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Chiquita Brands International Inc. (NYSE:CLDT)

Q1 2014 Results Earnings Conference Call

May 09, 2014, 11:00 AM ET

Executives

Chris Daly - President, Daly Gray, Inc

Jeffrey H. Fisher - Chairman, President and Chief Executive Officer

Dennis M. Craven - Executive Vice President and Chief Financial Officer

Analysts

Gaurav Mehta - Cantor Fitzgerald

Nikhil Bhalla - FBR

Operator

Please go ahead.

Chris Daly

Thank you, Operator. Good morning everyone and welcome to Chatham Lodging Trust First Quarter 2014 Results Conference Call. This morning, before the opening of the market Chatham released results for the first quarter of 2014 and I hope you’ve had a chance to review the press release. If you did not receive a copy of the release or you would like one, please call my office at 703-435-6293 and we’ll be happy to email you one. Or you may review the release online at Chatham’s website www.chathamlodgingtrust.com.

Today’s conference call is being transmitted live via telephone and by webcast over Chatham’s website and its streetevents.com. A recording of the call will be available by telephone until midnight on Friday, May 16, 2014, by dialing 1-800-406-7325, reference number 4681158. A replay of the conference call will be posted on Chatham’s website.

As a reminder, this conference call is the property of Chatham Lodging Trust and any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Chatham is prohibited.

Before we begin, management has asked me to remind you that in keeping with the SEC’s Safe Harbor guidelines, today’s conference call may contain forward-looking statements about Chatham Lodging Trust, including statements regarding future operating results and the timing and composition of revenues amongst others, except for historical information, these forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially, including the volatility of the national economy, economic conditions generally, and the hotel and real estate markets specifically, international and geo-political difficulties or health concerns, governmental actions, legislative and regulatory changes, availability of debt and equity capital, interest rates, competition, weather conditions or natural disasters, supply and demand for lodging facilities in our current and proposed market areas and the company’s ability to manage integration and growth.

Additional risks are discussed in the company’s filings with the Securities and Exchange Commission. All information in this call is as of May 08, 2014 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.

During this call, we may refer to certain non-GAAP financial measures, such as EBITDA and adjusted EBITDA, which we believe to be common in the industry, and helpful indicators of our performance. In keeping with SEC regulations, we have provided and encourage you to refer to the reconciliation of these measures to GAAP results in our earnings release.

Now, to provide you with some insights into Chatham’s 2014 first quarter results, allow me to introduce Jeff Fisher, Chairman, President and Chief Executive Officer; and Dennis Craven, Executive Vice President and Chief Financial Officer. Let me turn the session over to Jeff. Jeff?

Jeffrey H. Fisher

Great Chris, thank you and good morning everyone. Well, it’s a great day here for Chatham we think and our shareholders. We’ve got a lot to talk about today, obviously you’ll hear some excitement in our voice because you know we’ve worked lot and hard to try to arrange a transaction that we think is you know has beneficial as it is to our shareholders on all fronts frankly.

We produced another great quarter financial results and are really excited as I said to announce what we think is a real transformative deal having reached agreement to apply of the Innkeepers hotels through two meaningful investments. First we will acquire 47 or 51 Innkeeepers hotels in a joint venture with Northstar Realty Finance, a premier publicly-traded diversified commercial real estate investment trust an asset management company with $11 billion of commercial real estate assets under management.

Needless to say, we’re thrilled to partner with Northstar. We’ve as you know we’ve had a great experience thus far working with them and we certainly look forward to a profitable relationship as we move forward. Additionally, in the second part of the transaction, Chatham will acquire outright four Residence Inns in the heart of Silicon Valley for its own balance sheet. Upon closing of these transactions we will issue a press release providing updated guidance and other key information and also hold an investor conference call to speak in more detail about the transactions. So we’re going to take this from you know from a probably more 30,000 foot level than most of you would expect with the transaction like this but we want to emphasize deal is not closed yet but you know we are under firm contract here and we will tell you much much more including putting slides on our website with some more detail about exactly what we are acquiring here in both transactions as we move down the road.

