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Edited Transcript of CLDT earnings conference call or presentation 1-May-19 2:00pm GMT

Q1 2019 Chatham Lodging Trust Earnings Call

PALM BEACH May 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Chatham Lodging Trust earnings conference call or presentation Wednesday, May 1, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dennis M. Craven

Chatham Lodging Trust - Executive VP & COO

* Jeffrey H. Fisher

Chatham Lodging Trust - Chairman, President & CEO

* Jeremy Bruce Wegner

Chatham Lodging Trust - Senior VP & CFO

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Conference Call Participants

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* Bryan Anthony Maher

B. Riley FBR, Inc., Research Division - Analyst

* Tyler Anton Batory

Janney Montgomery Scott LLC, Research Division - VP of Travel, Lodging and Leisure

* Chris Daly

Daly Gray Public Relations - President

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Presentation

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Operator [1]

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Greetings, and welcome to Chatham Lodging Trust's First Quarter 2019 Financial Results Conference Call. (Operator Instructions) And as a reminder, this conference is being recorded.

I would now like to turn the conference over to Chris Daly, President of Daly Gray. Thank you. Please, go ahead.

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Chris Daly, Daly Gray Public Relations - President [2]

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Thank you, Brendan. Good morning, everyone, and welcome to the Chatham Lodging Trust First 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 risk 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 May 1, 2019, unless otherwise noted. And the company undertakes no obligation to update any forward-looking statement to conform that 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 first 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?

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Jeffrey H. Fisher, Chatham Lodging Trust - Chairman, President & CEO [3]

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Thanks, Chris. Good morning, everybody.

Earlier today, we reported our first quarter results and hope that everyone's had a chance to review those. We're happy to report RevPAR basically in line with our guidance but with higher EBITDA and FFO, driven by margins exceeding our expectations.

Overall, as industry RevPAR growth remains sluggish, our asset management efforts together with Island Hospitality, remained intensely focused on maximizing room revenue, adding or enhancing other sources of revenue and minimizing expense creep with the goal of becoming as efficient as possible on the operating side and mitigating any margin loss.

You've heard us talk about many of these initiatives since last year, and I'm pleased with the progress we've made and the results.

In our 40 comparable hotels through these initiatives, our total revenue was actually up year-over-year despite a $600,000 decline in actual room revenue. I think that's pretty impressive and quite honestly, would be very difficult to execute without our operating affiliation with Island.

A few examples: parking revenue was up $250,000 over the prior year or 17%. F&B revenue was up approximately $200,000 or 9%, benefiting from opening a new bar and enhancing existing bar services.

Amenity package revenue and other miscellaneous revenue was up approximately $100,000 and this is all incremental in the first quarter. And lastly, the 48-hour cancellation policy has enhanced revenue by about $100,000 compared to last year.

We've invested a lot of time enhancing our internal tools and personnel as well, designed to maximizing our revenue management capabilities, working with Island on that front. And we've seen great results, I think.

Our RevPAR index grew 1% over the last 6 months and for this past quarter, almost 2%, so 200 basis points better than the markets that we operate in or the competitive sets that we're in, pretty proud of that. Benefits costs are actually down 3%, and Dennis will get into a little more detail on that.

Another example I wanted to highlight just again on some of this ancillary and other revenue increase is the small bar concept that we initiated at our Downtown Savannah SpringHill Suites hotel.

In 2018, we converted a seldom-used meeting space that did have good corner frontage on the street into a pretty cool bar called Toasted Barrel. The bar has some specialized food service and quite a Bourbon and other liquor service establishment. And during the first quarter, we generated about $100,000 of revenue from that little bar and a profit of $26,000, which, by the way, is a pretty attractive margin for any F&B outlet at that percentage.

Continuing on that pace for the full year, we should generate at least $100,000 of brand new profit for the hotel and a return on our investment to build out the small bar space of about 25% ROI and increasing the value of our hotel with a reasonable cap rate by almost $1.5 million. And I would point out, other than Saint Patrick's Day, that first quarter in Downtown Savannah is a seasonally very slow time of the year, so that's why I think the $100,000 number is pretty conservative.

