Greetings, and welcome to Chatham Lodging Trust's Fourth Quarter 2020 Financial Results Conference Call. At this time, all participants are 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. It is now my pleasure to introduce your host, Chris Daly, owner of Daly Gray Inc. Thank you. You may begin.

Thank you, Doug. Good afternoon, everyone, and welcome to the Chatham Lodging Trust Fourth Quarter 2020 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 February 24, 2021, 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 in Chatham's 2020 fourth 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 afternoon, everyone. First and foremost, I want to thank you for your interest in Chatham, and we really sincerely appreciate your participation and interest during these unusual times. As I look back, this last year has required intense asset management and operating focus. I'm thankful for our platform and relationship with Island Hospitality as we are able to pivot very quickly. From a corporate perspective, we were laser-focused on how best to preserve long-term shareholder value and knew that we needed to maximize operating performance, reduce capital expenditures and G&A expense and preserve our strong balance sheet and enhance liquidity. We've certainly produced noteworthy operating performance during the pandemic. We've had the highest absolute RevPAR of all lodging REITs over the final three quarters of 2020, including companies who have reported their fourth quarter results. Pending others who have not yet reported, we continue to have the highest operating margins of all lodging REITs. Since our IPO, we've accumulated a portfolio that delivers on a relative basis, strong top line and bottom line results, no matter the cycle. We generated the second highest EBITDA per room of all lodging REITs in 2020. And lastly, and this is pretty incredible, through this unprecedented period, we were able to produce positive adjusted EBITDA for the full year. Our sales and revenue management teams have delivered outstanding results since the outset of the pandemic, as proven by our significant RevPAR index or market share gains. Since the beginning of April, our RevPAR index has jumped 15% to an average monthly index of 136 compared to our 2019 already strong RevPAR index of 118. The impressive gains are being driven by Island's outstanding direct sales efforts from its national, regional and local sales teams as well as concentrated revenue management efforts…

Thanks, Jeff. Good afternoon, everybody. For the quarter, our RevPAR declined 60% to $47, down from our third quarter -- third quarter RevPAR of 58%, which benefited from more seasonal leisure travel. The downward shift was not surprising given the seasonality of the industry as well as the spike in COVID-19 in November and December. January RevPAR $47 was higher the November RevPAR of $45 and meaningfully higher than December RevPAR of $40. Importantly, February RevPAR through the 21st was $52, which would be the highest level since October, and again, sequentially higher at about 10% more than January RevPAR. The gains have been made in occupancy, with ADRs still in a tight range in the low $100 range. Among our top six markets, Los Angeles was our top-performing market in the fourth quarter with RevPAR of $79. Our Anaheim Hotel ran occupancy of 84% and in the fourth quarter due to a large nursing group and some corporate demand. Our Marina del Rey Hilton Garden Inn had the highest ADR in our portfolio in the quarter, with an ADR of $154, which was down 25% from 2019 levels. San Diego had our second highest RevPAR among the top six markets at $74. Our Residence Inn in Gaslamp had RevPAR of $78, on a pretty strong ADR of $143, which was only down 15% to last year. Continuing with strong performance among our top markets, our northeastern coastal market portfolio earned RevPAR of $63 on occupancy of about 50% and rates of approximately $130. Despite their geographic location in a little bit colder areas, these three hotels continue to benefit from the leisure traveler. In fact, our Hampton and Portland Maine had the second highest fourth quarter ADR in our portfolio at approximately $144. We are looking for a strong…

