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. 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 sincerely appreciate your participation during these unusual times. This past year has required intense asset management and operational focus. I'm thankful for our platform and relationship with Island Hospitality, as we were 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 operational performance, reduce capital expenditures and G&A expenses, and preserve our strong balance sheet while enhancing liquidity. We've produced noteworthy operating performance during the pandemic, with the highest absolute RevPAR of all lodging REITs over the final three quarters of 2020, including companies that 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 strong top line and bottom line results, regardless of the cycle. We generated the second highest EBITDA per room of all lodging REITs in 2020, and through this unprecedented period, we produced positive adjusted EBITDA for the full year. Our sales and revenue management teams have delivered outstanding results since the onset of the pandemic, as evidenced 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 driven by Island's outstanding direct sales efforts from its national, regional, and local sales teams as well as concentrated revenue management efforts ensuring that we're quickly adjusting to diverse demand sources in today's lodging environment. Additionally, we have the largest concentration of extended-stay rooms of all lodging REITs at 58%. Another impressive statistic during 2020 is that 80% of our hotel EBITDA was generated by our Residence Inn and Homewood Suites hotels, a significant increase over the percentage of rooms. Our upscale extended-stay hotels provide us the flexibility during periods of growth or weakness to diversify our customer base to maximize revenue, a thesis we've believed for almost four decades. And certainly, these results are a testament to our portfolio. Without sacrificing upside, we can limit downside. From an operating expense standpoint, we're hyper-focused on every expense. On the Island side, we have a team of analysts in daily contact with every hotel GM, investing 100% of their time to help each hotel micro-manage expenses. Every regional manager reviews current expenses daily. Labor is, by far, our biggest expense. Even though occupancy and revenue have increased substantially off the April lows, our hotel employment has not increased materially. On March 1, we had almost 1,800 hotel level employees. At June 30, our hotel employee count was 776, and as of September 30, that count was 855 employees. At year-end, factoring in the sale of the Mission Valley Hotel, employment essentially remains unchanged. Again, a great job by our team to hold employment steady despite improving trends and adding back certain guest amenities. As trends improve in 2021, we need to maintain this focus to generate strong flow-through to the bottom line. In addition to hotel level expense management, at the corporate level, we've been very aggressive. We instituted corporate pay cuts across the board to all employees and unfortunately had to reduce our headcount by 35%. In total, we have reduced salary costs by over 50%. Our corporate G&A expense was down approximately 20% year-over-year. We also significantly cut CapEx during 2020. Our 2020 budgeted CapEx was $23 million, and we were able to cut that expense to $14 million, a reduction of approximately 40%. Of the $14 million spent, $11.2 million was on two renovations that were ongoing when the pandemic hit. Additionally, we will be pushing to drive that expense line lower. We experienced some wins in 2020, and property tax expense was down $1.2 million or over 6% at our 39 comparable hotels. Another strategic goal was to solidify our balance sheet as much as possible and enhance liquidity. With plenty of capacity and debt markets wide open, we used our credit facility to fund our Warner Center development. Given the potential liquidity crisis, it was important to obtain more permanent financing. We paused the development in the second quarter. Having already invested about $30 million into the project, we were able to fully fund the remaining costs with the construction loan. Additionally, we were able to amend our credit facility to gain full availability of the $250 million facility that allows us to make acquisitions if we see an opportunity. So on the liquidity front, although we are burning less cash than most of our peers and our liquidity runway is longer than many, we felt that if an opportunity presented itself, we would be open to selling an asset if the pricing was strong to further enhance our liquidity, ultimately adding flexibility to pursue growth opportunities. This exact opportunity arose when we started discussions with the San Diego Housing Commission, and in the fourth quarter, we sold our 192-room Residence Inn Mission Valley to the San Diego Housing Commission for $67 million, or almost $350,000 per key, a very attractive 6.5 cap rate on 2019 results. As we look back on lodging transactions in 2020, this sale stacks up as one of the best premium-branded sales that year. Last year was difficult across all fronts. But despite all that, I'm proud of our efforts and very appreciative of the sacrifices made by our employees nationwide. Our teams at Chatham and Island have the experience to persevere through challenges, and our achievements in a challenging year are noteworthy. We certainly believe we've made important strides to protect shareholder value now and provide flexibility to add value moving forward. We can all say we're looking forward to better days in 2021. From a lodging perspective, booking visibility remains days and maybe a couple of weeks ahead—not months in advance. Leisure travel remains the best segment in the industry, with weekends being the strongest days. Through the first eight weeks of the year, Friday and Saturday occupancy is at 51%, about 15% higher than the other five days of the week. Our ADRs are slightly higher on the weekends. President's Day weekend was particularly strong, with an occupancy of 60%. March trends seem to be picking up steam, led by leisure travel, and we are seeing some business demand pick up in various markets. With the continued vaccine rollout and the decrease in hospitalizations and the death rate, we expect leisure travel will lead us out of the pandemic, expecting business travel to gradually return as we progress through the year. Although we have not reached cash flow breakeven, we estimate we need to achieve RevPAR of approximately $75 for that. I firmly believe that given our portfolio attributes and our industry-leading platform with Island, we will be able to grow occupancy and rates faster than most of our lodging REIT peers and return to 2019 levels much sooner. Our liquidity is strong, our balance sheet is robust, and we have no looming debt maturities. Our teams possess incredible operational and corporate experience through good and challenging times, and we are enthusiastic about what lies ahead for Chatham and our investors. With that, I'd like to turn it over to Dennis.

