PALM BEACH, FL—Chatham Lodging Trust just announced second quarter results. The hotel REIT posted $47.10 million in revenues for the quarter, beating the street's estimate of $43.82 million.

The hotel REIT also increased hotel RevPAR 9.6% to $133 for Chatham's 29 wholly owned hotels in the quarter and grew hotel RevPAR 8%, excluding the Residence Inn Washington, D.C. hotel, which was without a brand for the entire 2013 first quarter.

Jeffrey H. Fisher, Chatham's president and CEO, says 2014 is shaping up to be a “terrific year” as the company followed up a “great” first quarter with a “phenomenal” second quarter which produced industry-leading RevPAR growth of 9.6% and drove more expansion of the hotel REIT's margins by 350 basis points to 43.6%.

“Continuing a pattern from the first quarter, 13 of our 29 hotels, or 45% of our portfolio, produced double-digit RevPAR gains, reinforcing our acquisition strategy of focusing on specific markets where economic growth is strong," says Fisher. "Anaheim, Boston, Dallas, Houston, Nashville, San Antonio and Silicon Valley were our strongest markets in the 2014 second quarter. Almost 90% of our portfolio is in higher growth west coast, northeast and Texas markets, allowing us to outperform our RevPAR guidance of 7 to 8%.”

Fisher reports strengthening corporate demand in the markets it serves from both individual an group travelers. Since Chatham's portfolio is heavily reliant on corporate business, the hotel REIT continues to see strong occupancy growth in its hotels and markets. In fact, he says, 40% of its RevPAR growth was attributable to occupancy gains as the firm saw occupancy rise to an exceptional 87% in the 2014 second quarter.

"This bodes well for our portfolio as the cycle matures and a greater proportion of RevPAR growth is expected to be attributable to rate increases, which Chatham has a long track record of aggressively driving to the bottom line given our industry leading margins,” Fisher says. “Our portfolio is in great physical shape, and we are well-positioned to benefit greatly as these metrics improve further. We continue to see on-going RevPAR growth above historical averages in our markets and remain very bullish with respect to the prospects for meaningful top-line growth in 2014 and 2015.”

As Fisher sees it, Chatham's platform makes a strong pair with Island Hospitality. Through strategic acquisitions and aggressive management, he says the relationship continues to deliver the industry's best margins, with second quarter hotel EBITDA margins surging 350 basis points to 43.6 percent growth, up almost 1,300 basis points since our 2010 IPO.

“Our business strategy is intensely focused on driving hotel profits and ultimately distributable cash flow,” he says. “We have achieved exceptional results on this front since our IPO. Adjusted EBITDA has grown at an average annual growth rate of 21%, and adjusted FFO per share has grown at an average annual rate of 30%, based on the midpoint of our 2014 guidance.”

For its part, the Innkeepers joint venture produced 2014 second quarter RevPAR growth of 8.5% to $115 on a 6.6% increase in average daily rate to $138 and a 1.8% increase in occupancy to 83%. Meanwhile, Chatham sold the 51-hotel portfolio it owned with Cerberus Capital Management in the quarter for $1.3 billion, realizing an economic gain of over $80 million.

“The Cerberus/Chatham joint venture was a great partnership and proved to be a highly successful investment, turning our initial $37 million investment into distributions of approximately $117 million and profits of approximately $80 million or almost $3 per share in less than three years,” says Dennis Craven, Chatham's CFO. “We generated an exceptional internal rate of return of over 80% and then re-invested most of the gain tax-free into new high growth, accretive investments.”

Chatham acquired four Residence Inns by Marriott in Silicon Valley as part of the sale of the 51-hotel portfolio for a net cash purchase price of $272.7 million, or about $363,000 per room. The remaining 47 hotels in the portfolio were purchased by a joint venture between NorthStar and Chatham for a gross purchase price of $958.5 million. NorthStar acquired Cerberus' 89.7% interest in the joint venture, while Chatham retained its 10.3% ownership stake.

“We share similar outlooks regarding the health of the hotel industry and performance expectations for the portfolio,” Fisher says. “Our long-term interests are aligned with a solid capital structure that we believe will provide strong, risk-adjusted returns for our shareholders, and Chatham and Island will continue to explore other joint venture opportunities with NorthStar. The hotels are in excellent physical condition with only minimal brand-mandated upgrades required. All the hotels will continue their current brand affiliations under long-term agreements.” 

In terms of capital structure, Craven explains that Chatham in 2011 leveraged its balance sheet to make the initial Innkeepers investments which included the $37 million Innkeepers joint venture investment with Cerberus and the acquisition of five hotels for almost $200 million.

“In 2013, we opportunistically accessed the equity markets in smaller sized offerings to match fund six acquisitions and create the capacity that allowed us to make the transformative acquisition of the four Silicon Valley Residence Inn hotels and the new joint venture investment in the Innkeepers portfolio with Northstar,” he continues. “We are willing to use borrowings under our line of credit or property specific debt to fund growth when the opportunity arises. With financing rates at historically low levels, we are comfortable at these leverage levels.”

What's next for Chatham? Fisher expects solid operating fundamentals for the balance of 2014 which is reflected in its higher guidance. 

“We believe there is still plenty of running room in this cycle,” Fisher says. “We expect 2015 to bring further earnings improvement as the significant, external growth attributable to the acquisition of the four, great hotels in the heart of Silicon Valley is included for the full year, further bolstered by the expected completion of the first expansion in Mountain View by the end of 2015.”