Thanks, Dennis. Good afternoon, everyone. Chatham's Q4 2020 RevPAR was $47, which represents a 60% decline from Q4 2019. While the $47 RevPAR was lower than our Q3 RevPAR at $58, the 60% decline versus last year was a slight improvement versus Q3's 61% decline. Q4 is always a seasonally low quarter for Chatham's business, and Q4 2020 was also impacted by elevated COVID spread relative to Q3. Through our significant efforts to contain costs, we were able to generate a same-store Q4 hotel EBITDA margin of 8.4% and GOP margin of 25.4%, which is quite strong in light of our $47 RevPAR in the quarter. Our Q4 2020 adjusted EBITDA was $0.2 million and cash flow before capital, which represents hotel EBITDA less corporate G&A, cash interest and $2.3 million of principal amortization, was minus $9.5 million. Chatham has a strong balance sheet that positions us well to weather the disruption being caused by the COVID-19 pandemic and to begin considering investment opportunities should they arise. We ended Q4 with $21.1 million of unrestricted cash and $10.3 million of restricted cash escrowed with loan servicers that can be used for capital expenditures, property taxes and insurance. In November, we completed the sale of the Residence Inn Mission Valley for $67 million, which generated a gain of $21.1 million and allowed us to repay the $26.7 million mortgage on the property and $37.7 million of borrowings under our credit facility. The $67 million sales price represents a 6.5% cap rate on the hotel's 2019 NOI of $4.3 million and a 14x multiple on 2019 EBITDA of $4.8 million. In December, we completed an amendment to our credit facility that provides us covenant relief until Q1 2022 and the ability to utilize the entire $250 million capacity of the facility. When…

Thank you. At this time, ladies and gentlemen, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Ari Klein with BMO Capital Markets. Please proceed with your question.

On the cost side, how are you thinking about the pace of bringing more employees back in relation to occupancy? How do you think that trends across the year into next year? And then maybe upon a return to a normalized environment, how are you thinking about margins longer-term versus where they were maybe pre-pandemic?

Yes. I think, Ari. I think to take the second part of the question first. I think, listen, I believe between the tweaks that are happening for the evening social hours basically being eliminated, breakfast, complementary breakfast, especially at our extended-stay and limited service hotels, I think the offerings there are going to be tweaked back a little bit as well. And then I think when you're talking about room, frequency of room cleaning, we do believe there will be savings there as well. And I think we've talked about this for a few quarters now. We do see margin improvement on an apples-to-apples basis pre-pandemic to whenever we stabilize down the road. We haven't quantified it in terms of how many basis points at this point. But we do think apples-to-apples, they're going to be better in the future as opposed to they are -- as opposed to what they were pre-pandemic. I think from a 2021, and what I said in my prepared remarks, it's going to be very important for us as a management team and Island Hospitality on the operating side, as occupancy starts to come up, that the rush to bring back staffing levels and frequency of cleaning, which just isn't going to be there, is going to be pretty important to stay on top of. And especially over the last 15 to 24 months, Island Hospitality is dedicated resources on their operations team that really spends a lot of time day-to-day talking to general managers at all of our hotels, in a real-time basis, managing staffing levels and expense levels. So it's certainly -- that's just something we've got to stay really focused on to understand that it is a new operating environment, that is the standards are going to be different moving forward than what they were pre-pandemic.

Got it. And then maybe can you talk a little bit about the M&A market, your expectations there. What are you seeing from a pricing standpoint? What kind of opportunities are out there? And then from a market preference point of view, are you somewhat agnostic or you have certain preferences, whether it's Sunbelt or other types of markets that you'd prefer?

Yes, Ari, this is Jeff. Thank you. On M&A, I think you're seeing that there's not a lot of transactions right now. I think that bid-ask gap is pretty wide. And without a bunch of distressed properties coming to market yet and there's still some anticipation that happens as we move through the year. Second half of the year, you've really got some owners that are testing the market and testing what kind of values they -- or offers they might get relative to their 2019 value. And although there's been a few deals done at some pretty small discounts to a 2019 realistic value, I just don't see very much happening nor do I see a lot happening in the next three or four months. So we're in the market. We're talking to owners all the time. We've got good folks, including myself, that do that every day, but I don't think it's there yet. But we want to be positioned properly to be able to take advantage of those opportunities that may come. We want to be opportunistic, but obviously, we want to keep an eye on markets like the Southeast and other markets that seem to have, even pre-pandemic, better growth, better RevPAR growth in the markets than the average growth. So, we're looking at that. We're trying to understand the real supply trends in those markets, but that's going to take a little time to shake out as well. We really don't believe all the numbers we read. So I think time will tell over the next six months what direction that goes in.

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

So on the same Residence Inn, how did that opportunity kind of come to you? And we've actually read about California markets looking to do more of that? And do you see the opportunity to do more of that type of transaction?

Yes. Go ahead.

No, I was going to let Mr. Craven who handled that inbound call, very acknowledged. Just teasing.