Thanks, Jeff. Good afternoon, everybody. For the quarter, our RevPAR declined 60% to $47, down from our third quarter RevPAR of $58, which benefited from more seasonal leisure travel. The downward shift was not surprising given the seasonality of the industry and the spike in COVID-19 in November and December. January RevPAR of $47 was higher than November's RevPAR of $45 and meaningfully higher than December's 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's RevPAR. The gains have been made in occupancy, with ADRs still in a tight range in the low $100s. Among our top six markets, Los Angeles was our top-performing market in the fourth quarter with a RevPAR of $79. Our Anaheim Hotel ran occupancy of 84% in the fourth quarter, benefiting from 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 a RevPAR of $78, on a strong ADR of $143, which was only down 15% from last year. Continuing with strong performance among our top markets, our northeastern coastal market portfolio earned a RevPAR of $63 on occupancy of about 50% and rates of approximately $130. Despite their geographic location in colder areas, these three hotels benefitted from leisure travelers. Our Hampton in Portland, Maine had the second highest fourth quarter ADR in our portfolio at approximately $144. We anticipate a strong summer in all three of these markets as they will be open this year, unlike last year when they were only open for about half of the summer. Silicon Valley had a RevPAR of $46 on an ADR of $105 and occupancy of 44%, compared to the 2019 fourth quarter RevPAR of $158 on occupancy of 69%. 18 of our 39 hotels had fourth quarter occupancy over 50%, which compares to 21 hotels in the third quarter and 11 hotels in the second quarter. Some standout performing hotels or markets, which were very similar to our third quarter outperformers, were our Fort Lauderdale Residence Inn, our two hotels in Charleston Summerville, South Carolina, and our Residence Inn in Holtsville and Mountain View, California. We continue to see an average length of stay much longer than historical levels for our portfolio, especially with respect to our two most significant brands, Residence Inn and Homewood Suites. At our Residence Inn hotels, the average length of stay was 4.4 nights in the 2020 fourth quarter, compared to 4.8 nights in the third quarter, 5.9 nights in the second quarter, and 2.4 nights in the 2019 fourth quarter. For our Homewood Suites hotels, our average length of stay was 3.3 nights in the 2020 fourth quarter, which compares to 3.9 nights in the third quarter, five nights in the second quarter, and 2.5 nights in the 2019 fourth quarter. Looking at our segmentation production compared to last year, corporate revenue was down 56%, a decline smaller than the 65% in the third quarter. Our retail production is down 60%, in line with the third quarter, and government revenue is down 54% compared to 46% in the third quarter. We saw a good boost in our local negotiated segments as we secured wins in a handful of our Homewood Suites markets booking primarily government, nursing, and prison staffing business. Lastly, our fourth quarter operating margins were 25% on RevPAR of $47, again proving how efficient our operating model remains despite the challenging overall lodging fundamentals and that we were able to adapt quickly once seasonality kicked in during November and December. For the second consecutive quarter and for the entire year, we delivered positive adjusted EBITDA. Our margin success throughout the pandemic has been largely attributable to our ability to control costs, particularly in labor. Labor is by far our largest expense, comprising about 38% of our operating expenses and 29% of our revenue. Our labor costs per occupied room are down about 15% in the quarter. In our rooms department, our labor costs per occupied room were down approximately 30% to $13 a room compared to $18 a room last year. As we head into 2021, it is critical for us to scrutinize our labor models and keep them under control when occupancy and rates start to increase. On past calls, we've stated our belief that the complementary food and beverage offerings will change for the industry due to health and safety protocols and customer desires, which should benefit our bottom line. We are working closely with our brand leaders at Marriott and Hilton, sharing our experiences and visions for what the future should look like. In the fourth quarter, our complementary food and beverage costs dropped 70% year-over-year. Our evening hospitality costs were a total of $2,000 in the quarter. On the CapEx front, we spent under $1 million in the fourth quarter on our 39 hotel portfolio and we invested $10 million in our Warner Center development. The Warner Center development is going according to plan from a timing and cost perspective, and we look forward to opening the hotel in the fourth quarter of this year. Looking ahead to 2021, our CapEx budget includes no renovations and a total estimated spend of approximately $6 million, of which about half is for mechanical long-term investments and about $750,000 is for brand-required items primarily related to the new lock system at our Marriott-branded hotels. I will now turn it over to Jeremy.

