Greetings and welcome to the Chatham Lodging Trust Fourth 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 Public Relations. Thank you. Mr. Daly you may begin.

Thank you, Devin. Good morning, everyone, and welcome to the Chatham Lodging Trust fourth quarter 2019 results conference call. Please note that many of our comments today are considered forward-looking statements, as defined by federal security 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 February 26, 2020, 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 fourth quarter results, allow me to introduce Jeff Fisher, Chairman, President and CEO; Dennis Craven, Executive Vice President and COO; and Jeremy Wegner, Senior Vice President and CFO. Let me turn the session over to Jeff Fisher. Jeff?

That's great. Thanks, Chris. Good morning, everybody. Glad you're on the call here today. As you know, we reported our fourth quarter results and RevPAR finished above the upper end of our guidance range and adjusted EBITDA and FFO beat consensus in the upper end of our guidance range, due to the RevPAR beat, as well as slightly better-than-expected margin performance. As a reminder, we had a very tough fourth quarter due to the comps and significant revenue we earned in 2018 in that quarter, from the gas explosion in North Boston, as well as a huge quarter in San Diego. Within the fourth quarter, RevPAR was down 5% in October, 2% in November and 7% in December. Given the very unusual fourth quarter comps, certain metrics such as overall RevPAR and margin performance, are really not indicative of our current operating environment, especially as we look forward into this year. So I'm going to spend a few minutes talking about what the current trends are that we're seeing in our portfolio and the overall operating environment. Market share was up, yet again, gaining almost 70 basis points for the quarter, which is very encouraging given the amount of new supply, especially new brands that have been introduced into some of our markets. We continue to drive other revenue, which was up $1 million or 31% in the quarter, led by a 27% increase in parking revenue. We firmly believe, we have the best-in-class operating platform, as you've heard before and our collaborative efforts with Island really have paid off over the last couple of years. We're perfectly positioned to quickly roll out revenue enhancement and expense-saving initiatives, properly assess their impact and then decide whether to move forward with those or tweak or cancel initiatives as we analyze those…

Thanks Jeff. RevPAR for the fourth quarter declined 4.9% to $118 with average daily rate down 4.1% to $157 and occupancy down 80 basis points to 76%. Looking into our six largest markets starting with Silicon Valley which is by far our largest market contributing approximately 1/4 of our EBITDA, RevPAR was down 4.2% to $158, but two of the hotels were under renovation during the quarter. And when you look at our guidance it assumed a decline of about 7%. So performance was a little bit better than expectations there. San Diego represents our second largest market and RevPAR was down 19% pretty much in line with our expectations for the quarter as both of our San Diego hotels face really tough comps in the fourth quarter due to significant border patrol demand and a huge convention calendar in downtown San Diego. Washington D.C. market experienced a RevPAR gain of almost 3% to $132 driven by strong gains in our Tysons Residence Inn, where RevPAR grew 9%. That hotel is benefiting from a great renovation earlier in 2019. That's bringing back corporate guests as well as the deflagging of a hotel that was in our comps set in the past that were gaining some additional market share. Our 3 northeastern coastal markets in New Hampshire and Maine saw RevPAR decline 8.4% better than our expectation of an 11% decline. Two of those three hotels are New Hampshire hotels saw huge gains last year from the North Boston gas explosion demand. Something to note is that these same hotels saw RevPAR advanced 18% last year. So it's pretty impressive they were able to hold on to a chunk of that gain. Houston which is our fifth largest market continues to struggle with RevPAR declining 12% to $83 and that decline…

Thanks, Dennis. Good morning everyone. For the quarter, we reported a net loss of $2.4 million or $0.05 per share compared to a net loss of $0.2 million or $0.01 per share in Q4 2018. Our Q4 2019 results included $2 million of losses related to our share of onetime items, which occurred in the joint ventures. These items include a $0.8 million write-off of deferred financing costs associated with the refinancing of the Innkeepers JV's debt; a $0.2 million loss associated with the sale of the Hampton Inn Willow Grove in the Innkeepers JV; and a $0.9 million impairment of the residence in Lexington in the Innkeepers JV. The primary differences between net income and FFO relate to non-cash costs such as depreciation, which was $12.8 million, one-time gains or losses which are $1.1 million and our share of similar items within the JV, which were approximately $2 million in the quarter. Adjusted FFO for the quarter was $15.3 million, compared to $18.4 million in Q4 2018. Adjusted FFO per share was $0.32 compared to the $0.39 per share generated in Q4 2018. Our 32% of FFO per share for the quarter was $0.01 above the high end of our guidance range of $0.28 to $0.31. Our Q4 2018 FFO per share benefited by approximately $0.03 from demand related to the gas leak business in the Boston area. Adjusted EBITDA for the company was $25.9 million in Q4 down from $28.9 million in Q4 2018 which benefited by approximately $1.5 million from the gas leak business in Boston. In Q4 our two joint ventures contributed approximately $3.3 million of adjusted EBITDA and $0.9 million of adjusted FFO. Fourth quarter RevPAR was down 1.7% in the Inland portfolio and 4.8% in the Innkeepers portfolio. The Innkeepers JV's RevPAR was impacted…

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

Hello, good morning everyone.

