Chatham Lodging Trust's (CLDT) CEO Jeffrey Fisher on Q2 2014 Results - Earnings Call Transcript

| About: Chatham Lodging (CLDT)

Chatham Lodging Trust (NYSE:CLDT)

Q2 2014 Earnings Conference Call

August 5, 2014 10:00 AM ET

Executives

Chris Daly – IR

Jeffrey Fisher – Chairman, CEO and President

Dennis Craven – EVP and CFO

Analysts

Gaurav Mehta – Cantor Fitzgerald, L.P.

Nikhil Bhalla – FBR Capital Markets & Co.

Anthony Powell – Barclays Capital, Inc.

Rod Petrik – Stifel Nicolaus

Operator

Good day everyone and welcome to the Chatham Lodging Announces their second quarter conference call. Today’s call is being recorded. And at this time, it is my pleasure to turn the conference over to Chris Daly. Please go ahead sir.

Chris Daly

Thank you, Lorrie. Good morning everyone. Welcome to the Chatham Lodging Trust second quarter 2014 results conference call. This morning, before the opening of the market, Chatham released results for the second quarter 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’d still like one, please call my office at 703-435-6293 and we’ll be happy to send you a copy. Or you may view 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 at streetevents.com. A recording of the call will be available by telephone until 1:00 PM Eastern on Tuesday, August 12, 2014, by dialing 1-888-203-1112, reference number 8711670. 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 August 04, 2014 unless otherwise noted, and the company undertakes no obligation to update any forward-looking statements to conform the statement to actual results or changes in the company’s expectations.

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 reconciliations of these release.

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

Jeffrey Fisher

Thanks, Chris, and thank you. Good morning, everyone. We’re thrilled to be here today, this being our first earnings release since acquiring the four Silicon Valley hotels and completing the Innkeeper’s Northstar transaction. I think the results reported continue to validate our strategy to own the best assets in the fastest growing markets with the highest barriers to entry.

Additionally, our utilization of best-in-class manager, Island Hospitality, further enhances our already strong return on investment. You can see that as you look at the results, look at the margin increases and the flowthrough to earnings from RevPAR gains.

We’ve got nothing but great results to talk about today. During the second quarter, we increased our annual dividend 14% and since our IPO, we’ve increased our dividend approximately 40%. We closed the largest acquisitions in the company’s history. We produced the highest RevPAR growth across the lodging industry. We drove the highest operating margins in the lodging industry. We saw EBITDA and FFO jump 58% and 71% respectively.

And when you look forward to 2015, our EBITDA and FFO growth is projected to be among the highest in the space. By almost any metric, Chatham ranks as one of, if not the best, performing companies in all of lodging.

We spend a tremendous amount of time and effort putting together the Innkeeper’s transactions. We realized a profit of approximately $80 million or $3.00 per share in less than three years. That’s $3.00 per share. The investment gained in over 80% IRR for our shareholders.

And through thoughtful analysis of potential structures and teaming up with Northstar, we were then able to reinvest that $80 million profit tax-free into new investments with high growth dynamics, with strong going in leverage [ph] yields. So when you put a multiple on that gain, the value is meaningful.

These transactions should create substantial value for Chatham and its shareholders going forward. And there’s even more embedded value when you factor in the expansion opportunities at four of the top performing residence inns in the country, our Silicon Valley residence inns. And those numbers and those earning gains have not been picked up by any analyst thus far because most of that is a 2016 event.

We’ve amassed a high quality portfolio of upscale extended stay in premium branded select service hotels in locations with limited new supply growth and highly focused on the corporate traveler. We know based on years of experience in these sectors that our hotels provide the best risk adjusted returns over time. Because of their location and their customer base, we are able to achieve high absolute RevPAR combined with growth characteristics very similar to those you may see in urban markets.

When you look at our 29 hotels, approximately 87% of our portfolio is located in the top 25 MSAs, 80% of our portfolio is located on the West Coast and the Northeastern United States and approximately 55% of our hotels are located in key West Coast markets, of course including Silicon Valley continued to be one of the highest growth markets in the United States.

