headed in terms of some new initiatives for 2020 that we're working on with the operator and the operating team to again maximize EBITDA here in a flattish I'll call it RevPAR environment. So we're going to keep blocking and tackling on those fronts and look forward to speaking with you again soon. Thanks a lot.

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