Greetings, and welcome to Chatham Lodging Trust's Second Quarter 2019 Financial Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is my pleasure to turn the conference over to your host today, Mr. Chris Daly. Thank you. You may begin.

Thank you, Rob. Good morning, everyone, and welcome to the Chatham Lodging Trust's Second 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 July 31, 2019, unless otherwise noted, and the company undertakes no obligation to update any forward-looking statements 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 insights into Chatham's 2019 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?

Okay. Thanks, Chris. Good morning, everybody. Earlier today, we reported our second quarter results and hope that everyone's had a chance to review those. Needless to say, we were surprised at second quarter RevPAR weekend as the quarter progressed and June's performance was further impacted by the July 4 holiday. Additionally, the sale of the two Western PA assets reduced our adjusted FFO by $0.01 in the quarter, and the sale was not included in our guidance. Dennis will give you a bit more detail around the impact of RevPAR during the holiday period, the July 4 shift and impact of the sale of the assets. We expect the second quarter RevPAR to increase approximately 1%, and due primarily to the sluggish June, second quarter RevPAR finished down 0.3%. The 130 basis point miss reduced hotel revenue by approximately $1 million and FFO by $0.01 to $0.02 in the quarter. Like our performance, June was by far the weakest month for the industry with the RevPAR rising 0.4%, and within the upscale segment where most of our hotels are categorized, RevPAR was down 1.6% in June and approximately 0.4% for the quarter that's for the industry. GDP growth also slowed during the second quarter coming out approximately 2% -- 2.1%, approximately 10% down versus 2018, whether it's the on-again, off-again tariffs trade tensions or interest rate volatility, there seems to be a lot of noise out there, which is creating somewhat of an uncertain business environment, which I think has impacted somewhat, the transient business traveler to a certain extent. I think the softening Chatham and the industry experience probably was a byproduct of a lot of these factors. In formulating our guidance for the last half of the year, we're taking a cautious approach based on what we saw…

Thanks, Jeff. RevPAR declined 0.3% to $145 in the quarter for our 38 comparable wholly owned hotels. This excludes the residence in Charleston Summerville, which opened in August of 2018, and the Courtyard Dallas, Downtown, which opened in September of 2018. Average daily rate declined 0.7% to $173, and occupancy rose 0.4% to 84%. Within the quarter, RevPAR was down 20 basis points in April, up 2.3% in May and then down 2.8% in June. The net effect from renovations this year versus last year really had no impact on second quarter RevPAR growth. As Jeff mentioned, June demand was soft, and June's performance was impacted by the shift in the July 4 holiday. For our portfolio, RevPAR in the last week of June declined 5% as business travelers hit the roads in June 2018 whereas in 2019, they were able to take advantage of the movement of the 4th of July holiday and travel early in the week of July 4. Looking into our six largest markets. Markets starting with Silicon Valley, which is clearly our largest market, RevPAR was up almost 2% to $194, ADR was up 3% to $240, while occupancy was down 1% at a still very healthy 81%. We have basically almost three of the four hotels fully renovated using our brand-new designs, the rooms are some of the biggest and nicest in the valley. Our four hotels are doing very well hitting on all cylinders, and we welcomed our largest group of interns across all four hotels in the second quarter for the summer. San Diego represents our second largest market, generating approximately 10% of our EBITDA, and RevPAR was up 4% in the quarter. Really had an easy quarter comp since our Mission Valley Residence Inn was under renovation for a portion of…

Thanks, Dennis. Good morning, everyone. For the quarter, we reported net income of $9.5 million compared to net income of $13.5 million in Q2 2018. $3.3 million of the decline was related to the loss on the sale of two hotels in the second quarter. The primary differences between net income and FFO related to noncash costs such as depreciation, which was $12.9 million in the quarter, other charges, which were $3.3 million, and our share of similar items within the joint ventures, which were approximately $1.9 million in the quarter. Adjusted FFO for the quarter was $27.7 million compared to $27.4 million in Q2 2018, an increase of 1%. Adjusted FFO per share was $0.58 compared to the $0.59 per share generated in Q2 2018. Adjusted EBITDA for the company increased 2.9% to $38.7 million compared to $37.6 million in Q2 2018. In the quarter, our 2 joint ventures contributed approximately $4.9 million of adjusted EBITDA and $2.3 million of adjusted FFO. Second quarter RevPAR was up 0.7% in the Inland portfolio and down 1.2% in the innkeepers portfolio. In Q2, we further strengthened our already solid balance sheet by selling our SpringHill Suites, Washington in Courtyard Altoona hotels, which generated $9 million of net proceeds and by issuing 347,000 shares through our ATM and direct stock purchase programs at an average price of $20.15, which generated $7 million of proceeds. The $16 million of net proceeds from the asset sales and equity issuance were used to repay borrowings under our revolving credit facility. At the end of the quarter, our leverage ratio was 34.2%, which is down significantly from the 40% leverage at the start of 2017. At the end of Q2, we had $79 million drawn under our credit facility and $171 million of remaining availability. A…

