Greetings and welcome to the Chatham Lodging Trust Second Quarter 2020 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Daly, President of Daly Gray Inc. Please go ahead.

Thanks, Sachi. Good morning, everyone and welcome to the Chatham Lodging Trust second 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 August 5, 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 insights into Chatham’s 2020 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. Jeff?

Thanks, Chris. Good morning, everyone. First and foremost, thank you for your interest in Chatham, and we sincerely appreciate your participation during these unusual times. The COVID-19 pandemic has been one of the most destructive events to the global and national economy in history, and its impact on the lodging industry is unprecedented, forcing hotel owners and operators to manage our businesses under the most dire circumstances. This unprecedented period has required intense asset management and operating focus. And I am very proud of the efforts of our teams, both at Chatham and Island Hospitality, allowing us to generate some of the best operating results of all public lodging REITs. We have optimized our best-in-class operating platform since our IPO. During these turbulent times, the benefits of that platform stand out as the ideal operating model, allowing us to work closely together to deliver leading results. For the quarter, our RevPAR declined 77% to $33. Although a dismal absolute RevPAR, the decline of 77% across our entire portfolio, not just some small subset of open hotels, is much better than most companies that have already reported RevPAR declines over 90%. I believe that our outperformance is attributable to the fact that 70% of our 2019 EBITDA and 60% of our rooms consist of extended stay hotels. An important differentiator is that Chatham has the highest percentage of extended stay rooms of all lodging REITs, basically double the next highest REIT, which is often overlooked. Additionally, more than 96% of Chatham’s rooms are characterized as limited-service rooms, the highest percentage among public lodging REITs. Our upscale extended stay hotels, along with our select and limited-service hotels, provide us the flexibility during periods of growth or weakness to diversify our customer base to maximize revenue, and that’s exactly what our operating team has been doing. Within the quarter and in July, we have seen gradual revenue improvement since hitting bottom in late March. We outlined in our press release our monthly RevPAR stats and RevPAR performance by brands for the quarter, and there are some interesting points. First, occupancy improved 1,000 basis points in each of May and June. Companies that have already reported earnings have stated that July has been similar to June, but for us, our occupancy further increased over 400 basis points to 48% for our entire portfolio. Having suites with full kitchens and large rooms has been beneficial in attracting today’s travelers, primarily first responders and government or military personnel in the first couple of months after the collapse. These wins allowed us to keep all 40 of our hotels open. Additionally, in Silicon Valley, where we have four Gen-1 Residence Inns, those hotels are designed to provide extra space and are well suited for longer-term corporate guests when they return, which should aid our direct sales efforts. In addition, those Gen-1 Residence Inn hotels have, of course, separate entrances without the need to even enter the lobby of the hotel, allowing for a completely contactless experience, which we think will be a significant advantage as we move through 2021. Second, the average daily rate (ADR) has rebounded. It’s not surprising that ADR took a hit, as the rate profile of early pandemic travelers was lower. ADR bottomed out for us in May but gained 12% in June and another 6% in July. Third, regarding our RevPAR index, which measures the share of business we are getting versus our competitors within a market, it skyrocketed throughout the pandemic. Even as hotels have reopened in the markets, we have been able to maintain a significant premium of around 144 for the past four months, which is 22% higher than our 2019 average of 118. This fantastic performance is a direct result of the outstanding efforts by Island’s direct sales and revenue management teams, again, winning more than our share of existing demand. Fourth, the average length of stay has markedly changed for our portfolio, driven by the type of traveler during the pandemic who prefer our extended stay hotels. The average length of stay in the second quarter 2020 was up to 5 nights for the Homewood hotels and 5.9 nights for Residence Inn, compared to 2.6 nights for both in the same quarter last year. Fifth, daily demand trends have completely flipped. As you have all read about for the industry, our portfolio has seen that demand is strongest on the weekends. For the past couple of months, Friday and Saturday occupancy was 50% at an ADR of $108, while for the remainder of the week, occupancy is 45% and ADR is $105. As most are aware, the leisure traveler is the driver of this trend, as people want to travel and get out of their homes. Lastly, revenue per day has increased every month since April, and July revenue per day was higher than June. With the exception of the week after July 4, room revenue has sequentially increased each week for the last nine weeks. The current trends remain somewhat encouraging, although the rate of growth from month to month has slowed. But if we have learned anything, it’s that these times are incomparable, and there is really no way to accurately project the future. Looking past the summer, we have seen some corporate demand percolating, but only time will tell if that comes to fruition. I can say that the corresponding rates are well down from the prior year, though slightly improved from the second quarter. I firmly believe that given our portfolio attributes, we will be able to return to 2019 revenue levels sooner than most of our lodging REIT peers, but the full return of the corporate transient traveler will depend on the availability of a vaccine. As I mentioned earlier, I am thankful to have our best-in-class operating platform with Island Hospitality, which has been further proven by our ability to operate much leaner at lower operating levels. This allowed us to reach operating profitability much sooner and at lower RevPAR levels than indicated. Dennis and Jeremy will provide more details on that, but I will tell you it required extensive adjustments to our cost structure. Compared to pre-pandemic levels, we laid off or furloughed approximately 70% of our employees, and currently have reduced that number to 60% as occupancy has returned. We have reduced service levels, staffing at our hotels to minimal but functional levels, reduced compensation, and are carefully analyzing every expense. When you review the monthly detail of hotel profitability in our release, you can see that we achieved positive gross operating profit (GOP) at RevPAR levels below $30 and positive EBITDA at RevPAR of about $40. Those are remarkable achievements accomplished by staying hyper-focused on managing expenses across all departments using our experienced operating teams and providing them with the right tools to actively manage expenses daily. As a result of better operating performance, our second quarter cash burn before CapEx of $8.4 million was a meaningful 40% lower than our original estimate of $21.3 million. Our June cash burn before CapEx of $2.8 million was approximately 50% better than our prior forecast of $7.1 million. If you wanted to assume that June performance would continue for the foreseeable future, our liquidity runway is 41 months, enough to sustain us into 2023. Most industry experts and pundits believe it will take until 2022 or 2023 before RevPAR returns to 2019 levels. Knowing how long this downturn will last, operating efficiently produces operating profit, lessening our cash burn, which ultimately has a significant impact on long-term equity value for our shareholders. Our teams at Chatham and Island have the experience to persevere through these situations, and we know how to lead a public lodging company through these challenging times. With that, I would like to turn it over to Dennis.

