PALM BEACH, FL—Chatham Lodging Trust justannounced second quarter results. The hotel REITposted $47.10 million in revenues for the quarter, beating thestreet's estimate of $43.82 million.

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The hotel REIT also increased hotel RevPAR 9.6%to $133 for Chatham's 29 wholly owned hotels inthe quarter and grew hotel RevPAR 8%, excluding the Residence InnWashington, D.C. hotel, which was without a brand for the entire2013 first quarter.

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

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

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Fisher reports strengthening corporate demand in the markets itserves from both individual an group travelers. Since Chatham'sportfolio is heavily reliant on corporate business, thehotel REIT continues to see strong occupancygrowth in its hotels and markets. In fact, he says, 40% of itsRevPAR growth was attributable to occupancy gains as the firm sawoccupancy rise to an exceptional 87% in the 2014 secondquarter.

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"This bodes well for our portfolio as the cycle matures and agreater proportion of RevPAR growth is expected to be attributableto rate increases, which Chatham has a long track record ofaggressively driving to the bottom line given our industry leadingmargins,” Fisher says. “Our portfolio is in great physical shape,and we are well-positioned to benefit greatly as these metricsimprove further. We continue to see on-going RevPAR growth abovehistorical averages in our markets and remain very bullish withrespect to the prospects for meaningful top-line growth in 2014 and2015.”

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As Fisher sees it, Chatham's platform makes a strong pair withIsland Hospitality. Through strategic acquisitions and aggressivemanagement, he says the relationship continues to deliver theindustry's best margins, with second quarter hotelEBITDA margins surging 350 basis points to 43.6 percent growth, upalmost 1,300 basis points since our 2010 IPO.

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

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

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

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

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“We share similar outlooks regarding the health of the hotelindustry and performance expectations for the portfolio,” Fishersays. “Our long-term interests are aligned with a solid capitalstructure that we believe will provide strong, risk-adjustedreturns for our shareholders, and Chatham and Island will continueto explore other joint venture opportunities with NorthStar. Thehotels are in excellent physical condition withonly minimal brand-mandated upgrades required. All thehotels will continue their current brandaffiliations under long-term agreements.”

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In terms of capital structure, Craven explains that Chatham in2011 leveraged its balance sheet to make the initial Innkeepersinvestments which included the $37 million Innkeepers joint ventureinvestment with Cerberus and the acquisition of five hotels foralmost $200 million.

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“In 2013, we opportunistically accessed the equity markets insmaller sized offerings to match fund six acquisitions and createthe capacity that allowed us to make the transformative acquisitionof the four Silicon Valley Residence Inn hotelsand the new joint venture investment in the Innkeepers portfoliowith Northstar,” he continues. “We are willing to use borrowingsunder our line of credit or property specific debt to fund growthwhen the opportunity arises. With financing rates at historicallylow levels, we are comfortable at these leverage levels.”

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What's next for Chatham? Fisher expects solid operatingfundamentals for the balance of 2014 which is reflected in itshigher guidance.

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“We believe there is still plenty of running room in thiscycle,” Fisher says. “We expect 2015 to bring further earningsimprovement as the significant, external growth attributable to theacquisition of the four, great hotels in the heartof Silicon Valley is included for the full year, further bolsteredby the expected completion of the first expansion in Mountain Viewby the end of 2015.”

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