Across the lodging REITs, the 55% ranks as one of the highest concentrations of all lodging REITs on the West Coast. We’ve concentrated our acquisition efforts on primarily high growth MSAs, as I’ve said, focused on technology, medical and oil and gas.

Our second quarter top line results were very impressive with RevPAR growing 9.6%, 8% excluding D.C., which as of this morning was the highest of all reporting companies. Absolute RevPAR was $133 on occupancy of almost 87% and an average daily rate of nearly $155 for these hotels. Certainly not figures one typically associates with a geographically diverse select service portfolio.

The RevPAR growth of 9.6% was driven by an increase in occupancy of 3.7% and an increase in rate of 5.7%. So here, again, we want to note although other companies are seeing most of their gains in rate, we are continuing to see occupancy gains as well, which I think bodes well for our company and our shareholders because it should give us even longer legs in the cycle because more rate growth will come as we continue to maximize the occupancy rates in these hotels.

We saw a strong growth across our portfolio with 13 of our 29 hotels posting double-digit RevPAR growth in the quarter. And importantly, this growth was spread across the country from Boston to Nashville to Texas to Southern California and Northern California. As a matter of fact, when you look at our portfolio RevPAR CAGR, this portfolio has exceeded the industry and upscale segments in eight of the last 12 years and has outperformed those segments by 41% and 64% respectively.

Pretty interesting numbers and just speaks to, again, the markets that we have chosen to acquire our assets in and the strength of the brands and the operator that we’re affiliated with.

RevPAR in our recently acquired Silicon Valley portfolio was up 12.1% for the quarter to $172, driven by occupancy growth of 5% to 92% and an increase in rate of 8.4% to $187. The converted D.C. residence inn continues to gain traction with a year-to-date market share index of 110 which is the highest level in any of the last five years. The highest index as a double rate [ph] was 106 in 2012.

RevPAR is projected to be over $160 in 2014 in D.C. which would be 10% higher than any year in the past 15 years. Yet another example of finding value in our portfolio. That conversion for the residence inn brand obviously is paying dividends and should continue to ramp up over the next year.

Within our markets, occupancy continues to climb up 2% to 81%, a sign that demand continues to grow. And since our hotels are typically the strongest brands in those markets, we stand to benefit most. Island Hospitality has grown market share and continue that momentum through the first six months of this year.

These factors bode well since our operating model is best at growing, as I mentioned, operating margins.

We’ve got the best in class portfolio through our affiliation with Island. With three decades of experience investing in and operating primarily select service and limited service hotels, we believe that we have a unique understanding of how to generate significant value in this space. The affiliation allows us to properly diligence acquisitions given our knowledge of most major markets across the country and allows us to leverage Island’s relationships to drive operating cost lower and allows us to make quick decisions regarding revenue management, revenue segmentation, all helping to maximize top line revenue.

With our top line revenue growth exceeding our expectations, our hotel EBITDA margins advanced a very strong 350 basis points to almost 44%, the highest among all lodging companies.

Since our IPO in 2010, we’ve raised EBITDA margins approximately 1,300 basis points. Staggering number. A testament to our ability to continue to drive operating profits higher. We were able to generate operating profit flow through of 55%, much better than our 40% first quarter performance. So we are very pleased with the improvement and applaud our general managers for doing much better this quarter and we expect that trend to continue throughout the year. We expect our third quarter hotel EBITDA margins to rise to over 45% and we believe there’s a substantial room for further advancement as ADR grows over the next several years.

As I said earlier, our operating model is best at driving EBITDA and our EBITDA per share has grown at a CAGR of 21% since our IPO. When you factor in reasonable leverage at low rates, we’ve been able to drive growth and FFO per share at a CAGR or 30% since our IPO. All this translates into generating strong free cash flow and Chatham pays a healthy dividend of $0.96 per share that is well covered given our estimated FFO per share of $1.91 to $1.96 for this year.