But before we get into the first quarter results, I do want to speak a little bit more on the Cerberus JV. We have had an incredibly successful and mutually beneficial joint venture with Cerberus. In 2011, we opportunistically leveraged our balance sheet to acquire five hotels out of the Innkeeper bankruptcy, as you will recall for $195 million and to invest $37 million into a new JV that acquired 64 of the Innkeepers hotels out of bankruptcy for a little more than $1 billion. Upon closing of the sale, the Cerberus JV in the second quarter, the investment will be a home run for Chatham and its shareholders as we expect we will have received total distributions of approximately $114 million in less than three years on our initial $37 million investment. I think I like that.

That represents a gain on the investment of $77 million for approximately $3 a share for us. Measured in conventional IRR terms, that equates to an approximate 81% internal rae of return for Chatham. On the buy side of the Innkeepers transactions, our new JV with Northstar is acquiring 47 of the 51 hotels for a cash purchase price of $934 million or $153,000 per room well below replacement cost and still below the $150,000 per room Apollo paid in 2007 when interest rates were almost 7% and the CapEx needs of the portfolio were substantial.

I love the structure of this deal because we roll $26 million of our promote to retain our 10.3% in the JV on a cash free basis, otherwise we would be incurring a substantial tax as a result of the transaction and net dollars not having the money that we do have now without tax obviously to re-invest in the hotels that we’re acquiring.

Additionally, we buy four fantastic Residence Inns in Silicon Valley for $342 million, an almost 50% increase in our investments in the wholly-owned hotels. We do that by taking the rest of our gain from the JV transaction which is approximately $54 million and apply that against the purchase price in a tax deferred transaction as well. So after application of the $54 million and a release of certain escrowed FF&E money attributable to these four hotels, the net cash purchase price for Chatham shareholders is $273 million or approximately $363,000 per room.

But when you factor in the expansion plans that I will get into later, we’ll be adding significant rooms to these hotels. The pro forma cost per room for these hotels is a very attractive $323,000 per room. Well from the acquisition using 10-year fixed rate debt with remaining cash required funded by our line of credit just like we did in 2011 when we used our balance sheet to opportunistically make the Innkeepers investments we are using our balance sheet to make these transformative deals investing $367 million in total which by far surpasses any since our interception. In fact, with these acquisitions are wholly owned portfolio investments will eclipse the $1 billion mark. Before considering the upside from the expansion opportunities I mentioned, though these acquisitions are very accretive to FFO considering 2014 EBITDA is estimated to be approximately $25 million and we are financing the acquisition with $273 million of debt that should carry an interest rate below 5%.

We’ll talk a lot more about the expansion in detail by hotel on our next call, but just to talk generally in terms of the expansion these four hotel sit on approximately 24 acres of prime real estate in Silicon Valley and we intend to partially redevelop and expand these hotels. Since the hotels are built in a pod-like construction methodology as gen-one Residence Inns were with eight units per building, the opportunity is to look at the very large site and landmass that these hotels sit on, tear down you know two or three of those guest house building and you know maximize coverage in a new four or five or six storey tower as [zoning] may or may not may permit and it varies ofcourse by town and by municipality and by location to be able to add those extra rooms.

So you temporarily remove minimal room inventory over the course of the year and you replace that inventory with a state of the art new building encompassing all new public space on the ground floor and of course the sleeping room, the suites above. We’ll be able to add atleast 272 rooms in total, an increase of 36% and given the amount of land the hotels sit on, there actually could be room for further expansion or other value opportunities as we move down the road.

Switching gears to our solid first quarter results. We saw our RevPAR jump 7.8% to $105 in the quarter even with the tough comparison last year from Superstorm Sandy business. We were aided by an easy comp for the Washington DC hotel since it operated without a brand for two thirds of the 2013 first quarter, but even taking that into consideration RevPAR was still up 6.5%. Importantly, we saw strong growth across our portfolio with 11 of our 25 hotels posting double digit RevPAR growth. Within our markets, occupancy continues to climb up 2% to 72%, a sign that demand continues to grow.

With our hotels separately holding one of the strongest brands in those markets we stand to benefit most from the underlying groundswell. Island hospitality has grown markets share in each of the past two years and continue that momentum in the first quarter, growing market share 2.1%. The converted DC Inn continues to gain traction with the year-to-date market share index of 112 which would be the highest level in any of the last five years, the highest index which the hotel had as a double tree was 106 in 2012.