[Operator Instructions]. Our first question comes from Anthony Powell with Barclays Bank.

A question on the development. I guess the price increased about $380,000 per key. How's that compared to current, I guess, transaction prices in that market?

Anthony, this is Dennis. Yes, I mean, listen, I think when you compare to similar asset classes or similar assets in our class, we think it's still below where some people have recently transacted for very high quality, well urban locations in LA. I think people paid in a four handle and even in a five handle recently for certain assets. So we think we're getting it. Even though it looks expensive on the surface, we think we're getting at a pretty good basin in a very urban area of LA.

Market occupancy, by the way, in Warner Center today is over 80% and has been for the last three or four years. So ADRs are strong. Submarket is growing.

Got it. And what other parcels do you own? I know you have one important one, but are there any other parcels that you'd like to point out in the portfolio?

No, that's it. And the Portland -- you call it parcel, to be clear, it's just excess land that currently is being used as a parking lot that can accommodate some number of rooms. But city of Portland just substantially toughened up, there's owning laws so that whatever you build there is probably way less dense than what you used to be able to build. But that's carried altogether as one hotel.

Got it. And just one more. I think in the release, you said that you have to cut costs with or without the help of the brands. How about those? I'm curious, are the brands being helpful in RevPAR to cut costs or are they resisting some of your initiatives?

Well, Dennis always like to talk about that. I think my view is, all of us, as franchisees, continue to talk to the brands, primarily about housekeeping costs because -- and at least in limited service hotels, of course, that's the biggest component of our payroll and that's where we see substantial increases year-over-year. So we're talking about how frequently you need to clean a room or can you do more of what's called a light touch in the room. And I think the advantage for us is when and if the brands ever come around to sort of lessening the standard of just clean the room every single night, no matter what, what if the person is staying over or not. And in an extended-stay hotel, there's already been, within the Residence Inn brand, a lessening of the standard. And I think there will continue to be the opportunity for somebody that's staying with us 7 days, 10 days, 30 days to get into that room once or twice a week perhaps, which really will help our labor costs over time. So that's just a matter of continuing to try to press on that front. And I think the longer RevPAR is flat to down a little bit or up a little bit. The more pressure of the brands, of course, we'll see themselves on the margin front.

Yes. Anthony, there's a couple -- a little more color on it. What Jeff alluded to is, I think, the TownPlace Suites brand that has basically a brand requirement of the full clean 175 days or something like that and limited service on weekends. So that's specifically what are you -- Jeff's talking about. And then if you look at our payroll cost, generally speaking, our room's cost -- room's payroll is about 65% of our overall payroll cost. So again, just a little more color to the fact that housekeeping and related costs are pretty significant for us.

Our next question comes from Bryan Maher with B. Riley.

A couple of questions. Following on that line of talking about the labor costs and the brands, can you quantify it all how impactful that might be on the P&L if the brands were to be a little bit more accommodative?

No, not at this point. I mean I think maybe over the next three or six months, Brian, we'll maybe try out a few things, hopefully, and can have some better results out of what might be a test in a couple of different hotels. But I think at this point, it's very subjective to what that brand would allow us to do.

It's easy to quantify though, Brian, once you get buy-in for what exactly the reduction is because we count -- I think most hotel operators count their productivity in the housekeeping department by what we call made minutes. So we know that it's 28 minutes in X brand, and we've got it down to 24 minutes in a Hampton Inn or whatever those numbers might be. And so that we can very easily quantify, hotel by hotel, based on what we're paying, including benefit costs, et cetera, et cetera. Once we get the net number if minutes down, the math is easy.

Yes. And in some of the brands, Brian, even Residence Inn, if you check in, they offer you the green initiative for -- you can earn points in exchange for not having your room clean. That is kind of a net wash. There's really not much benefit to us as an owner from the payment of points. So it's got to be something a little bit different.