Strategically, we're going to continue to explore our asset sales with the intention of using those proceeds to invest in acquisitions or potential developments. We're looking at more deals than last year just because I think more owners are trying to market hotels or at least see what the market will pay. But I think their expectations are unreasonable, certainly for us, based on what we think we ought to have as a cap rate going in and a stabilize yield. So that's why we have not announced any acquisitions. We are looking at a few and we'll continue to try to source more value-add opportunities where we can really bring value whether through management or through brand conversion out there. And we've had success, of course, doing that in our prior life at Innkeepers, so we're open to those kinds of deals.

We've also talked about developing 1 or 2 hotels in the right markets, that'll provide more attractive risk adjusted returns, we think, than buying something that is stabilized at a low cap rate and perhaps watching the return shrink. So we're encouraged by a couple of those opportunities as well. The good news is that we've raised almost $200 million over the past couple of years, which has put us in a good position to build just a little bit if we want to.

To touch briefly on supply in our markets, the good news is it continues to trend down in our direct markets, new upscale supply in our market tracks, as measured by Smith Travel, has peaked at 5% in 2015 and declined each year to 4% in 2016 and 3% in 2017, 2% in 2018, and so far same for 2019. We've managed to maintain occupancy over that same time frame, but we all know that ADR growth has suffered as a result of that supply growth.

With that, I'd like to turn it over to Dennis.

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Dennis M. Craven, Chatham Lodging Trust - Executive VP & COO [4]

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Thanks, Jeff. Good morning, everyone. A RevPAR decline of 1% at our 40 comparable hotels was driven by a gain in occupancy of 50 basis points to 76% combined with a loss in ADR of 1.5% to $159.

Within the quarter, RevPAR was down 1% in January, down 2% in February and up 40 basis points in March, bucking a slight trend, which I think some of our peers saw March a little bit weaker than we did.

We are facing tough comps in the quarter, which contributed to our RevPAR decline of 1% compared to the industry growth of 1.5%. First of all, we were impacted approximately 50 basis points due to a tough Super Bowl comparison in Minneapolis last year. And we do not have any hotels in Atlanta this year, so it was a year-over-year loss of an event for us. We lost another 60 basis points related to the renovation at one of our large Sunnyvale Residence Inns, which was completed in February. And we lost approximately 30 basis points related to some nonrecurring FEMA demand at our Residence Inn outside of Boston in Dedham, Massachusetts.

Our 6 largest markets contribute approximately 60% of our hotel EBITDA, and I'm going to talk a little bit about each of those. Silicon Valley contributes 23% of our hotel EBITDA on the trailing 12-month basis. And RevPAR in our 4 Silicon Valley Residence Inns was up 3.6% to $183, and that's despite the Residence Inn in Sunnyvale that was under renovation for 2/3 of the quarter.

RevPAR at the other 3 hotels, excluding the 1 under renovation, was up a strong 9% when we take out that location, with all 3 hotels posting RevPAR growth of at least 6%.

Customer reviews of our newly designed Residence Inn rooms have been fantastic, are being well received by our most-valued clients in the market. We remain encouraged by the depth and quality of the economic growth in the valley and are very happy with our 4 assets in Silicon Valley.

San Diego represents our second largest market. Generates about 9% of our EBITDA. RevPAR was up 13%, basically benefiting from an easy comp as our Mission Valley Residence Inn was under renovation last year.

Our third largest market, Washington, D.C., RevPAR declined 5%. Our Tysons Residence Inn was undergoing a major renovation, and its RevPAR was down 8% in the quarter.

RevPAR for other 2 hotels in the market, that being Springfield, Virginia and in downtown Washington D.C. was down about 3.5% primarily due to the impact from the government shutdown earlier this year.

Our Residence Inn Tysons renovation is complete. We blew up the lobby and significantly enhanced the guest experience. And we're working on a pretty enhanced outdoor experience there as well. So we look for good things to happen in that property.

Our 3 northeastern coastal market hotels had a great quarter, with RevPAR advancing 4%, driven by an almost 10% increase in RevPAR at the 2 leisure hotels in Portsmouth, New Hampshire and Portland, Maine.

Leisure demand remained strong with these hotels. And they, of course, they had a standout first quarter.

Houston, which represents our fifth largest market, RevPAR was down 4%.

RevPAR at our 2 Medical Center hotels was basically flat, while RevPAR at our 2 West University hotels was down approximately 9%. Those 2 hotels still had Hurricane Harvey business occupants in the hotel in the 2018 first quarter, which made for a tough comp.