No. I mean, listen, I think, Bryan, it came to -- again, it came to us through -- well, I mean, it was inbound interest that started the conversations, not necessarily about that particular asset, but certain of our assets in Southern California. And I think as we started getting into more details and sharing information, especially the needs of certain areas, I think we were able to pretty much come down to that particular location. I think there is -- and you've read about several of these that have now happened in the state of California. There is continued interest with the state of California in each of our markets, to be honest, for certain of these type things. They're not easy to do especially from the financing side on the housing commission side. It requires a lot of different pieces of financing. It requires a building that is basically ready and up to all current standards of fire and life safety requirements, ADA accessibility to where it makes sense for the entity or for the housing commissions to do that. So we do have continuous discussions with certain of, not only Chatham hotels, but hotels that are also in California within our Innkeepers joint venture, and we'll continue to kind of go down that path to see if there's any opportunities there. But we are -- we do understand that the state is planning to make more funds available for those types of deals in 2021.

Great. And then when we think about ADR, especially when we look back to 2009, some of the cash now that we saw back then, how are you guys thinking about the market and your competitors keeping rates at -- in a rational level, whether it's lessons learned or what? And how is Island addressing that?

Yes. I mean it's -- I'd say it's very -- they're addressing it on a very specific by hotel basis, whereas, I think most of -- a lot of these markets are selling, and we've seen rates basically since early days of the pandemic in the -- what was $90 to $110 range, and that really hasn't moved much as a portfolio. But as -- if you look at our portfolio specifically, and especially when you look at leisure markets, such as Fort Lauderdale, Savannah, Portland, Maine, Portsmouth, New Hampshire, Exeter, New Hampshire, San Diego, it's very -- they have a very close eye, not only on rates over the next 30 days. But importantly, rates that are over the next 180 days through the summer months, where I think everybody believe that demand, especially on a leisure basis, is going to be really strong. So I do believe there is some good rate opportunity, again, in a lot of those more leisure markets to hold, if not increase rates even over maybe what 2019 was.

All right. Great. And just maybe one last one for Jeff. The lodging stocks, especially the REITs, have just been ripping higher, some approaching pre-pandemic levels. What are your thoughts there in an environment where we're still running industry-wide RevPAR down 40% to 50%?

Well, look, we certainly like to see that happen, right, because we think we've done the right things for our shareholders as we've talked about, that ought to position us well for going forward. There's obviously lots of expectation about business coming back pretty strong in the second half of the year. We're a believer on that front. We are real excited about our President's Day weekend and our 65% occupancy on Saturday night and our 100% occupancy in some of those hotels actually that Dennis just mentioned. So we think that there's going to be business -- real business out there to be had. Our revenue management department is absolutely taking off all pandemic pricing starting March 1 in those markets. And most all markets will wait till the very last minute to see how close we can get to fill in before there's any rate adjustment at all. So hey, we'll see how smart the market really is relative to how they're valuing these companies. But I happen to be also a firm believer that there ought to be some real bounce back as we move through the year.

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

First one I had, I just wanted to go back to the commentary on February and what you're seeing real-time in terms of demand? It sounds like February really driven by some strong leisure travel, but interested what's out there real time in terms of corporate type business? And then also curious if you can touch a little bit more on the sales and revenue management strategy as demand is coming back into some of these markets?

I'll pick up on that. I mean, really, frankly, on the business traveler front, there's little bits and pieces, as we said, in the prepared remarks here and there. But there's nothing substantial to report real time in February, that there's any kind of turnaround in the very near future. And of course, in our select-service and extended-stay hotels, which is what we are, the booking window has always been tight. So we don't have the visibility on sort of group business and otherwise other than in one or two hotels that might be connected or very close connected physically. But their business is connected to conventions, whereby there's really no action in 2021 so far on the convention front. So I think we're, like I said, in a wait-and-see mode on the business side, we do have our usual business travelers, whether it be Google or otherwise in Silicon Valley doing some business and putting people in the hotels, but at levels that are just really no greater than more or less what we've seen over the last, let's say, three months anyway. So on that front, we're waiting. And on the pricing front, as I said, we're just being day-to-day very proactive in terms of what we price business at, what kind of business do we take and for when? So if we're putting National Guard in a hotel demand a vaccination site like we have in one or two spots, we certainly aren't putting them in the hotel for Memorial Day weekend or June or July, even at this point. So we're trying to keep all our options open for that business that we do expect to come later on.