Okay. That's helpful. And then shifting gears to the new development hotel, I didn't see in the release what brands you're putting on that? Have you disclosed that yet?

We have not because really we've got to wait on that. Technically, the brand doesn't become 100% firm really until you get approved upon CEO and they're ready to open. So we just thought it was the more conservative approach not to put the brand name on it.

Okay. And what was the room count, again, for that hotel?

What's that?

What was the room count for that hotel?

170.

I'm sorry, 170?

Yes.

Okay. And then just lastly for me. You talked about guest acquisition costs being down, can you elaborate on that a little bit? And maybe the trend there and how helpful or not the bigger brands like Marriott International and Hilton are being pressuring the OTAs on those costs?

Yes. I think for us, it's a little bit of everything within acquisition costs. So our TA commissions numbers was down about $180,000 in the quarter. Some of that is due to the renegotiated rates with the OTAs and then another $100,000 or so -- about $100,000 was actually brand cost primarily out of the Marriott shift in 2019. So we're getting a little bit of benefit from the merger with Marriott and Starwood. But also, we have -- like I said, we have a little bit of a benefit as well from some -- reduced OTA commissions.

[Operator Instructions]. Our next question comes from Tyler Batory with Janney Capital Markets.

Just a couple of follow-ups for me. On the second quarter specifically, can you run through which markets had the largest negative variance versus your expectations and your budgets from a RevPAR perspective?

Yes. I mean, it starts with Houston. That was really by far the worst performer for us even in -- versus expectations. We had a pretty good second quarter of 2018 in Houston with some group business that -- and it was in the latter part of the quarter that did not end up recurring this year. And then combined with, I think we underestimated the impact of the new supply on the two hotels there. So I think that was by far the biggest miss to what we expected going into the quarter. But outside of Houston, it was really just a lot of little bits here and there across our portfolio. We did talk about that in the quarter. LA was a little behind our expectations. The Star Wars opening at Disneyland and LA are at Anaheim. What basically happened in June was Disneyland turned it into kind of a VIP experience for the first three weeks of the opening. That reduced demand at what normally probably would be a grand opening of that type of new space at Disneyland. So the fact that June was really weak with that grand opening was a surprise. But outside of that, not much.

So that's Anaheim, even though Anaheim obviously falls within the description of LA. It should be clear, it's really not LA. It was an Anaheim issue in our residence in there.

Okay, got it. That's helpful. And then I also wanted to ask about what you're seeing in July and August. I'm not sure there's more detail you can provide on trends in July. Was there anything that maybe surprise you one way or the other? And I'm also curious specifically, what you're seeing on the corporate side of things as far as July and then your bookings as we sit here for August?

Yes. I mean, listen, as we sit here for July 1, we think we're basically be flat. If you go back to kind of the shift in the July 4 holiday interestingly, as I talked about in my prepared remarks, the last week of June was down 5% in RevPAR, the week of July -- the week that included July 4 was up 5%, and then the week following the July 4 week was again down 5%. So it's been a pretty up and down first few weeks in July. I think for us, in August right now, we have included in our model kind of a flat to minus 1.5. So far, we're trending in a good direction for August. But between what happened in June and the first couple weeks of July, as Jeff alluded to, lots of ups and downs. So far, we don't see what happened in June showing up in July or August, but we'll just have to wait and see.

So I think -- Jeff, again. I want to emphasize that. I think that the closeness that we have with the management company sometimes can be -- cause a little bit of apprehension because we sit in the same offices, and we're able to, day-by-day, I think, unlike most management teams in a REIT format, unless they've got an affiliated manager, really dig in deep as to where the bookings are, and we call it and everybody else calls it, pace. So where you are pacing in a hotel for the month, in the month, for the month, and we have our revenue management department for Island right there with the head of the revenue management department sharing space with the REIT executive team. So we really -- I think we're looking at July and looking at the third quarter, especially with a pretty negative view. Now all of a sudden, we sit here and July looks flat, which is better than what's baked into our guidance here for the third quarter already. And so I think we need to get into -- it's this close. I mean when you get into August here in the first 10 days, Island will give us a new August forecast here in about, what, middle of the next week or so. And we'll know a little better. So I think the take-away probably is, we want to be conservative, we don't want to miss. And -- but it's far from a disaster out there, especially for us. 81% occupancy is a strong occupancy number, and we're not giving rooms away with $175-plus ADRs in a lot of locations for a limited service hotel. So we still feel pretty good about where we are and our ability to generate revenue in these hotels.