Our board evaluates our dividend frequently and it’s our intention to grow our dividend in tandem with FFO per share growth. So when you look at our projected FFO per share growth, I believe that translates into a very significant dividend increase as we move forward.

Before I pass it on to Dennis, I would be remised if I didn’t thank Cerberus for their partnership in the Innkeepers transaction. The partnership was very successful and was mutually beneficial for both Chatham and Cerberus. We still hold one hotel in a separate joint venture with Cerberus and look forward to continuing that partnership with them.

At this point, I’ll turn it over to Dennis.

Dennis Craven

Thanks, Jeff. Great to be with everyone today and to talk about the all-around great results. For the first quarter, we report a net income of $64.9 million or $2.42 per diluted share compared to net income of $2.2 million of $0.11 per diluted share for the 2013 second quarter.

The primary diver behind the significant net income increase was the accounting gain of $66.2 million related to the recapitalization of the Innkeepers joint venture and the sale of the four Silicon Valley hotels from the joint venture to Chatham.

Also during the quarter, we incurred onetime expenses of approximately $5.5 million related to the transactions. The accounting gain of $66 million is not the same as the actual investment gain of over $80 million due to basically some technicalities surrounding the rollover of the gain related to our investment in the Innkeepers joint venture with Northstar.

It was record second quarter RevPAR growth for Chatham as we saw RevPAR grow 9.6% in the quarter for all 29 hotels owned at the end of the quarter. RevPAR were particularly strong, up 11% and 10.5% respectively aided by the fact that industry demand was up 4.5% while supply growth was a muted 0.8% in the second quarter.

We saw a double-digit RevPAR increases across almost half of our markets including all four of the Silicon Valley Residence Inns which as Jeff alluded to saw RevPAR grow approximately 12% in the quarter.

However, if you actually exclude those four hotels, RevPAR was still up approximately 9% for the quarter which shows the breadth of the performance across our entire portfolio with really the only weak market for us being Portland, Maine where RevPAR was down 1.4%. However, that was much better than we expected. We knew that there were three new hotels coming into the downtown waterfront market when we bought the hotel. So it wasn’t a surprise, but all in all, a very good summer regardless of the new supply increases in the market.

In the second quarter, we’re able to drive significant margin expansion through certain expense management initiatives we implemented across the portfolio and we’re able to drive our already leading margins up 360 basis points to 43.6% as of this morning, the highest in the industry.

Through a close working relationship with Island, we were able to identify some focal points to enhance profitability across the portfolio and as a result, we were to improve our flow during the second quarter to 55%.

The combination resulted in our delivering adjusted EBITDA of 21.7 million versus consensus estimates of about 20 million and FFO per share for the quarter of $0.56 exceeding consensus estimates of $0.52 to $0.53 a share.

Chatham is one of the top performing lodging REITs over the past four years with regards to FFO growth and the highest of the newer lodging REITs who have come public since 2009 growing on average 30% per year.

The Innkeepers joint venture performance was also strong for the quarter and it contributed $300.5 million of EBITDA and $1.9 million of FFO or $0.7 per share. At June 30th, our net debt was approximately $542 million, up $270 million from March 31st as they used basically debt of $270 million in the approximately $80 million of equity created through the rollover of our gain of the JV transactions to make the $350 million of investments in the Innkeepers transactions.

During the quarter, we issued $220 million of 10-year, five years interest only CMBS debt at an interest rate of 4.64%. The average interest rate on all of our debt sits now at 4.33% with the average interest rate on a fixed rate debt of 4.73%. And the weighted average maturity on our fixed rate debt is now out to October of 2023.

We only have $11 million of debt maturing over the next seven years with $5 million maturing next year and $6 million in 2016, very small amounts, easily handleable by available cash flow.

At quarter end, our leverage ratio is 51% based on the ratio of our net debt to investment in hotels at cost. Level is very similar to where we operated from 2011 through early 2013 with the only difference being that our average volume cost is down almost 150 basis points from that time. Our debt is well covered with a ratio of Chatham Holding on EBITDA at interest expense of well over three times.