Looking forward, our Medical Center hotels do face a difficult challenge due to new supply in that market, and it's a market that certainly doesn't need it. And some -- for some reason, people still want to build hotels in Houston. But that supply, we've got a brand new Residence Inn that's a Medical Center as well as a large 354-room Intercontinental that are both now open.

Our sixth largest market, Los Angeles, continues to move higher, with RevPAR advancing 2% in the quarter. Both Anaheim and Marina del Rey showed growth in the first quarter. And 2019 still looks to be a good year for us at both of our L.A. hotels, with RevPAR growth of approximately 3% expected.

Within our JVs, RevPAR was up 1 -- a little over 1% for the quarter. At our 40 comparable Island-managed hotels, which excludes hotels acquired in 2018, first quarter operating margins declined 50 basis points, pretty darn good when you consider the RevPAR was down 1%.

Total revenue at our 40 comparable hotels was actually up. And I think, Jeff, certainly spent plenty of time talking about that.

Payroll and benefits represent approximately 38% of our total operating expenses and about 20% of our revenue. For the quarter, on a per occupied room basis, payroll and benefits were up 2.7%. The first quarter innumerous years the increase has been less than 3%.

In the quarter, wages were up 4.9%, with benefits down 3.9% on a per occupied room basis. Again, when you look at our benefit cost declining, some is due to lower claims year-over-year, but a good portion is due to, once again, asset management initiatives.

Working with our own hospitality, we implemented some premium and plant adjustments during 2018 as well as in our renewal for 2019. And we're getting some pop to the bottom line as a result.

Lastly, there's been a lot of attention in the industry over the past year with respect to guest acquisition cost and the efforts by the [Sea Corp] to drive consumers to their membership programs to renegotiate OTA agreements and to implement changes to their reward programs.

During our first quarter, our guest acquisition costs were down 6% and this aided our margins by about 27 basis points.

I'll go ahead and turn it over to Jeremy.

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Jeremy Bruce Wegner, Chatham Lodging Trust - Senior VP & CFO [5]

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Thanks, Dennis. Good morning, everyone. For the quarter, we reported net income of $1.6 million compared to net income of $2.9 million in Q1 2018. The primary differences between net income and FFO relate to noncash cost such as depreciation, which was $12.7 million in the quarter. Other charges and our share of similar items within the joint ventures, which were approximately $1.8 million in the quarter.

Adjusted FFO for the quarter was $16.2 million compared to $16.5 million in Q1 2018, a decrease of 1.8%. Adjusted FFO per share was $0.34 compared to the $0.36 per share generated in Q1 2018. Adjusted EBITDA for the company increased 2.3% to $27 million compared to $26.4 million in Q1 2018.

In the quarter, our 2 joint ventures contributed approximately $3.2 million of adjusted EBITDA, $0.7 million of adjusted FFO.

First quarter RevPAR was up 2.3% in the Inland portfolio and up 0.5% in the Innkeepers portfolio. Our balance sheet remains in excellent condition. At the end of our quarter, our net debt was $588 million. Our leverage ratio is 35.1%. Our weighted average cost of debt was 4.6%, and our weighted average debt maturity is 4.6 years.

Transitioning to our guidance for Q2 and full year 2019, I'd like to note that it takes into account the renovations of the Residence Inn San Matteo, Residence Inn Houston and Hampton and Houston in Q2, Residence Inn Fort Lauderdale in Q3 and Residence Inn Sunnyvale II in Q4.

We expect Q2 RevPAR growth to be plus 0.5% to plus 1.5%, and full year 2019 RevPAR to be minus 1.5% to plus 0.5%, unchanged from our initial guidance for the year.

As a reminder, our Boston area properties will face very difficult Q4 comparisons due to the surge in onetime gas leak-related business in Q4 2018.

We expect that the challenging comparisons for our Boston properties will impact our overall 2019 RevPAR growth by approximately 65 basis points.

Our full year forecast for corporate cash G&A is $9.6 million. On a full year basis, the 2 JVs are expected to contribute $15.9 million to $16.7 million of EBITDA and $5.5 million to $6.3 million of FFO.

We're increasing our full year adjusted FFO guidance to $85.4 million to $89.7 million, which is an increase of $1 million or $0.02 per share at the midpoint.

I think at this point, operator, that concludes our remarks, and we'll open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first questions are from the line of Bryan Maher with B. Riley.

