Greetings, and welcome to Chatham Lodging Trust's Second Quarter 2021 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] Please note, this conference is being recorded. I'll now turn the conference over to your host, Chris Daly. You may begin.

Thanks Wally. Good morning, everyone, and welcome to the Chatham Lodging Trust Second Quarter 2021 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 3, 2021, 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 insight in Chatham's 2021 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?

Well, thanks, Chris. Good morning, everyone. I appreciate everyone who's joining us this morning. Good to be here and talk quite a bit about our quarter and the successes that we had. We became cash flow positive after corporate G&A after all debt service in April, the second hotel REIT to reach that achievement. For the quarter we generated FFO per share of $0.10 up $0.36 over the same quarter last year. We successfully executed our first preferred stock offering which was well oversubscribed, raising $120 million. And using a portion of those proceeds, we are positioned to acquire two incredible premium branded extended-stay hotels adjacent to the Domain in Austin, Texas. A market that we all know is absolutely thriving and will generate meaningful RevPAR growth and EBITDA growth for us going forward. Our RevPAR continues to grow meaningfully each month, driven of course by strong leisure travel, but aided by a bit of business and other non-leisure travel. Our operating margins continue to accelerate, now at 43% and not far off 2019 operating margins of 46%, despite much lower RevPAR and the brands are finally tweaking housekeeping standards and other complimentary service requirements that we have been asking and talking about with the brands for many years. Before I touch on operating trends, I want to emphasize our corporate efforts. Because we've emerged from the pandemic with a stronger balance sheet and more liquidity than we had going into the pandemic. Our liquidity was $135 million on March 31 2020 and it sits at $253 million as of the 2021 second quarter. Our leverage ratio was 36% on March 31 2020, and is now 29%. I'm real proud of that, our lowest level in a decade. Reinforcing my point, when EBITDA recovers, many probably don't realize that our…

Thanks Jeff. Good morning, everyone. Albeit two of our 39 hotels had occupancy over 50% in the quarter and that compares to 20 of our 39 hotels in the first quarter. 21 of our hotels had occupancy over 50% in the quarter with a third of our hotels that had occupancy over 50% and a third of our hotels had RevPAR over $100 in the second quarter. Looking at our most recent trends, our portfolio continues to rise. Since the start of the pandemic, we've produced the highest weekly ADRs over the last most recent four weeks, and our highest RevPAR over the most recent three weeks. In June, six of our 39 hotels had higher ADRs in 2019 and three of our hotels had higher RevPAR compared to 2019. In July 14 of our 39 hotels had higher ADRs than 2019 and 11 of our hotels had higher RevPAR compared to 2019. Just this past weekend, over half of our portfolio produced higher RevPAR again compared to 2019. Our most significant brands in the quarter had the highest occupancies with Residence Inn at 73%, Homewood Suites at 70%, and Hampton had the highest occupancy at 78%, bolstered by strong performance at our Portland Maine and Exeter New Hampshire hotels that had occupancies of 72% and 85%, respectively. Looking at our top markets, our suburban New York assets in New Rochelle and White Plains had average occupancy of over 90% in the quarter, up from 72% in the first quarter, and ADR of about $150. Our New York market hotels have performed best of our top markets since the start of the pandemic, something you certainly aren't hearing about from any hotels in the Manhattan area. In Los Angeles, we've shifted away from a lot of medical and government related…

