Greetings, and welcome to the Chatham Lodging Trust's Second Quarter 2018 Financial Results Conference Call. At this time, all participants will be in a listen-only mode. A 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 your host Mr. Chris Daly President of Daly Gray, Inc. Thank you. You may begin.

Thank you, Melissa. Good morning, everyone, and welcome to the Chatham Lodging Trust’s second 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 August 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 2018 second 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 we reported our results for the second quarter and by most key metrics finished at the upper end of the guidance range. RevPAR improved 0.08% versus our guidance of flat to up 1.5. Adjusted EBITDA of $37.6 million and adjusted FFO per share of $0.59 finished at the upper end of our guidance range, driven by improving performance at our JVs. Our RevPAR performance was right in line with our midpoint, and it was pretty clean quarter from a comparison prospective. Our guidance factored in the impact from renovations at our residents in Mountain View, that’s Silicon Valley, and Homewood Suites in Billerica. We did have a big roof fleet at our Dallas Market Center Homewood Suites after a rainstorm that caused us to have up to 35 rooms out of water for the portion of the quarter and that displacement impacted our RevPAR performance by 25 basis points in the quarter. Looking at our more significant markets in the quarter, RevPAR in our four Silicon Valley Residence Inns was up 0.5% to a strong $190, driven by an increase in ADR of almost 3% on occupancy of 81%. But those numbers would have been much better considering that we completed a major upgrade to our guest rooms in Mountain View, as I mentioned. But that renovation adversely impacted our portfolio RevPAR overall by almost 50 basis points for the quarter, and RevPAR at our four Silicon Valley hotels, when you look at them all together, would have jumped 4%, excluding the displacement from the Mountain View renovation. I think that's pretty telling just in terms of how strong demand remains in Silicon Valley. Obviously companies are doing well, growing and hiring. At the same time, we’ve talked…

Thanks, Jeff. Good morning. Our RevPAR increase of 0.8% in the quarter was driven by a 0.6% increase in ADR to $172 and a 0.2% increase in occupancy to a solid 83%. For our portfolio, booking trends remained very short term and growth this year has been primarily on the corporate side, up 1% in terms of revenue dollars. As I mentioned on our last call, along with Island Hospitality, we are aggressively implementing additional revenue opportunities. For example, at our 36 comparable hotels, we increased other revenue by almost 12% in the quarter, driven by parking revenue primarily, which is up $300,000 or 22% year-over-year. We’ve also rolled out some in-room amenity packages that are proving fruitful, and we’ve seen an increase in the 48-hour cancellation revenue as well as other revenue related to no-shows of approximately 75,000 in the quarter. On the room revenue side, we’re working very closely with our own hospitality team to ensure that we are maximizing revenue on shoulder and weekend nights which involves a more nimble with respect to pricing changes, overriding reservation system recommendations and other items like that. Today's pricing environment is very sensitive, requires much effort to stay on top of your markets and your competitors. These are great examples of the benefits of having the relationship that we have with our operator, and while we believe our platform with our own hospitality is the best model, especially in select service and extended-stay asset classes. Our reported second quarter GOP margins were 48.9%, down 50 basis points year-over-year, and our hotel EBITDA margins were 41.5%, down 70 basis points in within our guidance range of 41.4% to 41.8%. Despite the modest RevPAR gain, we were able to maximize -- or minimize our margin loss due to pushing harder than ever…

