Chatham Lodging Trust — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; unaudited. Chatham is a REIT focused on upscale extended-stay and premium-branded select-service hotels. It owned 39 hotels with 5,915 rooms across 16 states and Washington, D.C. All properties were managed by Island Hospitality Management, which is wholly owned by Chatham’s CEO.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $86.7 million | $87.9 million | $238.8 million | $224.5 million |
| Operating income | $13.9 million | $18.8 million | $31.4 million | $31.7 million |
| Net income | $7.5 million | $12.4 million | $11.8 million | $12.0 million |
| Net income attributable to common shareholders | $5.3 million | $10.1 million | $5.7 million | $5.9 million |
| Diluted income per common share | $0.11 | $0.21 | $0.11 | $0.12 |
| Adjusted EBITDA (non-GAAP) | $30.6 million | $35.1 million | $80.2 million | $79.4 million |
| Adjusted Hotel EBITDA (non-GAAP) | $32.8 million | $38.2 million | $88.2 million | $88.3 million |
Q3 same-property RevPAR fell 2.6% to $146.76, as occupancy declined 1.2% and ADR declined 1.3%. For the first nine months, same-property RevPAR rose 7.2% to $135.66, with occupancy up 3.8% and ADR up 3.3%. The filing does not provide a clearly labeled GAAP profit-margin measure.
Cash provided by operations for the first nine months was $66.3 million, up from $50.5 million. Capital improvements used $21.4 million; cash, cash equivalents and restricted cash increased $44.8 million to $90.0 million. Of that ending balance, $71.6 million was unrestricted cash and cash equivalents.
At September 30, total debt before unamortized financing costs was $487.7 million, at an average rate of approximately 5.5%. The company reported a 24.7% leverage ratio, measured as net debt to hotel investments at cost. It had $90.0 million outstanding on its unsecured term loan and no borrowings on its $260.0 million revolving facility. Four mortgage lenders had imposed cash traps, resulting in $6.2 million of restricted cash. The company reported compliance with its financial covenants.
Changes and key drivers
- Q3 revenue declined 1.3% year over year, and net income declined, primarily reflecting lower room revenue and higher operating expenses. The company attributed weaker room demand particularly to reduced summer intern business at Silicon Valley and Bellevue hotels; those five hotels’ room revenue fell $3.8 million year over year.
- Q3 hotel operating expenses rose 9.1% to $47.7 million, driven by staffing, wage costs and inflation. Higher interest and other income partly offset operating pressure, while interest expense rose 6.9% to $6.8 million.
- Nine-month revenue increased 6.4%, while net income was slightly lower. Same-property RevPAR growth reflected the continued recovery in lodging demand. Comparability also reflects 2022 hotel acquisitions, a hotel opening and the sale of four hotels.
- Nine-month operating cash flow improved by $15.8 million. Adjusted EBITDA increased modestly, while Adjusted Hotel EBITDA was essentially unchanged.
Outlook, liquidity and risks
- Management cited continued recovery in business and group travel, alongside leisure demand, but noted inflation and higher interest rates. It expected U.S. lodging industry RevPAR to increase modestly over the remainder of 2023. No specific company earnings or RevPAR guidance was provided.
- Management expected approximately $9.2 million of hotel renovations and other capital expenditures during the remainder of 2023. It said cash balances and credit availability should cover short-term needs; longer-term maturities may be funded through borrowings, securities issuance or asset sales.
- Debt refinancing is a significant near-term consideration: scheduled principal payments include $297.0 million in 2024, and the company reported $304.2 million of principal and interest obligations due within 12 months of September 30. It identified $279.1 million of mortgage principal maturities in that period. A 100-basis-point rise in SOFR was estimated to add approximately $0.9 million in annual interest, assuming the $90 million floating-rate term loan balance remained outstanding.
- Common dividends were reinstated in Q4 2022; the company declared $0.07 per common share for Q3 2023. Series A preferred dividends are cumulative at 6.625% annually. Dividend amounts remain subject to board decisions and cash needs.
- Other risks include hotel seasonality, recession or weaker travel demand, operating-cost inflation, competition and access to financing. The company said there were no material changes to previously disclosed risk factors. Routine litigation was not expected to have a material adverse effect.
- Unusual items included a $0.7 million loss on early extinguishment of debt in the first nine months, related to repayment of the Home2 Woodland Hills construction loan, and a $0.2 million gain from partial termination of the corporate office lease.
Important facts for investors to verify
- Plans and financing capacity for the substantial 2024 mortgage maturities, including refinancing terms and any effects on liquidity or interest expense.
- Whether demand at the Silicon Valley and Bellevue properties recovers, and whether modest industry RevPAR growth translates into company-level improvement.
- Progress of hotel operating costs, capital spending and cash generation relative to room revenue and the reinstated common dividend.
- Restricted-cash levels and any changes in lender cash-trap provisions; management said the existing traps were not expected to impair short-term liquidity.
- Related-party oversight and management fees: CEO-owned IHM manages all hotels and received $8.1 million in fees for the first nine months of 2023.
- Non-GAAP measures are supplemental, are not substitutes for GAAP results or cash flow, and may not be comparable with similarly named measures at other companies.