Okay. And I think I caught in the prepared remarks, CapEx spend for 2021 of only $6 million, which seems quite low versus what you've spent historically. And I think you said that you're not planning any renovation projects. Can you talk about that a little bit more? I mean, is that just reflective of the quality of the portfolio? Or are you just trying to be conservative in terms of how you're thinking about deploying capital?

Hi, Tyler, this is Dennis. Yes, $6 million is the plan as our budgeted expenditures for 2021. No renovations. I think in light of where we are in the recovery, still in the midst of the pandemic, our -- we're still taking the approach of conserving capital and I think to the extent that we won't be able -- we'll be able to bring in more business in 2021. And listen, I don't think there's any gun to our head to spend $2 million or $3 million per hotel to renovate it. So, no reason to push that capital out the door until we think the timing is right.

That makes sense. And then last question for me, just housekeeping. How much have you spent on the Warner Center development thus far? And what is the cadence of spend look like for that project in 2021?

Hold on one second. Get to the number. Yes. So we've spent -- it looks like about $44 million to date. On the development, about $34 million left -- or $24 million -- $26 million -- I'm sorry, less to go. My subtraction wasn't on at the moment. So we got about $26 million left to go in 2021. It's around $2 million per month between now and opening. So I think $2 million to $3 million a month is probably conservative and what you would want to use for the next -- for the first two quarters of the year, Tyler. I think, at that point, that will get you 18 -- $18 million of the $26 million, with the last eight kind of in the last six months of the year.

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

I guess, a question on acquisitions, I want -- could you remind me, are you able to use your current liquidity to buy assets without any kind of restrictions? And if there are, can you just lay them out for me?

We are able to use our liquidity under the line to acquire hotels. The only requirement under the line is that we maintain $25 million of minimum liquidity.

Got it. So I guess the math is that you'd want to make sure that you would have that before you would do a deal, so you would like to see your cash burn come down a bit. Is that fair?

Yes. Yes. I think, obviously, we'll be mindful of liquidity and availability as we consider potential investments. But we do have the ability to do something if we see something great.

Got it. And I guess have you seen leisure starting to pick up in some of the non, I guess, resort or obvious vacation hotels like -- end markets like, let's say, I don't know, Dallas, Houston, is not right now, but maybe before the storms or in the future. And I guess, broad leisure beyond kind of your Savannahs and Portland Maines and whatnot? And if not, do you expect to see that broader leisure come back to the portfolio in the spring and summer?

Yes, I mean, the answer is yes. I mean, it's -- as we talked about on another meeting, but the staycation concept is still out there. And in our hotels, we do see people that are -- whether they're traveling 10 miles down the road to take -- to go and stay at a hotel for a few nights, they might have a pool or be next to something they want to do, those are happening. And that -- I think that is going to continue to be the case as we move forward. And it's part of the leisure travel. But staycation is still a word that applies. And listen, it can be to a courtyard, it can be to a Hilton Garden Inn, it can be to a Residence Inn. And really anywhere America, but people are looking at, hey, we want to get out of the house. We want to go somewhere, a change of scenery and have a pool and head out for a couple of days. So that is certainly out there.

Got it. Maybe one more. I mean, have you been approached or started talk to counterparties for about a potential new joint venture? I mean, I know that's part of your playbook during the last recovery. So is that still something you consider? And have you -- have those started yet?

I mean, Anthony, I'd tell you that since -- for the last 9 or 10 months, I think there's certainly people who have expressed an interest in lodging and trying to establish some type of position in lodging and acquire assets. And thankfully, we're a group that's done them. So there has been interest there. But I think those are a little bit difficult for us from a corporate perspective as opposed to just buying assets outright. We're still involved, obviously, in our Colony JVs at the moment. So I think, listen, the interest is there. We're glad that we're on a list of people who would love to do business with us. And hopefully, that provides some opportunities down the road.

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Well, we appreciate all the questions. And as I said at the outset, everybody's continued interest here. We look forward to moving ahead and reporting even better results for the next quarter. Thank you.

Ladies and gentlemen, that does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.