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 over 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 generated a same-store Q4 hotel EBITDA margin of 8.4% and a GOP margin of 25.4%, which is quite strong given our $47 RevPAR in the quarter. Our Q4 2020 adjusted EBITDA was $0.2 million, and cash flow before capital, representing 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 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, generating a gain of $21.1 million and allowing 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, providing covenant relief until Q1 2022 and the ability to utilize the entire $250 million capacity of the facility. When covenants resume testing starting in March 2022, EBITDA and NOI figures used for covenants will be calculated on an annualized basis for the first three quarters after testing resumes. At December 31, we had $136 million of liquidity from our unrestricted cash balance and revolving credit facility availability, providing substantial runway for performance recovery and capacity to consider potential investment opportunities should they arise. Our cash burn has been limited during the pandemic, given the resilience of our extended-stay and limited service asset class and the superior performance of our hotel manager. We expect cash flow to continue to improve in the upcoming quarters as COVID vaccination deployment progresses, infections decline, and we exit the seasonal low period that occurs for our hotels in Q4 and Q1. Chatham's balance sheet benefits from minimal debt maturities over the next several years. The only debt maturing between now and the end of 2021 is a single $12.6 million nonrecourse mortgage loan maturing in September 2021. After that, the next debt maturity is for our credit facility in March 2022, but we have the option to extend that maturity through March 2023. We will have significant time for hotel operating performance to recover before needing to refinance material amounts of debt beginning in 2023. Since visibility around the timing of a recovery and hotel operating performance remains limited, we are not providing guidance at this time. This concludes my portion of the call. Operator, please open the line for questions.

Thank you. At this time, ladies and gentlemen, we will be conducting a question and answer session. 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 pre-pandemic?

I think, Ari, to take the second part of the question first, I believe between the tweaks happening for the evening social hours being essentially eliminated, and changes to breakfast offerings, especially at our extended-stay and limited service hotels, I think those offerings will be adjusted back a little bit as well. Regarding room cleaning frequency, we anticipate savings there too. We've discussed this for a few quarters now. We see margin improvements on an apples-to-apples basis pre-pandemic to whenever we stabilize moving forward. We haven't yet quantified how many basis points that might be. But we do think margins will improve in the future compared to pre-pandemic levels. In 2021, as stated in my prepared remarks, it is crucial for our management team, along with Island Hospitality, to remain highly focused on staffing levels and expense controls as occupancy starts to rise. Given the last 15 to 24 months, Island Hospitality has dedicated resources on their operations team that communicate daily with general managers at all of our hotels, actively managing staffing and expenses.

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 from a market preference point of view, are you somewhat agnostic, or do 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 are not many transactions happening right now. The bid-ask gap is significant, and without many distressed properties coming to market yet, there's still some anticipation as we move through the year. In the second half of the year, some owners are testing the market and investigating what offers they might receive relative to their 2019 values. Although a few deals have been done at modest discounts to 2019 values, I don’t see much more activity in the near term. We are exploring the market and speaking with owners, but I believe we aren’t there yet. We're keen to be positioned to take advantage of potential opportunities as they arise, while keeping an eye on markets like the Southeast that, even pre-pandemic, showed better growth. We want to understand the real supply trends in those markets, but it will take some time for clarity.

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

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. I mean, it came to us through inbound interest, not specifically about that asset but about certain of our assets in Southern California. As we began to delve into more details and share information around the needs of certain areas, we were able to focus on that particular location. There is continued interest with the state of California in our markets for certain types of projects. They are not easy to execute, especially regarding financing through housing commissions. It often requires many financing pieces and a building ready to meet all current standards for safety and ADA accessibility. We are engaged in ongoing discussions for Chatham hotels and others in California within our Innkeepers joint venture, and we will continue to explore those opportunities as they arise.