Subsequent to the end of the quarter, we issued permanent financing on our SpringHill Suites Savannah through a $30 million 10-year CMBS loan at an interest rate of 4.62%, again, with the first five years interest only.

Proceeds from that financing were used to pay down a portion of our bonds on our line of credit which now fit to the approximately $62 million outstanding as of today. And we have $130 million available on our line.

We will continue to use free cash flow to pay down debt in the interim and ultimately to reinvest into our hotels of new acquisitions. With projected FFO of approximately $27.5 million over the back half of 2014, dividend payments of approximately $13 million and capital expenditures of a few million dollars, we will use that approximately $10 million of free cash again to reduce borrowings on our line over the balance of the year.

In April, our board of trustees approved a 14% in the dividend, now standing at $0.08 per share per month equating to an annualized dividend of $0.96 a share. With minimal CapEx obligations for the next several years and debt locked in at very attractive long-term rates, our free cash flow projections are very strong.

We’ve increased our dividend every year since our inception 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 grow dividends in tandem with our earnings. And if you look at as a percentage of FFO per share, we paid out approximately 60% in 2012, 56% in 2013 and what’s projected to be approximately 48% in 2014 based on the current midpoint of our guidance of $1.94 per share. As Jeff said, we would expect that the dividend will continue to grow.

Our competence of the overall health of the hotel industry remains bullish and our Board of Trustees will continue to reevaluate the dividend each quarter. As a company and the management, we know that dividends make up the primary component of REIT returns over time. And our goal is to continue to build a best-in-class company that produces strong cash flow that will provide such dividends to our shareholders.

Turning attention to our guidance for the third quarter and the full-year, we raised our full-year RevPAR growth by approximately 50 basis points to account for the RevPAR outperformance in the second quarter of 9% growth for the 25 hotels owned for the entire quarter versus a range of 7% to 8% that we had provided back in May.

For the third quarter, our RevPAR growth is forecast to grow 7% to 8% on a 2% increase in occupancy. Prior year quarterly RevPAR was $128 in the 2013 third quarter and $108 in the 2013 fourth quarter.

Fourth quarter RevPAR is currently forecast to grow approximately 5% to 7% with almost all of that increase attributable to rate.

We’ve raised our Q3 and Q4 adjusted EBITDA, adjusted FFO and adjusted FFO per share by about $500,000 to $750,000 or $0.02 to $0.03 per share based on our increased RevPAR and margin expansion for the balance of the year.

There was a slight increase to interest and low amortization expense associated with the new Savannah loan that we closed in early July. Additionally, we’ve increased our corporate G&A projections by approximately $250,000.

Our share of JV EBITDA increased $0.3 million from our June forecast due to second quarter outperformance and higher expectations for the balance of the year. Our joint ventures are expected to contribute $2.4 million of EBITDA on the third quarter and $1.7 million in the fourth quarter and approximately $1.4 million and $0.75 million of FFO in the third and fourth quarter respectively.

On our June investor call, we provided a preliminary indication of 2015 adjusted FFO of approximately $2.35. Given the fact that our current portfolio has outperformed the industry for eight of the past 12 years, our outlook and earnings power is strong. When we look ahead to 2015 and if you just assume RevPAR growth of 68% which is a point above industry projections, our FFO per share grows from a range of $1.91 to $1.96 in 2014 to a range of $2.43 to $2.53 per share in 2015, yet another year of significant growth. That’s almost a 30% gain next year.

These are very powerful numbers. And one thing not to forget that Jeff mentioned is the fact that we do have the expansion and incremental EBITDA from the four Silicon Valley residence inns. We projected it’s going to cost approximately $59 million on a pro forma basis. When we look at those expansion opportunities, it would add incremental EBITDA of approximately $12 million. And if you look at that on a pro forma basis based on our current capital structure, that equates to another $0.30 to $0.35 of FFO accretion once the four renovations are finished.

These – and expansions are finished. These acquisitions have proved to be very accretive to earnings and the value of the company.