Hey Anthony.

Just one coronavirus question. One of your peers said that they had a decent amount of China business in their Silicon Valley properties. Is that the same case for you? And what's your outlook for the impact to those particular properties for coronavirus?

Yes. Anthony, we certainly have a little bit of China business in our hotels in Silicon Valley also in our Bellevue downtown location even have a little bit in one of our Houston hotels. Certainly, the impact for us I think we quantified it has been about $200,000 a little less than that through the end of February. We are seeing a little bit of attrition, but I think one thing to note even when you look at our portfolio, the impact even in Silicon Valley isn't necessarily Chinese-related guesting at our hotels. It might have been that they were staying at other hotels in the market that have now canceled their trip, and therefore, you have a little bit more vacancy that people are trying to fill. And that does filter through to our hotels. So even though for us the impact hasn't been significant at this point. I think there has been a little bit of a drag on the overall market especially Silicon Valley.

Got it. And that March 3% expected decline, is that just due to tough comps? Or is it any of the coronavirus impacting it in that March number?

Certainly we have a little bit of -- we certainly are a little bit -- we are reflective of a little bit of a coronavirus impact, especially stuff that we know that has canceled but we do have a major renovation ongoing at the Sunnyvale II location. I think for the full year that renovation for that hotel, RevPAR is down about 9% for the full year and actually impacts our full year RevPAR by about 90 basis points that renovation alone. So that's the main driver behind Silicon Valley.

Okay, all right. And then could you update us on how the Charleston and Dallas Texas are ramping and what you expect them to do this year?

Yeah. I think if you look at the -- Charleston assets actually I think have -- certainly had a good last three or four months of 2019 and we've got some good business going in early 2020. If you look at our RevPAR change for -- I'm just pulling them up here the Residence Inn, Summerville in 2020, our RevPAR is projected to be down about 6%. The Courtyard Summerville, I think is projected to be down about 6% in that market. The two hotels we hope that we outperformed that, but I think when you look at -- certainly there's been two new Hilton products that have opened up there recently, so we are feeling some supply in that market. Our Courtyard Dallas Downtown, our 2020 projection is RevPAR growth of about 9%. So that hotel continues to ramp. I think as we've had a full year to prepare for a convention-related business and establishing the right relationships that hotel is going to continue we think to outperform in 2020.

All right. Maybe just one more for me. You mentioned the Hilton had introduced some new efficiency initiatives. Can you just go into detail about what those were? Thank you.

Yeah. Similar to what we're doing where they're looking at the stays of guests and if it's more than a single night, they're either tailoring guest expectations for how often they're making -- cleaning the entire room versus doing a quick run through making the bed, cleaning the bathroom, replacing the towels if asked. So it's truly trying to reduce minutes in those rooms on stay over’s for sure.

Okay. All right. Great. Thank you.

Thanks, Anthony.

Thank you. Our next question comes from the line of Ari Klein with BMO Capital Markets. Please proceed with your question.

Thanks, and good morning.

Hey, Ari.

Maybe just -- hey. Maybe just following up on that last question. Can you talk a little bit about the incremental opportunity and expense savings from the housekeeping initiatives in 2020? And then there seems to be a little more margin pressure in 2020 despite the RevPAR outlook being somewhat better than 2019. So maybe what are you looking for on the side this year?

Yeah. I think there's two things there. One, is certainly the impact on margins, I'll take the second one first. The impact on margins is influenced a little bit on just the flattening out of that other revenue increase. But secondly in addition to labor, you have labor being on the third point like many others, we have seen a pretty good increase in property taxes and insurance, especially on the property and liability insurance side, which I think for us as a company those two line items are up about -- for a little over 4% year-over-year. Now hopefully we can fight some of the property tax stuff and bring that number back down. But at this point, we've got about -- an impact on our margins of about 50 basis points between our property taxes and insurance line items to our overall margins. On the housekeeping side, listen I think we spent -- we're projected to spend over $65 million on labor and benefits in 2020, so -- with 60% of that being in the housekeeping department. So when you look at a $35 million to $40 million spend in housekeeping, I think we are hopeful that we can eke out where we normally spend it might be 16 to 18 minutes in a stay over room if we can knock that down into 12 minutes or 13 minutes those things add a little bit here and there. So it's too early to quantify our initial rollout results that we've done in a handful of hotels that we started in the fourth quarter but I think as we kind of move through on our next call and even probably the one in August, we'll have a much better handle on the success of those initiatives. But Hilton is doing something similar and our guess is others will probably fall in line to try and battle this cost increase that's hitting us all.

Okay. And then just on the supply outlook in 2020. Where are you expecting the most supply pressure across your markets?

Yes. I mean listen, I think the – we've – I talked briefly about Anthony's question, certainly within our Charleston market, the impact for the next – for 2020, we're going to feel it a little bit. We didn't know those hotels were coming, so it was expected. And when we bought the hotels, this is just going to be one of those years where we have to absorb it. We still are seeing some decent new supply in our Silicon Valley markets as well mid- to upper single-digits in 2020. So we continue to absorb that.