Thanks, Dennis. Good morning, everyone. For the quarter, we reported net income of $13.5 million or $0.29 per diluted share compared to net income of $5.1 million or $0.13 per diluted share in Q2 2017. In Q2 2017, we recorded a $6.7 million impairment on our Springhill Suites Washington, Pennsylvania, property. The primary differences between net income and FFO relate to non-cash costs such as depreciation, which was $11.9 million in the quarter; other charges, which were $300,000; our share of similar items within the joint ventures, which were approximately $1.8 million in the quarter. Adjusted FFO for the quarter was $27.4 million compared to $25.2 million in Q2 2017, an increase of 8.7%. Adjusted FFO per share was $0.59 compared to $0.65 per share generated in Q2 2017. Adjusted EBIT for the company increased 7.1% to $37.6 million compared to $35.1 million in Q2 2017. In the quarter, our two joint ventures contributed approximately $5.1 million of adjusted EBITDA and $2.8 million of adjusted FFO. Chatham received $1.8 million of cash distributions from the JVs in Q2 2018. Second quarter RevPAR was up 5% in the Inland portfolio and up 1.9% and Innkeepers portfolio. We’ve completed a substantial amount of renovations in our joint venture portfolios over the last couple of years, and the results are beginning to show in the strong RevPAR performance. Both of our JVs should have very limited capital requirements for the next several years. Our balance sheet remains in excellent condition. Our net debt was $525 million at the end of the quarter, and leverage ratio was 33.3%. Transitioning to our guidance for Q3 and full year 2018, I’d like to note that it takes into account the anticipated renovations of the Homewood Suites Dallas in Q3 and the Residence Inn Sunnyvale I, Residence Inn Tysons Corner and Homewood Suites Farmington in Q4. Our guidance assumes that we close the $21 million acquisition of the Residence Inn Somerville South Carolina at the end of August and finance the purchase fusing our credit facility. We expect Q3 RevPAR to be minus 1% to plus 0.5% and full year 2018 RevPAR to be minus 1.5% to flat. Our RevPAR guidance assumes the current trends of solid GDP growth combined with above-average new supply in the Upscale segment will continue throughout the rest of 2018. As a reminder, our Q3 and Q4 RevPAR growth will be impacted by difficult comps for our four hotels in Houston and two hotels in Florida, which benefited from increased demand after hurricanes Harvey and Irma starting at the end of August 2017. Our full year forecast for cash G&A is $9.7 million. On a full year basis, the two JVs are expected to contribute $16.3 million to $16.7 million of EBITDA and $6.7 million to $7.1 million of FFO. I think at this point, operator, that concludes our remarks and we will open it up for questions.

[Operator Instructions] Our first question comes from the line of Bryan Maher with B. Riley FBR.

Maybe this is a question for Jeremy. At the end of the quarter, what was your acquisition capacity when you factor in your credit facility?

I think it’s about $125 million to $150 million. To kind get us back to the leverage level we were before, we raised the equity and completed the acquisitions we done sort of over the last year.

And then – and I apologize if I missed this, if I didn’t see it. Did you guys issue any shares under the ATM in the quarter?

We did not.

And then lastly from me. Did I hear it correctly that property taxes were up about 9% in the quarter?

I think you saw that in our numbers. We did have a one-time correction to our Marina Del Rey -- Marina Del Rey Hotel that were certainly appealing and going to work through, but we have a one-time adjustment there for prior year property taxes.

I mean, we’ve seen that a couple of times now both in the first quarter and in the second quarter not just with Chatham but with a number of logging REITs posting some pretty meaningful property tax increases. Where do you think that that stops? Or should we just get used to it other than the lengthy period of appealing and hopefully getting some back?

Listen, I think for us Marina Del Rey was an acquisition a few years ago. The state of California is certainly very slow in getting out any type of supplemental types of property tax bills. We budget for it when we make an acquisition in states like that. In this case a little more aggressive related to how the state, and specifically the city, is looking at the ground lease value there in addition to the hotel value. So we're appearing it. But we try and factor those in when we acquire the hotel into our guidance and into our model, but certain states in California really is one of the worst as far as trying to be timely at all on that. So I think for us it's really driven by acquisition-type activity, and we did have a few last year, but we think those are in states that we’re pretty comfortable with. So we will see what happens. But I think for us at least all the California step is behind us.

And maybe just one more for Jeffrey. You said that the pipeline is thin but that you do have one. When you say you do have a pipeline, would you consider to the handful of properties? And can you give us any color where you are focusing at this time?

Hi, Brain. I’d say a handful is a proper description, if not even touch on the generous side, because we are really looking right now at this part of where we are in the cycle I think for more of a value-add kind of an acquisition. Because we think steady-state select-service hotels, or any hotel for that matter look that it’s just expensive out there. You got cost that we've all talked about that are rising. So we certainly don't want to buy something that we think is whatever cap -- we buy it at, call it, 7.5 or something and have it turn into a 7 or 6. So we want value-add. That makes it more difficult and that's where we rely on our management company to help heavily through this process and trying to find deals that have some opportunity for upside. Keeps the pipeline a little bit thin, however. You know that we don't really compete in heavily brokered deals. So that part is not something that we believe in and nor do we think really create shareholder value.

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

Just a question on the RevPAR guidance. You took down the top end by having 50 basis points. What drove that change in the guidance relative to where you were last quarter?