2014 RevPAR is projected over $160 which would be 10% higher than any year in the past 15 years, strong numbers. When we acquired hotel a lot of the Innkeepers bankruptcy in 2011 we knew that the hotel would flourish as a residence Inn and our thesis is proving out well so far.

With our topline clicking on all cylinders our margins continue to expand with hotel EBITDA margins advancing 70 basis points to 34.9%. Incremental utility cost and harsh weather, winter weather related cost adversely impacted margins and profits as you’ve heard from others and we do have a lot of hotels in the northeast operating profits flow through for all 25 hotels was atleast for us a modest 40% not as well as we would have liked but not bad considering the weather the snow removal and the utility cost increase that I saw in all those P&Ls.

We expect our margins will expand further through the balance of the year and estimate 2014 operating margins for the current hotel portfolio to expand almost 200 basis points to 40% and we believe there is substantial room for further advancement as ADR grows over the next several years.

We’ve got a great hotel platform here at Chatham owning premium brand that extended stay of select service hotels and employing Island hospitality our affiliate manager who we believe is one of the best in the states. With three decades of experience investing in and operating primarily select service and limited service hotels, we believe that we have a pretty unique understanding of how to generate significant value in this space, I think you know the most recent transaction that we’ve announced here today certainly amplifies the kind of results that we – and track record that we continue to do and we just look forward to continuing to utilise that expertise as we grow the company moving forward.

Dennis M. Craven

Thanks Jeff. Great to be with everyone today and sharing the exciting news that we have been working on for quite sometime with respect to the joint-venture with Northstar and the acquisition of the Florida hotels.

For the first quarter, we reported a net loss of $1.7 million or $0.07 per diluted share, compared to a net loss of $1.6 million or $0.10 per share in the 2013 first quarter. Ont time expenses of $1.2 million were incurred in the quarter related to the HG Vora shareholder proxy settlement and the unsolicited offer from Blue Mountain Capital Management.

As Jeff spoke, RevPAR was at 7.8% versus our previous guidance of 3 to 4%. February and March RevPAR growth really came on strong at plus 10 and plus 9% respectively after a moderate 4% growth in January. With strong topline revenue growth and a continued margin expansion combined with continued lowering of our borrowing cost, we’ve been able to significantly expand FFO of 66% to $7.4 million and FFO per share rising almost 10% to $0.28 per share which came into the operating of our guidance, and we generated flow through of 50 to 60% versus the 40% that Jeff spoke to earlier our margins would have come in at the upper end of our guidance range and EBITDA and FFO per share would have been $0.5 million and $0.02 per share higher.

In addition to the increased utility and harsh winter cost, the fact that occupancy made up more than half of our RevPAR in the first quarter it does impact flow through potential. Adjusted EBITDA for the company rose 41% to $13.2 million in the quarter. In the quarter, the joint ventures between both the Innkeeper joint venture and our Torrance joint venture contribute approximately $2.3 million in adjusted EBITDA through our results compared to approximately $2.1 million into 2013 fourth quarter – I mean first quarter. And from an FFO perspective, the JVs contributed approximately $0.03 of FFO per share to the company which is basically flat year-over-year for the 2013 first quarter.

At March 31, our net debt was approximately $272million comprised of debt of $270 million offset by $6 million from available cash. During the quarter, we refinanced the $32.2 million 6% mortgage on the Residence Inn Anaheim Garden Grove with a new 10 year $34 million 4.7 million percent mortgage creating interest savings of about 0.4 million on an annualized basis.

We will continue to issue long-term financing at these historically low rates as it needs the funding future growth. The average interest rate on all of our debt now sits at 4.33% down from 5% about a year ago. From a year ago, we’ve managed to reduce the average rate on our fixed rate debt about 120 basis points to what is now 4.8% and our average maturity on our fixed rate debt now is out to 2023.

At quarter end, our leverage ratio was 37% basically on the ratio of our net debt to investment in hotels that cost. Assuming the confirmation of the Innkeepers acquisitions in the second quarter, our leverage ratio increased from 37% to approximately 52 to 53%, levels very similar to what we operated at from 2011 through early 2013. Additionally after the Innkeepers transactions closed, we will have approximately 75 million available on our line of credit and we’ll have two hotels out of the 29 that remain unencumbered the SpringHill Suites in Savannah, Georgia and the Hilton Garden Inn in Denver, Colorado.

