Business Context and Reporting Period
Company: Chatham Lodging Trust (Chatham)
Filing Type: Form 8-K (Current Report)
Date of Report: May 27, 2014
Event: Disclosure of a definitive purchase and sale agreement to acquire the "Silicon Valley Portfolio" (four hotels in California) and the concurrent sale of Chatham's interest in the "Innkeepers JV" to NorthStar Realty Finance Corp.
Key Financial Metrics
Transaction Details
- Target Asset: Silicon Valley Portfolio (4 hotels, 751 rooms: Residence Inn Mountain View, San Mateo, Silicon Valley I, and Silicon Valley II).
- Gross Purchase Price: $341.5 million.
- Reserve Credits: $15.1 million.
- Net Purchase Price: $326.4 million.
- Ownership Structure Post-Closing: Chatham will own 100% of the Silicon Valley Portfolio and retain a 10.3% interest in the remaining Innkeepers JV (47 hotels), while NorthStar will own 89.7% of the Innkeepers JV.
Target Asset Financials (Silicon Valley Portfolio)
Combined historical data for the four hotels (in thousands, unless noted):
| Metric | Three Months Ended Mar 31, 2014 | Year Ended Dec 31, 2013 |
|---|---|---|
| Total Revenue | $10,254 | $41,268 |
| Operating Income | $3,014 | $11,718 |
| Net Income (Loss) | $346 | $1,862 |
| Net Cash from Operating Activities | $3,110 | $13,124 |
| Total Debt (Outstanding) | $215,868 | $215,868 |
| Total Assets | $164,433 | $166,442 |
Pro Forma Impact on Chatham (Three Months Ended Mar 31, 2014)
- Pro Forma Total Revenue: $47.1 million (vs. $36.9 million historical).
- Pro Forma Net Loss: $(2.3) million (vs. $(1.7) million historical).
- Pro Forma Total Debt: $551.0 million (includes $222.0 million new mortgage debt and $50.9 million revolver draw).
Material Changes and Outlook
Material Changes
- Portfolio Expansion: Acquisition of 751 rooms in the Silicon Valley market, significantly increasing Chatham's asset base.
- Debt Restructuring: The transaction involves refinancing the target assets with new mortgage debt totaling $222.0 million at an average interest rate of 4.61% and utilizing Chatham's revolving credit facility.
- Management Fee Adjustment: Base management fees for the Silicon Valley Portfolio will increase from 2% to 3% of revenues upon acquisition.
- Divestiture: Sale of the majority interest (89.7%) in the Innkeepers JV to NorthStar, reducing Chatham's exposure to the remaining 47-hotel portfolio while retaining a 10.3% stake.
Guidance and Risks
- Closing Conditions: The transaction is contingent upon the satisfaction of certain closing conditions. There is no assurance that the deal will close.
- Financing Risk: While Chatham anticipates funding via new mortgages and its credit facility, it may seek additional secured/unsecured financing or equity if timing or market conditions dictate.
- Interest Rate Sensitivity: Chatham estimates a hypothetical 0.125% increase in variable interest rates would result in approximately $0.1 million in additional annual interest expense on floating rate debt.
- Related Party Transactions: The hotels are managed by Island Hospitality Management (IHM), 90% owned by Chatham's CEO, Jeffrey H. Fisher.
Investor Verification Checklist
- Verify the satisfaction of closing conditions for the $326.4 million acquisition.
- Confirm the final terms of the $222.0 million new mortgage debt and the draw on the revolving credit facility.
- Review the impact of the increased management fee (2% to 3%) on future operating margins for the Silicon Valley Portfolio.
- Assess the liquidity impact of the transaction on Chatham's remaining cash reserves and debt covenants.
- Monitor the status of the Innkeepers JV sale to NorthStar and the resulting 10.3% retained interest valuation.