That concludes my remarks. So I think this time, operator, we’ll turn it over for questions.

Question-and-Answer Session

Operator

Thank you, gentlemen. The question-and-answer session will be conducted electronically today. (Operator instructions) We’ll go first to Gaurav Mehta with Cantor Fitzgerald.

Gaurav Mehta – Cantor Fitzgerald, L.P.

Thank you, good morning.

Jeffrey Fisher

Good morning.

Gaurav Mehta – Cantor Fitzgerald, L.P.

You mentioned about certain expense management initiative that partly drove the margin expansion. Can you elaborate on that?

Dennis Craven

Yes, we certainly can. We had spent some time in the second quarter and really in the latter part of the first quarter looking at first of all some repairs and maintenance expenses across the portfolio where we thought we were just being a little inefficient in terms of staffing and overall expenses. So we spent some time making those adjustments to repairs and maintenance.

And then as we’ve kind of moved through the second quarter, we also looked at both from a G&A and just a room’s margin perspective, again primarily staffing related issues where we were just a little bit heavy in certain departments. So we spent some time there, made some efficiencies that helped with the margins.

Gaurav Mehta – Cantor Fitzgerald, L.P.

Great. And second question I have is on joint venture. In the press release you mentioned that Chatham and Northstar will continue to explore other JV opportunities. Can you provide more details on that? Are you looking at future acquisitions via JVs or any kind of details on that?

Dennis Craven

Yes, we can certainly expand on it. I mean, listen, there are quite a few and there have been quite a few larger portfolios that have been on the market and sold this year. There continue to be some larger portfolios as well as some smaller portfolios.

And as same thing we did with the Cerberus joint venture but with Northstar now, we continue to look at those and we discuss those openly those opportunities with Northstar who is also very interested in the space.

Gaurav Mehta – Cantor Fitzgerald, L.P.

Great. That’s all I have.

Dennis Craven

Thank you.

Operator

And moving on, we’ll go to Nikhil Bhalla at FBR.

Nikhil Bhalla – FBR Capital Markets & Co.

Hi, good morning, Jeff and Dennis. Just the first question I have is on second quarter results, how much did the four hotels contribute on the EBITDA side? You only owned it I think for just maybe two weeks or so, so I was wondering if I could get some color on that.

Dennis Craven

Yes, I mean I don’t have the EBIT number off the top of my head. I do know that I can basically from an FFO perspective after debt cost, it was basically $0.01 for the second quarter. So it was about $300,000 of FFO. From an EBITDA perspective, that’s probably almost $500,000.

Nikhil Bhalla – FBR Capital Markets & Co.

Got it, thank you.

Jeffrey Fisher

And also – Nikhil, also I’d just like to add because I think you’re driving a certain point home which is those assets do not drive, at least as of now, our RevPAR results. So don’t – we don’t want investors to believe that they added four Silicon Valley hotels yet and all their strength and their portfolio, RevPAR gain of almost 10% is there. It’s not.

As we said, a number of these hotels, almost half have got double-digit RevPAR gains and market spread all around the country. When you exclude those four hotels, RevPAR was still up 9% for the quarter. Really strong. There’s the number.

Nikhil Bhalla – FBR Capital Markets & Co.

Yes, that’s pretty strong. Thank you for that, Jeff. Just a follow-up question on the $59 million spend – the CapEx spend, could you just remind us how much of that takes place in 2014, how much of that takes place in 2015 and ‘16?

Dennis Craven

Yes, no problem. When you look at the four hotels, the timing of that is that the Mountain View hotel is a little bit ahead of – or is quite a bit ahead of the other three in terms of planning. We hope to start construction of the new tower of Mountain View in the fourth quarter of this year.

That cost is about $7 million in total. And that’s basically – you’ll probably spend about $1 million, maybe $2 million by the end of the year, not a lot. I’d say closer to $1 million. And then the balance of that, $7 million will be spent in 2015. For the other three hotels, you’re looking at $52 million of cost with those projects starting in the latter part of 2015. So again, probably for those three, you’re talking about $10 million of the $50 million is going to be spent in 2015 with the balance spent in 2016.