Thanks, Jeff. I’d further add on the outlook that the impact of new supply is going to lessen significantly in the future. Hotels under construction will be slowing down but will still be completed. If a hotel isn’t currently under construction, it will be challenging to underwrite the appropriate terms and returns that justify construction. Additionally, even though we were able to secure a construction loan for our hotel in LA, underwriting it has been quite challenging at this time. Given our solid credit and good relationships, we were able to get that loan closed, but it’s not something others will easily achieve moving forward. Given the expected recovery for the industry, it’s hard to envision new supply being an issue for at least as long as it took post-financial crisis. Among our key markets, San Diego was the top performer with RevPAR of $52 due to military and government-related business. Silicon Valley's RevPAR of $38 was better than our portfolio average, benefiting from some corporate travel in late May and June. Our three coastal hotels in Maine and New Hampshire were hindered during the quarter due to severe restrictions that have since been eased. Our leisure market hotels have certainly seen the best rebound; our Residence Inn Anaheim had a second quarter occupancy of 45% even while under renovation. June occupancy was 71%, and July occupancy was 93%. At our Residence Inn Lugano and Fort Lauderdale, second quarter occupancy was 44%, with June occupancy of 60% and July occupancy of 97%. In Savannah at our Springhill Suites, second quarter occupancy was 26%, June occupancy was 44%, and July occupancy was 50%. The three coastal New England hotels had a second quarter occupancy in the low 20s, but July occupancy for those three hotels was approximately 65% after restrictions were loosened. Eleven hotels had second quarter occupancy over 50% out of our 40 hotels; three hotels had occupancy below 15%, but of those three, two are complex hotels with an adjacent hotel where we are consolidating most guests into one hotel, specifically at our Courtyard in Houston West University and at one of our Residence Inns in Sunnyvale, Silicon Valley. Relative to revenue segments, government revenue has been our best-performing segment during the quarter, but it still comprises the least of the three major segments for our business. Corporate revenue made up approximately 26% of our second quarter revenue in 2020 versus 29% last year, with RevPAR of 79% and ADR of 40% to 50%. Importantly, about 40% of corporate business was related to traveling nurses and doctors engaging in pandemic response. Retail revenue accounted for about 53% of our second quarter revenue this year compared to 56% last year, with RevPAR of 78% and ADR of about 35% to 40%. Government revenue production doubled this year, accounting for approximately 16% of our second quarter revenue, though revenue has dropped 55% with ADR of about 25% to 30%, roughly at $125. We have seen significant government-related production associated with military and related personnel being housed in two hotels outside of Charleston. Operationally, as a major Hilton and Marriott franchisee, we believe that the operating model will look different going forward. The pandemic has prompted the industry to reevaluate how guests are served, be it related to housekeeping, food and beverage, or other complementary services. As you may have heard from us for a while, we have been advocating for change with the brands. While these changes won’t happen overnight, the brands are now aligned with us on making necessary changes to drive better returns. We adhere to all cleanliness and life safety standards and have only limited exposure to unions, with only one of our hotels being unionized, that being the Residence Inn in White Plains. All lodging companies have to assess liquidity needs, something previously unheard of in the lodging industry, especially for well-capitalized firms like Chatham. At the corporate level, we have been very proactive in adjusting our cost structure during these difficult times to minimize cash outflow. Our general and administrative (G&A) expenses were already among the lowest of all lodging REITs, but we sought to be as aggressive as possible. Unfortunately, we had to reduce our headcount by about 25%. Jeff and I took 50% pay cuts, while every corporate employee took a 25% pay cut. Overall, we’ve reduced salary costs by approximately 50% this quarter. Our Board of Trustees also reduced their 2020 compensation by 25%. Consequently, our cash G&A is down about 35%, amounting to over $3 million saved for the year. We filed a business interruption claim related to COVID-19 losses and will continue to pursue it, but any potential recovery will take time and the amount is not estimable. As Jeff mentioned, we are very pleased to have our cash burn be much less than initially modeled. Our GOP breakeven RevPAR ended up being approximately $26 versus our original estimate of $32 to $35, representing a 20% improvement. Our hotel EBITDA breakeven RevPAR came in around $40, again about 20% below our original estimate of $50. Importantly, we estimate our RevPAR breakeven level is now about $75, down 20% to 25% from previously expected levels. On the CapEx front, we spent approximately $8 million in the second quarter, which included $4 million on the Warner Center development, $1.2 million on renovations at the Anaheim Residence Inn and Residence Inn in New Rochelle, New York, and another $1 million on finishing renovations in Silicon Valley. We have suspended all renovations that have not started and all non-emergency CapEx, saving $10 million in 2020. We have slowed down spending on our Warner Center development until we could secure a dedicated loan for that project. We anticipate spending around $4 million on CapEx other than Warner Center throughout the rest of the year. We are pleased to have recently finalized a construction loan that solidifies our capital structure by not utilizing our liquidity on our credit facility and enables us to proceed with the project with an expected completion in early 2022. We expect this hotel to ramp up quickly and generate meaningful hotel EBITDA in 2022 and beyond. As mentioned in our release, the Inland portfolio has been appointed a receiver by the special servicer of the loans, and ownership is transitioning. Although this investment did not pan out as expected, our joint venture investments since our IPO have provided attractive returns, approximately $87 million in total JV investment generating cash returns of approximately $150 million. Overall, these deals have performed well.