Thank you.

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

Good morning, guys. Just a couple of quick ones for me. Kind of staying on that property tax and insurance discussion. I mean, it almost seems as if listening to your call and certainly other hotel REITs that we covered here that hotels are almost targeted by municipalities as it relates to jacking up property taxes. When and how does that ever get mitigated? And what can you do other than just – is there anything else you can do besides just simply go through the process of fighting them? And how long does that take to resolve a certain claim?

Yes. I mean, listen, I think if – there's a reason why there's lots of property tax consultants out there getting commissions and making pretty nice living doing that as a career because it's a never-ending process. I think for – as the cycle ramps up and the jurisdictions typically are kind of two to three years behind in the cycle, so as you get kind of late cycle they're trying to increase it the most. And by the time the cycle might turn a little bit. They're still trying to increase the property tax values. So it's a constant game that you have to play certainly when you're looking at – when we look at acquisitions and development costs and everything like that. It's a major factor in underwriting in some of these jurisdictions that have actually killed quite a few deals that we've looked at when you start going through the process of assessing what's going to happen to your property tax number. So it's just a game. I'm not sure if there's any way to really get ahead of it.

Okay. And then moving on to your discussion regarding cost containment opportunities. You were a little coy in your discussion on Hilton providing some relief there. Can you get a little bit more granular on that? And how far behind Hilton do you think Marriott is in giving you a little relief?

So I don't have any knowledge on what Marriott is doing as far as rolling out those initiatives other than to just say that Hilton is – this is something Bryan I think you know we've talked about for a little over a year that we've been trying to work through a plan to roll out that we can properly train our employees. I think Hilton has been certainly pretty aggressive on that front as well and doing stuff quite honestly very similar to what we're doing. I can't really speak for what Marriott is intending to roll out to its managed hotels. But certainly, I think we're all facing the same issue which is rising labor. And a lot of times it's guest expectations for what they really need on a daily basis. So I think as the – as technology continues to evolve and guest expectations, especially with kind of the younger travelers who have the "do not disturb" on their door a lot of the time I think we'll be able to continue to tailor those experiences and hopefully make housekeeping a little bit more efficient. And I think you can switch that into two things which is one, employee morale but also I think you can then afford to pay – continue to pay competitive wages to your housekeeping department.

And then just lastly for me on the Warner Center development, do you guys have – and I'm sure you do but can you share what kind of level of ADR are you looking to get on that property when it opens up?

Well, we haven't shared that yet, so we're still over a year from opening the hotel, but I like the question. Listen, I think ,Bryan as we get towards the end of the year and we are topped off and working inside and pretty -- have a pretty good understanding of when we're going to open that hotel which we still expect to be late second quarter of 2021. I think we'll start to put that in. I will say, without disclosing ADRs and all that stuff, it's a $65 million investment. We've talked publicly that we expect to be able to ramp that to a pretty nice return over the first -- a ramp of a couple of years that we hope to get a 200 basis point spread over where we could buy assets generally speaking. So I think for that purpose that at least will give you kind of where we think the cash flow will be as it ramps.

Thanks. That’s all for me.

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

Hi, good morning. Thanks for taking my questions. So, a question on the other and non-room revenue the growth there is pretty significant in 2019. Can you talk a little bit more about what that might look like in 2020 and beyond? And how much room there is left to grow that?

Yes. I mean I think through -- if you look at how we've modeled it Tyler, I think -- and what I think I spoke to in my prepared remarks, we expect that to kind of flatten out on a year-over-year basis over the last half of the year. So, I think you can continue to see similar type increases, maybe not on the overall percentage-wise, but to the tune of $300,000 to $400,000 a quarter over the first half of the year just in terms of parking revenue alone. And that again like I said that probably flattens out a little bit more in the second half of the year. We did benefit a little bit in the fourth quarter. We did have a new breakfast -- or now a new tenant in some of our restaurant space at our San Diego Gaslamp Hotel. So, we did start to collect some rent on that hotel, on that space. But the main driver is certainly the parking revenue. And like I said, it's kind of $300,000 to $400,000 a quarter for the first couple of quarters of 2020.

Okay. And switching gears a little bit on the pipeline for dispositions and acquisitions. It doesn't sound like much has changed there, so just wanted to confirm that. And also curious, if you guys think you might be a net seller this year or maybe you think you can get a couple of deals across the finish line from the acquisition perspective.

Yes, this is Jeff. I think that it will probably be pretty quiet on the acquisition front. We really look at development, kind of very selective basis as we've said has just given us a much better yield in today's environment and with our knowledge that we gain through operating hotels in markets that we have great, great familiarity with. So, the Warner Center development is a good example of that. So maybe we sell one or two hotels and maybe we add one more development opportunity to what we're doing here that would kind of follow-on to our next year opening for Warner Center, but I think that's probably the most realistic expectation for you to have.

All right. That’s all for me. Thank you.

Thanks, Tyler.

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

Well, thanks everybody for being on the call and we look forward to talking to you with the next quarter results. Bye-bye.

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