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Bryan Anthony Maher, B. Riley FBR, Inc., Research Division - Analyst [2]

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The rate of increase in payroll and benefits has continued to decelerate. Do you think that, that continues through the back half of 2019? Or you think it moderates here?

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Jeremy Bruce Wegner, Chatham Lodging Trust - Senior VP & CFO [3]

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I think it moderates. I'm not sure it decelerates much more than kind of a 3% range. Ours for total wages and benefits was 2.7%, but portion of that wages -- the wages piece of that was up 4.9% and benefits were down 3.9%. So I don't think it decelerates anytime soon. But in total, around 3% is probably about right.

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Jeffrey H. Fisher, Chatham Lodging Trust - Chairman, President & CEO [4]

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But -- and the benefits, this is Jeff, adjustment that we made was for the last 6 months of last year. So as you lap those numbers, your benefits won't be down at all because the levels were adjusted pretty much halfway through the year.

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Bryan Anthony Maher, B. Riley FBR, Inc., Research Division - Analyst [5]

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Okay. And then kind of looking at the RevPAR weakness, how much do you attribute that to the renovation activity that was ongoing? And how much do you suspect was supply and tough comps? And I don't expect an exact number but kind of a ballpark.

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Jeremy Bruce Wegner, Chatham Lodging Trust - Senior VP & CFO [6]

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Yes. I mean listen, just our Sunnyvale property alone was about 60 basis points to our RevPAR for the quarter, as an adverse impact. The only other -- we did have our Boston Dedham hotel a little -- under renovation for a period of it and our Tysons Virginia hotel under [for a little bit]. So it's probably about a full point in total.

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Bryan Anthony Maher, B. Riley FBR, Inc., Research Division - Analyst [7]

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Okay. And then when we think about supply in your markets, you ramped through the last several years. The trend has been improving. What do you think we look at -- as we look out to '20 and '21, how are your markets shaping up on new supply?

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Jeffrey H. Fisher, Chatham Lodging Trust - Chairman, President & CEO [8]

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This is Jeff. As you look at the numbers from Smith Travel and the reports, it looks like that 2% number is probably pretty good for next year. There's a fair amount that's on the books overall. So I would imagine at least for another year you'd be seeing, for us, supply additions at that level.

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Bryan Anthony Maher, B. Riley FBR, Inc., Research Division - Analyst [9]

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All right. And then just lastly, and maybe this is for Jeffrey. Acquisitions and dispositions, I think you touched upon the potential for some dispositions in 2019. What are you seeing out there as it relates to cap rates? How wide is the bid spread? And how comfortable are you that you actually get some stuff done this year?

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Jeffrey H. Fisher, Chatham Lodging Trust - Chairman, President & CEO [10]

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Well, I think the spread is wide. So I'm not going to stand up on a kind of soapbox or whatever and beat my chest and say we're selling a bunch of hotels. But there were a few out in Western PA that I think we'll get done, and sort of get rid of those problems so to speak. But I think on an opportunistic basis, we'll continue to look for deals that will allow us to recycle capital in a accretive way. But the gap is wide right now. I think -- and our expectations are not to let something go because somebody -- at a high cap rate because somebody else thinks RevPAR or EBITDA is declining in the next year or so.

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Operator [11]

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(Operator Instructions) Our next question there is from the line of Tyler Batory with Janney Capital.

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Tyler Anton Batory, Janney Montgomery Scott LLC, Research Division - VP of Travel, Lodging and Leisure [12]

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So a couple of questions for me. Can you circle back and comment a little bit more on what you guys saw in March? Obviously, you bucked the industry trends. And then if you're able to provide any color on what you're seeing in April and into the second quarter that would be helpful as well?

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Jeremy Bruce Wegner, Chatham Lodging Trust - Senior VP & CFO [13]

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Yes, I mean, I think, the main thing for us, we did have a pretty good piece of corporate business in Silicon Valley and in San Diego that helped our quarter and specifically, helped March. I think you also had a little bit of stronger leisure demand, as I talked about in our North Eastern hotels. But those are primarily the markets that kind of helped us outperform in March.

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Tyler Anton Batory, Janney Montgomery Scott LLC, Research Division - VP of Travel, Lodging and Leisure [14]

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Okay, got it. And then I also wanted to ask about Silicon Valley. I think the last time we spoke, your expectations were for the full year that market was going to be down slightly -- up slightly. Obviously, very strong performance in the first quarter. Any change to your full year outlook for what Silicon Valley could do from a RevPAR perspective?