Great. And then when we think about ADR, especially looking back to 2009, some of the cash dynamics we saw back then, how are you thinking about the market and your competitors keeping rates at rational levels? And how is Island addressing that?

It's very specific by hotel. A lot of hotels in various markets are still selling within the $90 to $110 range for room rates, and that hasn't moved much overall. If you look specifically at our portfolio, especially in leisure markets like Fort Lauderdale, Savannah, Portland Maine, Portsmouth, New Hampshire, and San Diego, our teams have a close eye on rates not only over the next 30 days but rates projected for the next 180 days through the summer months. We believe demand, especially for leisure travel, will be robust. We see strong opportunities to maintain or even raise rates compared to 2019 levels in those leisure markets.

Alright. Great. And just one last one for Jeff. The lodging stocks, especially the REITs, have been performing very well, with some approaching pre-pandemic levels. What are your thoughts on this, especially in an environment where we're still experiencing industry-wide RevPAR declines of 40% to 50%?

Of course, we like to see that trend because we believe we've acted in the best interests of our shareholders, positioning the company well going forward. There's a great deal of optimism regarding business returning strongly in the second half of the year, which we support. We're very encouraged by our President's Day weekend performance, averaging 65% occupancy on Saturday night and reaching 100% occupancy in some hotels. We anticipate genuine business growth ahead. Our revenue management team will be removing pandemic pricing from our offerings starting March 1 in these markets, and most will wait until the last minute to assess how close we can get to max occupancy before adjusting rates. We'll see how market dynamics play out and how companies value themselves as we progress.

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

First, I wanted to get back to your February commentary and what you're seeing in terms of demand? It seems like February was driven by strong leisure travel, but I'm curious about corporate travel as well. Can you share more about real-time demand and your sales and revenue management strategy as demand is returning in some markets?

I'll address that. Currently, on the business traveler side, we've seen minimal movement—some small transactions here and there. However, nothing substantial to report in real-time for February regarding an immediate turnaround. In our select-service and extended-stay hotels, the booking window has always been tight. Thus, we do not have visibility on group business beyond one or two connected hotels. Business connected to conventions is practically nonexistent in 2021 so far. We're in a holding pattern on the business travel side but do have our regular corporate clients, such as Google in Silicon Valley, utilizing rooms at a rate similar to the previous months. We're maintaining flexibility with demand planning as we expect business to begin ramping up later this year.

I recall you mentioned a CapEx spend for 2021 of only $6 million, which seems low compared to what you've spent historically. Can you explain this? Are you maintaining a conservative approach to deploying capital?

Yes, Tyler. Our CapEx budget for 2021 is set at $6 million, which we believe reflects a conservative approach given our position in the recovery process still during the pandemic. We believe we can bring in more business in 2021 but do not feel pressure to heavily invest in renovations at this time. We want to conserve capital until the timing is more favorable for such investments.

That makes sense. As a final question, how much have you spent on the Warner Center development so far? What will the spending cadence look like for that project in 2021?

We've spent around $44 million to date on the Warner Center development, with about $26 million remaining to spend. Expect expenditures to be around $2 million per month through the opening. A conservative estimate would put $2 million to $3 million monthly for the first two quarters of the year, rounding out the rest and the final $8 million in the last half of the year.

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

On acquisitions, can you remind me, are you able to use your current liquidity to buy assets without any restrictions? If there are any, can you lay them out for me?

We can utilize our liquidity under the line to acquire hotels. The only requirement is that we maintain a minimum liquidity level of $25 million.

Understood. I presume you would want to ensure your cash burn decreases before making an acquisition. Is that accurate?

Yes, that's correct. We will remain mindful of liquidity and availability as we consider potential investments. However, we are in a position to act if a suitable opportunity presents itself.

Have you noticed leisure starting to pick up in non-resort or expected vacation hotels like Dallas or Houston? If not, do you anticipate broader leisure returning to the portfolio in the spring and summer?

Yes, certainly. The staycation trend remains prevalent. People are traveling short distances to stay in hotels for a few nights, looking for a change of scenery, and wanting access to amenities like pools. This trend applies across various types of hotels and locations.

I have a final inquiry. Have you had discussions about a potential new joint venture? I know that was part of your strategy during the last recovery process. Is that still on the table?

There have certainly been groups expressing interest in lodging and looking to establish positions by acquiring assets. We believe our track record places us in a favorable position. There is interest, but crafting a deal tends to be more challenging than straightforward asset purchases. We still actively work on our Colony JVs. Ultimately, we're open to discussions and opportunities moving forward.

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

We appreciate all the questions and your continued interest. 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.