Nikhil Bhalla – FBR Capital Markets & Co.

Okay, so it seems like majority of the CapEx spend loaded in 2016 probably more like around $40 million or so, is that fair?

Dennis Craven

Yes, that’s fair.

Jeffrey Fisher

Yes, because that’s – we plan of finishing the hotel, furnishing the hotel, et cetera.

Nikhil Bhalla – FBR Capital Markets & Co.

Okay, got it. Just final question on your target leverage levels, where would you like to be on the net debt to EBITDA sort of one to two years from now?

Dennis Craven

Yes, I mean listen, I think as I alluded to, our free cash flow is pretty strong. We’ll continue to pay down debt. As we kind of sit here at seven-ish times debt to EBITDA, I think we’d certainly like to ratchet that down over time with free cash flow. So maybe in the kind of five to six times range.

But we’re pretty comfortable. I mean we’re certainly comfortable as we sit here today. We certainly want to continue to grow the portfolio if the right opportunities come around. But it has to be at the right price.

Nikhil Bhalla – FBR Capital Markets & Co.

Got it. Thanks, Dennis and Jeff.

Dennis Craven

All right, thank you.

Operator

(Operator instructions) And we’ll go next to Anthony Powell at Barclays.

Anthony Powell – Barclays Capital, Inc.

Hi, good morning guys. Good results this morning.

Dennis Craven

Hey, Anthony. How are you? Thank you.

Anthony Powell – Barclays Capital, Inc.

Very good. The second quarter, we saw a pretty strong transient demand growth across the board, especially at your hotels. How sustainable is that demand growth going forward and how do you expect groups to transient or I guess leisure versus business to trend in the third quarter and beyond?

Jeffrey Fisher

I think – this is Jeff. I think you’re right that we don’t see any reason for any change in the current demand patterns at all that we’re experiencing. Obviously, our portfolio when you look at it particularly in the third quarter, has more leisure business. Not more as an overall number, but some of the hotels like Portland downtown at the waterfront, Bellevue asset, et cetera will experience heavy leisure demand that really doesn’t exist for other parts of the year. But beyond that, corporate is strong and that’s really our bread and butter business.

Anthony Powell – Barclays Capital, Inc.

Great. And just one more maybe on the – at the market program, what kind of role does it play today as you share the at that time and what were these proceeds and how do you view that program going forward?

Dennis Craven

Sure. This is Dennis. We were included in the RMZ at the latter part basically at the end of May. And we saw the opportunity from the increased volume and liquidity in the stock at the time. And demand basically is an opportunity to issue some shares on the ATM which I think we disclosed was about $11 million.

We basically use that debt or use that cash to pay down borrowings on our line that we had obviously pumped out a little bit in closing the Innkeepers transactions in the first week of June. So really we look at it as a way to source a little bit of liquidity for that transaction.

Jeffrey Fisher

And the stock price turned out to be pretty close or on top of our 52-week high, right, Dennis?

Dennis Craven

Yes.

Jeffrey Fisher

So the number was the right number.

Anthony Powell – Barclays Capital, Inc.

Got it. Thank you.

Operator

(Operator instructions) And we’ll go next to Rod Petrik at Stifel.

Rod Petrik – Stifel Nicolaus

Hey, good morning, Jeff, Dennis. Hey, can we go back to the Northstar relationship? They’ve come out publicly and talked to investors about growing their hotel platform. And they envisioned expanding their relationship with you all. And this is a company that can grow a platform quickly. They just grew their healthcare platform over $4 billion today. How do you look at that relationship evolving from your perspective? Where do you fit in? I think they’ve talked about you sourcing deals, the possibility of Island managing the properties. But just from your perspective, how do you look at it?

Jeffrey Fisher

Well, we look at it, Rod, as a fantastic opportunity and a relationship that probably will bring more benefits to our shareholder overtime than even the Cerberus one. I think first and foremost, the structure that we envision on very large transactions such as some of the larger portfolio transactions like Innkeepers that we completed, would be the model.