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Jeremy Bruce Wegner, Chatham Lodging Trust - Senior VP & CFO [15]

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Yes. I mean, listen, I think, we have adjusted our expectations a little bit higher. April is a little bit squarely with just about the Easter, Passover holidays, especially with some of the larger corporate accounts that we have. But we've certainly moved up our expectations for Silicon Valley. Excluding renovation, by the way, to where it'd be up a little bit. Just to remind you, in the second quarter, we started our renovation at our San Matteo Residence Inn and in the fourth quarter we're starting our -- fourth quarter, we'll be starting our renovation at our second Sunnyvale location. So certainly outside of the renovations, listen, we believe that's still a healthy market for this year.

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Tyler Anton Batory, Janney Montgomery Scott LLC, Research Division - VP of Travel, Lodging and Leisure [16]

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Okay, great. And then just a couple more for me. When you look at some of the recent acquisitions, you've one in Charleston and then you had a Dallas property that you purchased in December, can you discuss a little bit more what's going on with those 2 assets? How they're performing versus your underwriting?

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Jeffrey H. Fisher, Chatham Lodging Trust - Chairman, President & CEO [17]

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Yes. I'd say the Charleston has been a disappointment. And we really can't put our finger on it because it's not supply particularly, although, there was 1 home, 2 suites that opened up in our quadrant there. But I'd say, we're having definite ADR shortfalls to our model and our budget in the Residence Inn that we opened up there, the market itself has been down, our index down in the sort of mid- to even upper-single-digits down, whereas our RevPAR index has been better than model. Thank goodness as has been the case around here lately. So I think that's a disappointment, but we still firmly believe, obviously, in the market, especially for the longer haul and all the construction and other developments that we had underwritten to be occurring in the area and the addition of the second Volvo plant, et cetera, is all occurring. So feel good overall, not now. Dallas, I think has been a pleasant surprise. I think Dallas has been pretty good, but like most markets, underperforming on ADR again and in this case, exceeding our expectations at the occupancy level for a brand new hotel especially. So that one feels real good. And I think for the year, unlike Charleston, we ought to be able to make our numbers.

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Tyler Anton Batory, Janney Montgomery Scott LLC, Research Division - VP of Travel, Lodging and Leisure [18]

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Okay, great. And then just last question for me. Developments, can you remind us markets where that can make sense, time line, costs, et cetera? That's all for me.

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Jeremy Bruce Wegner, Chatham Lodging Trust - Senior VP & CFO [19]

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Yes. I mean, listen, I think for markets, Tyler, we're going to -- we're still big believers in the West Coast markets, Southern Cal as well as Silicon Valley for potential developments. We don't really have an estimate yet as of cost or anything like that. But certainly as we kind of continue to progress down a couple of options down the road as soon as we get to where we think we're in a good position, we'll certainly be able to -- certainly good enough to let anybody know what's going on obviously.

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Jeffrey H. Fisher, Chatham Lodging Trust - Chairman, President & CEO [20]

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So we've got cost estimates to be clear. Otherwise, we wouldn't be doing this, but -- are exploring it. But we're not at a point where we can disclose those developments and specific numbers around them. But I would say that if we're not getting 150 or 200 basis points more in a stabilized yield than something we could buy today, then we're not even going down that road. And look, we all know construction costs are escalating in some markets even -- especially in the West Coast, greater than 10% per annum. So it's a unique, I think, opportunity to be in a market and most likely for us, it's a market that we're already in that has the kind of overall demand generation support that would work to build a new hotel. So I think we can leave it at that for now.

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Operator [21]

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We have no further questions in the queue at this time. I'd like to turn the floor back to management for any closing comments.

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Jeffrey H. Fisher, Chatham Lodging Trust - Chairman, President & CEO [22]

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Well, once again, we appreciate everybody's support and being on the call. We look forward to continue working real hard for everybody here, particularly on the front of minimizing our margin erosion during the flat RevPAR environment that we're in to working on these other opportunities for revenue in these hotels and frankly, the continued focus on moving that RevPAR index ahead in markets that might not be performing as well as you -- as we might expect overall will allow us to continue to put up pretty strong numbers. So with that, I'll sign off, and look forward to speaking soon.

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Operator [23]

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