A piece of it was second quarter performance. So second quarter we basically kind of came in right above the midpoint of the 0 to 1.5, so alone and itself for the quarter brought it down at least about 25, 30 basis points. And really the next half of the year is really just a little bit of protection when we’re looking at the Florida and Houston markets. Right now we have Houston projected down like 37% in August and 21% in the fourth quarter – sorry, 37% in September and 21% in the fourth quarter. So we believe that those are fairly conservative. The impact of that to the overall guidance for the rest of the year from where we were before is another kind of 10 to 20 basis points. So those are your two things.

Just tailing on RevPAR, I mean it seems like you had some good demand growth in some of the markets that you highlighted, but RevPAR is still dissembling this 0-1 range. What has to happen for RevPAR to kind of get closer to at least the upscale average of roughly 2-ish percent that we are seeing?

Listen, I think for us we continue it even as we talked about with the industry and new supply coming down for us. Again, this is another quarter where if you look at it on a trailing 12 basis, now the impact of new supply for us is in the 2.5% to 3% range now. So, certainly as those numbers continue to trickle down, we will be able to drive a little bit more RevPAR growth. The great example of Silicon Valley, where we have absorbed a ton. Demand are strong. And again, outside of that Mountain View renovation, our RevPAR would have been up almost 4%. But as Jeff alluded to, we do have some markets such as Boston, the Route 128 corridor. We have three hotels. Boston has been a pretty lackluster market the entire year. And again, a lot of that’s supply-driven. So for it’s [Audio Gap] as that continues to leak off, we’ll be to drive at higher.

In some of these cleaner months where we don't have the sort of hurricane comps or the Super Bowl comps, RevPAR spend not too bad. Like June for Chatham RevPAR was up 2.5%. I think we said in the press release that July RevPAR is up about 3%. So we’re -- in months where there isn’t weird comps, we’re doing okay.

And I want to add to that too that I can think of four hotels really that drive the disparity that you’re talking between sort of the average, let’s say, for this kind of hotel that are down upper single digits or double digits in RevPAR. Their driving the results. We are seeing, as you we’ve talked about here, some very good performance in more markets than we first started the year at or ever anticipated when we did our budgets for 2018. So we don't want to come away by saying there that we don't see some of what everybody else sees, which is some decent demand and demand growth in the markets. But if you will look at a hotel like downtown Bellevue for us, you look at Billerica or you look at Burlington, Mass, I mean I could just name real fast, they are suffering some deep declines as brand new hotels open up and as many times an operator will do just starts with very low rates and grab some of your business at the get go. That always comes back. As we indicated downtown -- you look at downtown San Diego, you even look at Silicon Valley as we are absorbing that supply and the numbers start gravitating back towards low to mid-single-digit RevPAR growth. So I'm optimistic from that perspective. We got three hotels at least that we really need to absorb some more that supply.

That’s very helpful. And just looking out maybe for next year and even a year after, are any hotels that aren’t seeing that supply impact going to be impacted by new properties? If we can just look at your portfolio or what hotels you think may be at risk due to some supply growth that you know that’s coming or opening soon?

We for us there is still new supply coming in Houston market over time –

Houston and Denver I would think.

Houston and Denver are fairly – again, they’re two of the top market. So even though Nashville has a tremendous amount of new supply coming at our hotels in Brentwood, it does have a little bit of an impact on kind of the city wides are occurring downtown. But that hotel in Brentwood done a pretty good job despite all the new supply. So it's really Denver. It’s really Houston. And there are still something Dallas as well.

Maybe just one more. As you look for acquisitions, are there market where the supply growth not really is better than kind of the others because some of the markets that you described are markets where you bought recently. So how do you avoid these directly competitive supply issues as you look to buy new hotels?

Well, the biggest and best way to avoid it is to do your due diligence and make sure you understand what's common. We can all do that in a variety of different ways, but I think understand what's coming and then do an accurate or the best that you can do pro forma and account for that supply opening. But there are, as you well know by looking at the list, lots of markets that’s still are penciling anyway, lots of supply for 2019 and 2020. I mean, I think lodging econometrics came out with something about 2020 recently this week. I'm not sure I believe all the numbers because you have significant, and everyone has been talking about construction cost increases. But now you look at some of the tariff-related cost increases. Labor has always been the issue. I was just talking to a developer yesterday about a couple deals and he was telling me that, “Look, we fought the labor battle forever, Jeff, here and that’s been incrementally negative for our returns, but material costs, lumbar cost, aluminum costs, way, way up, record prices.” So I'm not sure that that’s really doesn't kind of also help in so far as what the supply picture looks like as you go out. But it does make it a little bit harder to buy hotels if you want to have a growing return and a growing cash flow such as we and our board wants when we make an acquisition.