Thanks, Dennis. Good morning everyone. Chatham's Q2 2021 RevPAR of $87 represents a 57% increase versus our Q1 RevPAR of $55. During the quarter RevPAR increased from $75 in April to $88 in May, and $96 in June, and Q3 is off to a great start with RevPAR of $113 in July. Our $87 Q2 RevPAR represents a 39% decline from a RevPAR in Q2 2019 and our July 2021 RevPAR of $113 represents a decline of 26% to July 2019. Through our significant efforts to contain costs, we were able to generate a Q2 hotel EBITDA margin of 31.2% and GOP margin of 43.3%, which are quite strong in light of the $87 RevPAR in the quarter and are higher than many other hotel owners' margins before the pandemic. Our Q2 2021 hotel EBITDA was $15.6 million, adjusted EBITDA was $12.5 million, adjusted FFO was $0.10 per share and cash flow before capital would represent hotel EBITDA less corporate G&A, cash interest and $2.1 million of principal amortization was positive $4 million for the quarter. I think it's worth noting that these solid results were achieved, even with a very limited amount of business travel demand in Q2. Some of our largest and most profitable hotels before the start of the pandemic, like the four Residence Inn in Silicon Valley and the Residence Inn in Bellevue are very dependent on business travel, and I've seen the least amount of recovery of all our hotels today. Whenever business traveler starts to recover in a more meaningful way, our portfolio should experience significant upside from its current performance. Chatham's portfolio has demonstrated remarkable resilience during the pandemic and our unique focus on extended stay hotels has enabled us to get through the worst of the pandemic with significantly less cash burn…

[Operator Instructions]. Our first question is from Aryeh Klein with BMO Capital Markets. Please proceed with your question.

Thanks and good morning. Maybe first just on the labor front. I think there're probably that 1000 basis points below 2019 on occupancy and I think you mentioned 40% below FTE. So could you just talk about that dynamic and are you where you want to be from a hiring standpoint. Where do you think you end up with and are you having to increase pay at all as you bring on new employees?

Thanks Aryeh, this is Dennis. Listen, we're not at an ideal staffing level, that's for sure. We are supplementing our current labor numbers not only with additional overtime for those employees but also casual labor, which is obviously generally more expensive. In certain of our markets we have had to increase our pay levels. But you know, we were just talking with the operation side yesterday about kind of the challenges that we've seen as we've toured some assets up in the Boston area. And even though there might be some premium hourly rates at the moment, but as the labor pool expands, there might be an opportunity to reset some of those that have already seen some increases as you start to replace or hire additional employees. So, it is a bit more cost at the moment, but we're not - we're certainly not of the belief that hourly wages just continue to rise, as the employment and labor force starts to become more available.

Got it. And then, just on the seasonality of the business, typically we'll be seeing debt in the fourth quarter, trends are still continuing to improve, but we may have this lag between leisure and business recovery. So I guess that's how should we think about the fourth quarter relative to what we normally see, from a seasonality standpoint?

I'll start and then Jeff can add in. I mean, I think, one, we do expect there to continue to be seasonality in our portfolio. Generally, August is a bit less than July, generally September is a bit less than August and then October is usually one of our strongest months of the year. So, we expect there to continue to be seasonality, we saw that even in the first and second quarters of this year. So, we don't expect there to be any different trends, we do believe I think, as Jeff talked about in his prepared remarks. That there will be what is a little bit different is, we do expect leisure to remain pretty strong on weekends and holidays in the fall, and certainly as you get towards the end of the year. And really the question is, is what is that midweek business traveler going to be doing and how quickly is it going to ramp up post Labor Day.

I couldn't do any better. Thanks, Dennis.

Alright, thanks for the call, guys.

And our next question is from Anthony Powell with Barclays. Please proceed with your question?

Hi, good morning. Just a question on the transaction environment, obviously, branded, upscale extended states outperformed the past several quarters and through the pandemic. Have you seen values for these hotels reach or exceed pre pandemic levels? And how does that impact your ability to do more deals this year and next year?

Hey, Anthony, it's Jeff. Well, you certainly got the drift of what's happening in the market. And I would say that values are certainly at or pretty close, for almost all limited service products, honestly, to pre pandemic levels, 2019 valuation. That's why I said it's a difficult environment and we 're just having to work really hard to kind of pick and choose, I would say, cherry pick a few opportunities on a direct basis, that might be out there for some folks and some developers that just want to recycle some capital or have some other reasons as always exist in our world, whether it's a partner issue, whether it's getting old, whether it's a state planning, that kind of thing, whether it's I need to fund some hotels that during the pandemic, really, really suffered, I'm not going to lose them. But I absolutely would like to gain some liquidity, if I could. So those are the circumstances that now and again I think we'll be able to take advantage of, mostly because of our long standing kind of just direct relationships with owners and developers within the Marriott and Hilton franchise community, really, I think more so than anything else. But extended stay hotels are hard to come by within the limited service, subclass of hotels, because of how well they've performed relative to most of the other brands.