So switching gears to the hotel developments. I apologize if I missed it, but did you give a time line in terms of when the projects can be done? And also just looking at that submarkets, what's the hotel supply picture look like going out in the future? But also just over the past couple of years has there been many other properties that have opened or been developed or not so much?

I'll take the supply. Well, quickly, the opening, the scheduled one, early 2021. I think it's going to take us 24 months or more to build that hotel because it's so in full -- infill. And this thing is sitting in between three other office buildings on each side of the hotel, but anyway -- or two. There's been those supply that has come to the Warner Center submarket. It's pretty hard to build there overall, the land prices are high. But there is one -- is that all, Residence Inn slated, I think, for somewhere. It's been on the books at all for about four or five years and has not come yet, nor is there any sign within the building apartment even because we check all the time on what's happening there. That's it. That's pretty much all there is. The market is dominated by a pretty old Marriott called the Warner Center Marriott and a very old Hilton as well.

Okay. And then just last question for me. You're giving what you're seeing in the acquisition market right now. I mean it sounds like development is obviously more of a focus. I mean are potential acquisitions completely off the table at this point? You'd rather do developments? And do you think you need to do an asset sale or two to free up some additional capital for acquisitions or more development?

Look, I think we're going to look at one or two other hotels, that's about it that we've got in this portfolio that we might say are not long-term holds. And I think the reason for that would only be being able to get a real low cap rate like the Western PA asset sale and maybe just help our overall cash flow by having a renovation coming up where dollars would be spent that we felt were not going to generate any real return or incremental cash flow. But that might help, obviously, even better our balance sheet for purposes of doing this. Development asset acquisition, as we said, is going to be a special case, if we do one. It's probably a real broken asset in some fashion or another that we're looking for, that we can enhance the returns because anything that's pretty stable in markets that we want to be in is still going to trade for a low, even sometimes sub-7 cap rate.

Our next question comes from Bryan Maher with B. Riley.

Maybe for Jeff, I think, kind of as a follow-up to Tyler's question. Given your commentary about how high pricing has been and given how deep-pocketed private equity shops seem to be for real estate money now, do you think that there -- we could see a portfolio transaction, maybe with one of the JVs you're involved with? Or to a lesser extent, for Chatham itself? I mean, Jeff, your fame is for having sold at the top of the cycle last go around. Can we be thinking along those lines here?

Well, we certainly would be amenable to a sale at the right number. But what I'm seeing is flat to shrinking EBITDA doesn't necessarily excite those kind of buyers that you're talking about, right? I mean the key to the last sale was that things were still going up. Now look, they -- that dramatically reversed course after June '07. But nobody suspected that, nobody suspected that blowup. And here, we've kind of got this death-by-a-thousand-cuts scenario going on where overall hotel occupancies and ADRs are really strong. So that sets up good for a sale, but the growth isn't there. So the same reason why we won't buy something at a seven cap is because we don't want to own it at a six cap a year later, right?

Right. But given the fact that you guys are pretty low levered and the fact that private equity tends to lever up fairly meaningfully and when we see so many companies that we cover borrowing at this kind of 4% level, something you might pencil out. I mean, these guys got to do something to earn the fees on this private equity money. It's not inconceivable somebody might stretch at this point. I'm not saying that they would, I was just looking for your thoughts on it.

Like I said, we'd absolutely be amenable to somebody talking to us. We'd look at it like we're supposed to look at it, frankly, like we would want to look at it to maximize shareholder value in that context. And I'll add a little editorial comment. If somebody's stock price, because that was really the setup for other kinds of M&A transactions that have occurred, the last few, if somebody gets dislocated substantially and is trading way below some kind of reasonable NAV, not some cooked up internal NAV, by the way, that some folks talk about, I think then those buyers that you are talking about absolutely will have a bid on the table, which kind of puts the floor in all these stock prices to some extent.

Ladies and gentlemen, we've reached the end of the question-and-answer session. At this time, I'd like to turn the call back to Jeffrey Fisher for closing comments.

Well, I think you all heard enough from me, so I will probably close this up by thanking you for being on the call and looking forward to coming on the next call with, as we suspect, perhaps, a little better results than what we might be thinking currently or have guided to as we continue to work these hotels day-by-day. Thank you.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.