Thanks, Dennis. Good morning, everyone. Chatham’s Q2 2020 RevPAR was down 77%, but we saw positive trends throughout the quarter and beyond. RevPAR increased from approximately $24 in April to $31 in May, to $45 in June, and to $52 in July. Through our significant efforts to contain costs, we were able to limit our adjusted EBITDA loss for the quarter to $3.3 million. As with RevPAR, we saw positive EBITDA trends throughout the quarter with hotel EBITDA losses of $2.3 million in April and $0.8 million in May, before generating a positive hotel EBITDA of $0.8 million in June. At the end of Q1, we wrote off our entire investment in the Inland JV and in Q2, we ceased recognizing any income or EBITDA from it. The Inland JV has not been able to negotiate a debt forbearance agreement, and the servicer has initiated the process of appointing a receiver to oversee the hotels. Excluding the Inland JV, Chatham’s pro forma 2019 net debt to EBITDA ratio would be 5.4x, versus 5.7x if it were included. The Innkeepers JV continues pursuing a debt forbearance agreement. Both JV loans are non-recourse to Chatham except for certain actions that do not trigger cross-defaults under any Chatham debt. Chatham has a robust balance sheet that positions us well to navigate the disruption caused by the COVID-19 pandemic. We ended Q2 with $36.9 million in unrestricted cash and $8.9 million in restricted cash that can be utilized for capital expenditures, property taxes, and insurance. In early May, we amended our credit facility, allowing for covenant relief until Q2 2021 and enabling us to utilize the entire $250 million capacity of the facility. When covenants begin to be tested again in June 2021, EBITDA and NOI figures used for covenants will be calculated on an annualized basis through the end of the year. As of June 30, we had $114 million in liquidity between our unrestricted cash balance and revolving credit facility availability. Even at our June 2020 RevPAR of $45, our monthly cash burn, including corporate G&A, interest expense, and principal amortization, was approximately $2.8 million before CapEx. Thus, our current liquidity position covers our monthly cash burn for roughly 41 months, providing ample time for operating performance to recover. Just yesterday, we secured a $40 million construction loan to fund the remaining cost of our Warner Center development. This will allow us to finalize the project without utilizing liquidity from our cash balance or revolving credit facility. The construction loan has a four-year maturity with two six-month extension options and is initially priced at LIBOR plus 750. Once the property achieves a debt yield of 9%, the spread on the loan will decrease to 600 basis points. While we don’t believe we will need additional liquidity beyond what we have, we have six unencumbered hotels with a book value of $276 million, which could serve as collateral to raise additional debt proceeds. Chatham’s balance sheet is further strengthened by minimal debt maturities in the coming years. The only debt maturing between now and the end of 2021 is a single $12.8 million non-recourse mortgage loan maturing in September 2021. After that, the next debt maturity for our credit facility is in March 2022, which we have the option to extend through March 2023. This gives us significant time for both hotel operating performance and the capital markets to recover before needing to refinance any material debt starting in 2023. Due to the current lack of visibility regarding operating performance, we withdrew our earnings guidance in March. Given the continued limited visibility around recovery and hotel operating performance, we will not provide guidance at this time. This concludes my portion of the call. Operator, please open the line for questions.