And do you think this dynamic will lead to maybe a faster resumption of development in supply growth than you originally thought?

I still think that from what we're hearing, there's plenty of financing constraints on that front. And more than we thought, more importantly, was just pricing for construction. I mean, Dennis and I were sitting with our contractor and the construction trailer, what was it two weeks ago now, in Warner Center. And I said, so what's this going to cost me to build if you are pricing it today, and they got a look around at each other and came back and said, Jeff, at least 25% more. And when you look at that kind of increase, whichever way you want to look at it, even if you just automatically assume 2019 RevPAR, and then you put a little growth on it, I think there's a lot of deals that just don't pencil for developers. So, you see a little bit of a sequential decrease. I was just reading Marriott's numbers, it's small, but it's probably larger than what you're reading per se. So I think we still feel pretty good about where we've come, where we're headed from a cyclical upswing perspective, and you have to remember, with Chatham's assets, and you lived through with us, in '17 '18, and '19, we experienced a disproportionate share of supply increase in Silicon Valley and in the Bellevue Washington area, and other areas, frankly, most of our hotel clusters did Dallas, go on and on. So, a lot of their brands that really would be directly competitive have come in the market, two or three years pretty new prior to the pandemic, so that in and of itself, I think presents somewhat of a barrier to entry for us.

Got it. Maybe just one more unrelated, and markets like Fort Lauderdale, or Portland, where you're charging more than you charges in 2019. But guests aren't getting daily housekeeping or the breakfast maybe downgraded? How are the guests reacting? Are they taking that I guess that lower service level, okay, are they complaining? What's kind of the reaction on the ground?

Generally speaking, as we look at our guest service floors, and look at customer complaints, and of course, the Hampton Inn brand has a 100% satisfaction guarantee. We don't really see much more of an uptick, given money back, for example, in Portland, Maine, more for charging, what we're charging there. So, that experience has been pretty good, frankly. And we'll see, how that continues going forward. But so far so good. I think people are very happy, obviously, just to get out of their house, get into hotels, and experience, what they're experiencing in the markets they're visiting.

Thank you.

Our next question is from Kyle Menges with B. Riley Securities. Please proceed with your question.

Good morning, this is Kyle on for Brian. I was hoping if you could provide a little bit more detail on the two announced acquisitions and how they were sourced. And then any cap rate or expected return information would also be helpful?

Yes, we would expect about an 8.5% return on those ones that TPS we think the Residence Inn, because it was open a couple years before the pandemic, we'll just continue to increase RevPAR along with the pandemic recovery, TPS will take 12 to 18 months to ramp up. So within that period of time, that are expected yield, at least, of course, there's a heck of a lot of activity in Austin. So we're hope we're going to here on the conservative side, I think we have with that number. I actually, we actually bought - we'll buy this because, quote, to be clear, closing, should be this week's from somebody that we have transacted with on two or three different occasions, before even going all the way back to our or my innkeepers, USA Trust Days, so kind of long standing almost 25 or 30 year relationship, we were able to avail ourselves, these are pretty attractive opportunities, obviously, and we're just, I think, cherry picking some great assets here.

Great, thanks for that color. And then also, could you talk a little bit about leverage. Just as you look to grow the portfolio, what leverage level would you be comfortable with?

Jeremy, you want to pop that one?

I think as we come out of the pandemic and business gets back more normal, I think we would probably target a net debt to EBITDA before the preferred of something like four and three quarters to five and a quarter times, that sort of ballpark.

Great, thanks. That's all from me.

Thanks Kyle.

[Operator Instructions]. Our next question is from Tyler Batory with Janney Capital Markets. Please proceed with your question.

Good morning. Thanks for taking my questions. I appreciate all the commentary so far. First question for me, just in terms of the improvements in July versus June, can you give a little bit more specific in terms of what drove that I mean as that corporate getting a little bit better? And then have you seen any impact from the Delta variant on your results yet?