AS Jeff mentioned, we estimate that we have realized a gain of approximately $77 million or $3 a share on our current Innkeepers joint venture. We’re able to roll over the $77 million gain into the basis of our investments in both the new joint venture, the Northstar and the Silicon Valley four pack because the transactions are being structured as entity purchases.

This provides maximum tax efficiency because we are able to reinvest a 100% of the gain into further income producing hotel investments, in essence leveraging that gain into – incremental earnings and building shareholder value. In April, our board of trustees approved a 14% increase in the dividend now standing at $0.08 per share per month according to an annualized dividend of $0.96 a share. With minimal CapEx obligations for the next several years in debt locked in at very attractive long term rates, our free cash flow projections were very strong.

We’ve increased our dividend every year since our interception in 2010 and we’ll continue to reward our shareholders with increases as our FFO per share climbs. We stated since our IPO that we will continue to build dividends in tandem with our earnings. As a percentage of FFO per share we paid out approximately 60% in 2012, 56% in 2013 and was projected to be approximately 54% in 2014 based on the current midpoint of our guidance now which is around $1.73 per share. Our confidence in the overall health of the hotel industry remains very positive and our board of trustees will continue to revaluate the dividend each quarter. As the company and the management team we know that dividends make up the primary component of REIT returns overtime and our goal is to continue to build a successful company that produced a strong cash flow that will provide [fresh] dividends to our shareholders.

Turning attention to our guidance for the second quarter and full year, we basically raised our full year RevPAR growth by 50 basis points in the low end of our EBITDA and FFO per share guidance which accounts for the out performance in the first quarter. As Jeff alluded to atleast for this call and keep it at kind of the 30,000 foot level and then keep these transactions and like you said we’ll issue a press release and host an investor call after the transactions closed, but atleast to give some preliminary guidance on what it means to share them. Our share of the – reduction of the JV from 51 hotels to 47 hotels, our share of 2014 without the JV on a pro forma basis would go from 10.6 million to 8.1 million which equates to about 3.1 million, excuse me equates to about $0.06 or $0.07 per share of FFO, it would reduce our concurrent run rate of about 73.

However, when you include the four pack acquisition early in the call Jeff noted that 2014 hotel EBITDA is projected to be approximately 25 million and with estimated borrowing cost on the 273 million of debt at a rate of around 5% even when you factor those assumptions the addition of the four pack would add approximately $0.40 of FFO per share on a full year basis. And when you put those two together on a pro forma 2014 FFO per share basis you know these transactions would accrete approximately $0.33 to $0.34 of FFO per share to Chatham.

In our current estimates of expansion cost is approximately $59 million as I think Jeff alluded to earlier in the call, and on a pro forma basis again if you looked at just 2014, RevPAR and EBITDA margins for those four hotels that would equate to incremental EBITDA of about $12 million on a pro forma basis. So again when you look at these transactions and we start to look at the impact that is going to have on our company, you know both the joint venture and the acquisition before hotels certainly is very meaningful from an earnings perspective to Chatham and to the long term value of the portfolio.

And I think with that operator, its going to conclude our remarks and we’ll go ahead and open it up for Q&A

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). One moment please. And our first question comes from the line of Gaurav Mehta with Cantor Fitzgerald, please go ahead.

Gaurav Mehta - Cantor Fitzgerald

Thank you, good morning.

Jeffrey H. Fisher

Good morning, how are you?

Gaurav Mehta - Cantor Fitzgerald

Good. Couple of questions on the four assets that you are acquiring. So you decided to buy these four assets out of the 50 run hotels that were in the JV. Can you talk about why in four hotels and then did you look at some other hotels as well?

Jeffrey H. Fisher

Yeah, I think that this is Jeff, hi. We really you know overall trying to meet you know I think what Northstar’s needs are and ours. So these assets represent probably a lower cap going in you know than the 47 to some extent. But most importantly require development and expansion capabilities and frankly the willingness to take some rooms out of order and in the near term suffer some earnings hit as a result of taking those rooms out of order, because these are hotels that run in excess of 80% occupancy.