Whereby it’s kind of 90-10 JV, but with Chatham being able to carve out the very, very high RevPAR, high barrier to entry market hotels that would go on its balance sheet 100%. So we get great growth inside of Chatham with those kind of assets. Northstar is happy to let have those kind of assets because they’re going to be more in a levered return model, not quite as reliant on RevPAR and earnings growth type assets as we are.

So obviously, the higher barrier to entry market assets such as the four Silicon Valley assets that we bought and frankly the rest of our portfolio grows faster. So we’ll have growth. And on the Island side, it certainly has – that company has proven itself over and over and over again to be best in class. I think companies like Northstars and others on Wall Street are seeing the results that Chatham posts and therefore, Island as an independent third party management company is being sought out for new management contracts. And Northstar sourced a 22-hotel portfolio over a year ago that they’ve been working on taking down. And in fact, they did and engaged Island separately to run those assets for them.

So you’re right. They definitely are in a growth mode and Island has the scalability obviously to be able to assist them on assets that they sourced and that they may find on their own and acquire.

Rod Petrik – Stifel Nicolaus

Thanks. Can you look at the Silicon Valley market? What kind of supply growth do you see coming on? And are there any barriers inherent in the properties that you have?

Jeffrey Fisher

When you say barriers inherent in the properties, what do you mean by that?

Rod Petrik – Stifel Nicolaus

Well, specifically location. Can somebody come and build across the street from you?

Jeffrey Fisher

No, nobody is building across the street from Sunnyvale, Silicon Valley one and two which sit on Highway 101 and are surrounded by dense office or one case some high-end residential. Mountain View, El Camino, I’m just taking them one by one, Rod, I don’t see opportunity in Mountain View at all. Besides they’re all chopped up and tiny, we actually bought a tiny little luggage store in adjoining parcel where we’re going to be able to add those rooms from Mountain View.

San Mateo is characterized the same way. It’s all land lock stuff. There is some new supply coming in and around the San Jose Airport. There’s two or three hotels coming there and there, there’s a little more land. And given the high absolute RevPAR numbers in Silicon Valley, those deals even with the very high land cost there, probably pencil pretty well.

But of course, as you look over the last 10 years and we’ve tracked it obviously for 20, there’s literally on one hand the amount of hotels that have been added to that supply over those 20 years and of course we all know what office space and companies and number of employees in that market has done in terms of growth. So frankly, the occupancy rates that you see ought to continue to be the occupancy rates.

Dennis Craven

I think it’s really important, Rod, in those markets with the customer base that you have that is a little more from a think safe perspective, a little bit longer. That’s where the residents and brand really succeeds. You’ve got a customer that has to be there for multiple weeks or multiple months. They’re not looking to stay at a hotel where they’re got to pay for breakfast every morning and deal with those types of things. They want to – our room at the Residence Inn provides the best value for those guys.

Jeffrey Fisher

Well, they’re engineers. They’re people in from Asia. They don’t want to stay at the [indiscernible] of the airport. So it’s a different view.

Rod Petrik – Stifel Nicolaus

Any sense to what an extended stay property at the San Jose airport would cost to build today if you have to go and then buy the land?

Jeffrey Fisher

Well, I’d say with land, you’re certainly going to be well over 250,000 room, somewhere in that area I would guess, 250 to 285 is a pretty ball park depending upon what you pay for land in that market.

Rod Petrik – Stifel Nicolaus

Okay, thank you.

Jeffrey Fisher

Thanks, Rod.

Operator

And gentlemen, I have no further questions at this time. I would like to turn the program back over to you for any additional or concluding remarks.

Jeffrey Fisher

We thank everybody for their participation today. We are looking at I think a pretty strong summer based on looking at our July numbers here as well. So we look forward to coming for our third quarter call and further reporting good results. Thank you.

Operator

And ladies and gentlemen, that does conclude today’s conference. I’d again like to thank everyone for joining us.

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