Yes, I would work backwards, we really haven't seen any impact on the Delta variant, any significant impact on the Delta variants. We did have a book of business in Silicon Valley that is expected to come back in the fall. So it's been kind of delayed there, we're going to have a little mini session here this summer, which is now pushed to a bigger session in the fall. But outside of that, no meaningful events. I think, certainly, as we look at July, over June, you continue to see for us our Portland, Maine asset, our Portsmouth, New Hampshire, Hilton Garden Inn. Those are two hotels, especially in the northeast, where really the leisure traveler is a little bit more frequent and less rate resistant in July versus June. So we certainly saw some increases there, month over month. But, as Jeff talked about, and I've talked about, we've seen no other real, what I would call drivers other than just still kind of steady accumulation of occupancy from month to month. So I think that's pretty consistent for us that we've seen over the last few months and really the only incremental spike would be in those kind of northeastern leisure hotels.

And to follow with some of the other questions on perhaps get at some of these topics in a different way. On the margin side of things, and clearly very impressive where you are right now, versus where you were pre pandemic, considering where RevPAR and occupancy are. As trends hopefully continue to improve into the fall, I mean, how sustainable do you think these margins are, I mean given some of the labor pressures that are out there, if we see occupancy go a little bit higher, or guest expectations ramp up? Is that something that you're concerned about or something that you're considering, as you're looking at, where margin might go in the back half of the year?

Always, I mean we certainly believe on an apples-to-apples basis that our operating margins should be a bit better on a stabilized basis, and they were in 2019. I think, listen, there's going to be a lot of bumps in the road between now and then with respect to staffing, especially. But the one thing that is fundamentally different now than it was in 2019, from an operating standpoint, is the likes of Hilton, the likes of Marriott officially changing the housekeeping standards, which is obviously where our biggest cost component is. So, probably you've heard us talk about this for several years now. But that is a big driver, and it's going to benefit companies that have portfolios that are not flipping the rooms every one and a half nights, more so than others. So, we certainly believe we're going to have to continue to add more staff as we move from 75 to what was historically, our portfolio occupancy was in the low to mid 80s. So we're not far away from that. And so we have been bringing back staff and as I talked about earlier, we've had to use casual labor and overtime to close some of the gap. But we are at least encouraged that our operating model from a profitability standpoint is going to be better on a long-term basis.

Okay, very helpful. And last question for me, just in terms of capital allocation. I mean, you need to talk about leverage. I think the liquidity position you have right now is extremely strong. Just help us think a little bit more about the priorities for that. It sounds like acquisitions are really priority number one, but what are the other sort of avenues could you look at in terms of deploying some of that capital. How conservative would you like to be with that going forward? And then also, if you could touch on potentially when dividends might start to make more sense?

Let me just start and then Dennis can pick up. Yes, acquisitions and growth, I think, are first and foremost on our mind. As we said, kind of when we were talking in the prepared remarks, barring a real shutdown, we think we've got cash burn behind us. So the need to maintain and be ultra conservative with our balance sheet and liquidity probably, obviously, is not as great as it was. That's why we want to be in a growth mode. So that's really what we're thinking about on the capital allocation side, by the way, we still are trying to recycle some capital as well. And talking about, selling a couple of hotels that we just think, are a little bit older in the portfolio that once the brands do come back with some resumption of renovation requirements and otherwise, are probably going to take an outsized amount of capital for return that we don't think, is there. So that may provide even more liquidity for us in the near term, if we're successful in that endeavor. So we feel pretty good about where we said, as Jeremy was talking on the balance sheet side. Did you have something else on that?

Dividend.

And on the dividend, look, our Board's perspective on that has always been to pay taxable income. And we would think that there is some dividend, obviously some dividend resumption most likely next year, not this year, based on our numbers and carried forward.

Okay, that's all for me. Appreciate the detail. Thank you.

Thanks, Tyler.

And we have reached the end of the question-and-answer session. I'll now turn the call back over to Jeff Fisher for closing remarks.

Well, again, I'd like to say we appreciate everybody being on the call today. And we look forward to continuing our successes and moving forward in a very positive manner, hopefully with more good news, as the third quarter winds itself up, and we'll talk to you then. Thanks.

This concludes today's conference and you may disconnect your line at this time. Thank you for your participation.