Thank you. The first question is from Ari Klein of BMO Capital Markets. Please go ahead.

Thank you and good morning. Can you talk to the specifics of what has been done to reduce the breakeven versus prior expectations? And then how much of the cost reductions do you think are permanent, or how different would you expect staffing levels to pull up when we return to normalized occupancy levels in the next few years?

Hey, Ari, this is Dennis. Yes. Listen, I think the outperformance on the operating side is really across the board, but it’s primarily focused, a third of our costs are labor-related. So, it’s primarily centered on being efficient with staffing. Most food and beverage offerings, even in the select service segment, have seen their breakfast offerings significantly reduced in both content and staffing levels, and there are no evening social events. Our best contributor to this performance is labor-driven and the ability to hold off on rehiring as occupancy has improved from 20% to almost 50%. We have only brought back about 10% of our employees, which is quite significant. We have a team of analysts that are in regular contact with every hotel GM and regional manager, looking at current expenses across the board and projecting them on a monthly basis. So, it’s simply a hyper-focus on every dollar being spent. Regarding the second part of your question, as we move towards stabilization, we believe the housekeeping model will be different, and we expect that the evening social hours will largely disappear, for the most part, and breakfast will be modified as well. These changes should benefit our model on a stabilized basis.

Got it. And then just on the corporate segmentation, you mentioned some of the corporate negotiations you've been involved in. Are they worse than the ADR declines you've seen to date?

No, they are not worse. I think ADRs will slowly recover as the corporate traveler starts coming back to our hotels. The rate profile for most of our corporate guests was skewed by the demand for traveling nurses and doctors, which was at a much lower ADR profile. As room blocks return in the third and fourth quarters from corporate travelers, we expect to see improved rates compared to where we are today.

Okay. And then lastly, is there any seasonality we should be aware of post-summer, given leisure travel might decline somewhat?

I think that’s a reasonable aspect to consider, Ari. We know that the hotels, particularly those with weekend occupancy, as discussed, are leisure-driven; kids will be returning to school around the country, indicating that we may experience some flattening or reduction in leisure travel. Therefore, we will take a wait-and-see approach, but we also hope for the potential increase in corporate travel to balance any potential drop in leisure demand within our markets and hotels. Only time will tell, and that is precisely why we aren't providing any guidance.

Sure, thanks for that.

Thank you.

The next question is from Anthony Powell of Barclays. Please go ahead.

Hi. Good morning, everyone. Another question on the seasonality issue. What about the seasonality of corporate and government business in your hotels? Will that remain steady or do you expect any changes in the fall or winter?

Certainly, we are seeing a decline in traveling nurses that has been occurring slowly since April, which will introduce some seasonality due to the pandemic-driven movements of people. That said, this has been offset by leisure and corporate business in select markets.