[Operator Instructions] Our next question comes from the line of Tyler Batory with Janney Capital Markets. Please proceed with your question.

Just a few questions from me here. Can you just talk a little bit some of the recent hotels that you bought? How those have been performing versus your expectations and your underwriting?

We bought three hotels last year, the Springfield Embassy Suites, Hilton Garden Inn in Portsmouth, and the Courtyard in Summerville. Two of the three -- so the Summerville asset and the Springfield asset are outperforming our original expectations for this year. The Hilton Garden Inn in Portsmouth is underperforming our expectations. But when you roll all three up, they are a little bit better than what we originally underwrote for this year. Not significantly, but topline performance is doing okay there with the Hilton Garden in Portsmouth. Listen, it’s going to be a great long-term market. I think, as kind of the business shifts around within that market, we will be fine there. So I think we have made some adjustments to the management team at the hotel this year in the last few months, and we are starting to see things get a little bit better there. But all in all, the three acquisitions and slightly ahead of what we underwrote a math.

I think you mentioned this a little bit in your opening remarks, but any more details on what we are seeing with ERTA [ph] business? And then just given the pretty strong demand environment here, any change to how you are thinking about revenue management and your mix of occupancy in ADR?

I think we have spent a lot of time over that within the last few months. Revenue management and especially examining pricing is at an all-time high in terms of how often and how much you got to be involved in the process. I think Island Hospitality has done a great job getting a handle on the on the last few months. Listen, we've implemented – they’ve implemented structural changes and how they treat. They look at stuff on shoulder nights and weekends that we believe is providing a little bit of differentiation for us. And I think as – when we talked about in our prepared remarks, the volume of our online business and online bookings is up a little bit, but certainly as a percentage of our revenue is down. But it is more important than ever to be as flexible and as nimble as possible. And what we found, Tyler, in ADR and occupancy split is that especially on those shoulder nights and weekend nights, the brand, revenue management systems are – listen, there they hopefully drive as much ADR growth as possible, but in some cases, we found that they are too aggressive and we've got to do a little bit of a better job of overwriting those recommendations to benefit the hotel. And that's really been kind of one of the main focal point for us over the last few months.

Okay, great. And just last question from me maybe for Jeff. When you talk about the acquisition pipeline being a little bit same, I mean, can you share some additional thoughts on what’s your thinking or maybe some the hotel expansion you’ve touched on in the past or you move building properties on some of the excess lands you guys have?

Well, we certainly think and evidenced by our actions, we’re halfway through the year. We haven’t bought a hotel. Last year we bought three. We announced that we were interested in doing some development and are in fact pursuing that. But anywhere we do that, by definition, is going to be in a market with a pretty significant and lengthy entitlement periods of time and processes. So that takes a little bit of time. But I think the returns from those kind of activities are significantly better than what we're looking at in the market right now from most existing acquisitions. Again, I’m not completely bearish on our ability to buy, but we’re picky and were very picky. And we want to return and we don't want to see return go south from what we think is accretive or at least non-dilutive. We look our implied multiple through our share price every day. It’s not a few times a day and we’re pretty focused on being ahead of that number. So that's the way we’re looking at the world. And we do have a couple development deals that are in the entitlement process. We look for 10% on leverage returns when we do those deals and we know we can get them. Because they are in markets that we already own or operate hotels in, so therefore I think we, through the management company, understand the possibility and capabilities with those projects. When we look at expansion and we were very bullish on an expansion for Portland Maine. That hotel has continued to be on fire. Market is strong. Market has absorbed three to four new hotels downtown in historic waterfront district where we are. But also there's been some zoning changes in the last nine months that have made it now, I think, very difficult to expand or build another small hotel on our parking lot site that we thought we could. Now that's good news and bad news. Right? I mean, the good news is, there probably be less hotels built downtown, but I think we may at least for the time being not have an opportunity to do that expansion. But we will keep working. And I think as the year progresses, we will make an acquisition or two.

[Operator Instructions] Gentlemen, there are no further questions at this time. I’ll turn the floor back to you for any final comments.

We appreciate the questions. We appreciate the interest. And we look forward to reporting some continuing better numbers as we move through the third quarter. And I think that as you look at Houston, particularly we certainly covered our self for what we saw as an enormous amount of displacement type from hurricane business room nights that were added in the third quarter last year. But on the other hand, the underlying demand in Houston and the underlying corporate demand has certainly surprised us in its strength as it built from the first quarter to the second quarter. So with that, we look forward to coming back to you shortly. Thank you.

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