So you know probably just simply better suited for us you know being a pure hotel REIT and frankly you know we are having the expertise, the ability and the desire to do that work as compared to Northstar.

Gaurav Mehta - Cantor Fitzgerald

Okay and then you talked about financing these hotels with fixed rate debts and [LOC]. Can you talk about what’s the breakdown between LOC and mortgage debt?

Jeffrey H. Fisher

We are still working through the mix of that. I think generally speaking you know what we’ve been doing and you know in all the rooms that we’ve been putting in place is debt you know that 10-year fixed rate debt kind of in the loan to value ratio somewhere between 55 and 65%. You know I think generally speaking that’s where there is a fall out.

Gaurav Mehta - Cantor Fitzgerald

Okay and then last question I have is on RevPAR so yeah 7.8% in 1Q and then your 2Q guidance is 7 to 8, but if I look at 2014 guidance it’s 6% at midpoint. Are you underwriting any kind of slowdown in the second half or its outside of the seasonal variation.

Dennis M. Craven

We do have, when you look a the fourth quarter, fourth quarter is a little bit lower, Gaurav. When you look at the breakdown it’s basically kind of 7% to 8% second quarter, 6.5% to 7.5% third quarter and around 4% to 5% in the fourth quarter. You know our visibility is not quite as strong for the fourth quarter. You know I think kind of given where the trend is, you know we hope to outperform that number you know that we haven’t formally adjusted that for our guidance.

Gaurav Mehta - Cantor Fitzgerald

Okay. Great. That’s all I have. Thank you.

Operator

And our next question comes from the line of Nikhil Bhalla with FBR. Please go ahead.

Nikhil Bhalla – FBR

Yeah hi, thank you and hi Jeff and Dennis. Just a question on the new JV here. Is there another promoted structure in place in this new JV with NRF similar to what you had before with Cerberus?

Jeffrey H. Fisher

Yeah and we’ll talk more about that Nikki on the next call. We’ll get in a little more detail, but yes, I mean an advantage is rolling our equity, maintaining our 10.3% in those great assets with strong cash flow and having a new promoted structure in place.

Nikhil Bhalla - FBR

Okay, that’s good. And in terms of EBITDA from the West Coast with the four hotels included, how much of a EBITDA will come from the West Coast now/

Dennis M. Craven

As a percentage. There you go, alright I actually got that. It looks like you are going to have roughly 47% of our EBITDA from the West Coast, 40% California and around 28% from Silicon Valley but after the expansion, I mean assuming a static portfolio more like 35% in Silicon Valley. So you know look that market that market is strong as you know and we’ll talk a little bit more about you know the supply demand fundamentals and what’s going on there in our next call.

Nikhil Bhalla - FBR

Just a follow up question there on that Jeff. You know you look at San Francisco RevPAR of course it’s been gang busts, right. And I mean are these assets it kind of do they do somewhat similar types of growth rates versus what you see in the San Fran market a little bit lower. You know how do they track versus that area?

Jeffrey H. Fisher

Yeah, I mean its Nikhil a – fairly comfortable for the last couple of years the market has been double digit RevPAR growth it’s once again pretty strong this year as well in that same double digit range. So it compares very favorably to the San Fran market.

Nikhil Bhalla - FBR

Okay. That’s all I have. Thank you very much.

Jeffrey H. Fisher

Allright.

Nikhil Bhalla - FBR

Thank you.

Operator

(Operator Instructions) And I’m showing no further questions in the queue. Please continue.

Jeffrey H. Fisher

All right. Well, we appreciate everybody listening today and we look forward to closing this transaction and reporting back with some further detail as specifically as been I think the accretion as Dennis was alluding to because you got to consider the role of the equity and the result of the acquisition in the hotel with that in essence that promote resulting in a very substantial efforts should result in a substantial FFO increase and EBITDA increase. Well we are confident, additionally business was good. Second quarter was good, and ofcourse in our hotels there is no long booking window so you know you don’t have as Dennis indicated, huge visibility but you know there is very little new supply here in the markets that we’re in. So we look forward to frankly I think that’s very good 2014. And we look forward to reporting back further with good results on our next call

Operator

Ladies and gentlemen that does conclude our conference for today. You may now disconnect.

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