Okay, thanks. Moving on to the Warner Center construction and the loan. Can you share what motivated you to proceed, and provide more details on the loan? Were the terms attractive?

Okay, Anthony, this is Jeff. As far as the construction process, we’ve made significant progress with the first four floors completed. Given the complexity of the project, which includes underground parking and other mechanical elements, we felt it essential to continue construction rather than leave it idle for an extended period. Delaying could incur extra costs, such as dewatering expenses. Additionally, we see a unique opportunity in Warner Center because the competitive landscape consists of outdated large full-service hotels. We are confident that our projections for ADR and occupancy will be vindicated once we finish the project and ramp up operations. Subsequently, we sought a construction loan, and Dennis can explain how challenging that has been.

Yes, we are very pleased to have completed the loan. It was a difficult process. We reached out to over 100 potential lenders, and there are very few willing to make construction loans at this time. However, our project has some unique factors that played to our advantage. We already have a $30 million investment, and the project is 40% complete, which mitigates some risk. Also, having a public REIT backing the loan differs significantly from private developer funding. This combination of factors contributed to our success in securing the loan. Nonetheless, it reflects the cautious sentiment around construction financing right now.

Additionally, securing a standalone loan for that project was crucial as it preserves our liquidity without further encumbering our line of credit or other supporting assets.

Thanks for that color. Have you announced a brand for that hotel yet?

We have not announced that yet.

Got it. Thanks a lot, I appreciate it.

Thank you.

The next question is from Kyle of B. Riley FBR. Please go ahead.

Hi, this is Kyle on for Brian. Is occupancy levels improved, do you anticipate any government-mandated occupancy limits in the near future?

No, I believe if mandatory limits were to be imposed, we would have seen them earlier on in the pandemic.

Yes, and especially in New Hampshire and Maine, those states were quite cautious with travel restrictions. However, those hotel occupancy restrictions have been relaxed since July.

Makes sense. Thank you. Lastly, in ramping up staffing, has it been fairly straightforward to rehire furloughed employees and are they being brought back at the same wage levels as before?

No, it has not been easy at all. A common theme across hospitality, retail, and restaurants is that employees have been reluctant to return, especially when receiving the extra $600 unemployment supplement. We've had to seek outside labor in certain regions. Looking ahead, I believe that the average wage may stabilize below pre-COVID levels, allowing us some benefits from that situation.

Great, that’s all for me. Thank you.

Thank you.

The next question is from Tyler Batory of Janney Capital Markets. Please go ahead.

Thank you. Good morning. Great news from this report and the call this morning, which I think is worth acknowledging. I wanted to tie the loop on July trends if I could. I’m curious about some of the markets that have seen spikes in COVID-19 cases, specifically California. Is there much difference week-over-week compared to areas with fewer surges?

No, not exactly, Tyler. I mean, whether you’re talking about California, the Carolinas, Florida, or even Texas, we have seen improvement in July compared to June. I wouldn't say that the spikes are negatively affecting our travel at this point.

Okay. I noticed the growth rate seems to have slowed a bit, compared to sequential improvements seen in June? Is that simply a case of hitting a wall with how far leisure travel can take you, or is there something else worth noting?

There isn’t much to point to other than simple math regarding numerator and denominator. The early acceleration will obviously show a higher percentage gain as opposed to what is anticipated over the next 12 to 18 months. A few hotels in Florida were expected to go the other direction, yet they haven't. The Laguna hotel in Fort Lauderdale is running at 90+ occupancy, despite the high infection rates in Broward County. We still have leisure business as well as fundamental mid-week business from first responders. That was encouraging.

I appreciate that. Lastly, I want to revisit your RevPAR index. It appears quite strong. Can you elaborate on direct sales efforts and your revenue management strategy regarding enhanced market share?

Certainly, this initiative began early on in the pandemic. The Island team has a direct sales division based in our corporate office and across the country that has aggressively pursued various business sources such as government agencies, nurses, and doctors, ensuring our hotel rooms are available for them. This proactive outreach has sustained us through the months of April and May. Revenue management operates in tandem with direct sales in opening channels that had previously been closed when demand was robust, leading to the advantages we currently see in our portfolio.

Can you remind us of the restrictions regarding dividends at the moment?

Currently, we must keep our dividend below REIT taxable income until the end of this credit facility amendment, which is set for March next year. If there is any taxable income this year, we will need to issue a portion in stock, but I suspect there won't be taxable income, meaning it would be next year at the earliest that dividends could be paid.

Okay. That’s all for me. Thank you.

Thank you.

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