Chatham Lodging Trust — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Chatham is a lodging REIT focused on upscale extended-stay and premium-branded select-service hotels. At quarter-end it owned 42 hotels with 6,283 rooms and held minority interests in two joint ventures.
Financial results and position
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Total revenue | $75.7 million | $72.9 million; up 3.8% |
| Operating income | $9.9 million | $10.3 million |
| Net income attributable to common shareholders | $1.6 million; $0.03 per diluted share | $2.8 million; $0.06 per diluted share |
| FFO attributable to common shareholders and units | $16.2 million | $16.5 million |
| Adjusted EBITDA | $27.0 million | $26.4 million |
| Net cash provided by operating activities | $13.3 million | $13.4 million |
| Capital improvements | $11.7 million | $6.9 million |
| Cash, cash equivalents and restricted cash | $32.5 million | $32.3 million at December 31, 2018 |
| Debt | $599.2 million before unamortized debt costs; $97.0 million drawn on revolving facility | $585.1 million before unamortized debt costs at December 31, 2018 |
Comparable-hotel RevPAR declined 1.0%: occupancy rose 0.5%, while average daily rate fell 1.5%. Companywide room revenue increased 2.8%, but the two hotels acquired in 2018 contributed $2.4 million of the increase; at the 40 comparable hotels, room revenue fell 0.9%. Hotel operating expenses rose 5.4% to $41.8 million, reflecting acquired properties and higher labor and benefit costs. Interest expense increased 8.5% to $7.2 million, primarily due to greater revolver usage. Joint-venture losses increased to $1.1 million from $0.8 million, largely due to higher interest costs on floating-rate JV debt.
At March 31, 2019, the company reported $153.0 million of available capacity on its $250 million revolving credit facility, a 35.1% leverage ratio, and an average interest rate of approximately 4.7%. It was in compliance with financial covenants; its fixed-charge coverage ratio was 3.3 against a 1.5 covenant minimum. A 100-basis-point increase in variable rates was estimated to add approximately $1.0 million of annual interest expense, assuming the revolver balance remained $97.0 million.
Outlook, risks and notable items
- Management projected 2019 RevPAR change of -1.5% to +0.5% versus 2018, citing elevated supply growth in the upscale segment. It noted that industry supply growth could pressure RevPAR.
- Management expects lower hotel revenue, operating income and cash flow generally in the first and fourth quarters, with higher results in the second and third quarters. It expected a further $20.5 million of hotel renovations and other capital spending during the remainder of 2019.
- Management said it expected to meet 2019 covenant requirements and believed operating cash flow, existing cash and revolver capacity would meet short-term liquidity needs. Longer-term funding options include borrowing, equity issuance and asset sales; acquisitions depend partly on access to capital.
- Two California wage-and-hour class actions name Island Hospitality Management, which manages all 42 wholly owned hotels and is 51% owned by the company’s CEO. No class had been certified; $0.1 million was accrued for estimated company exposure under indemnification obligations.
- Two joint-venture property loans had initial maturities in June and July 2019, respectively, with three one-year extension options each. The company disclosed possible capital calls and limited guarantees tied to customary non-recourse carve-outs.
- The company adopted lease accounting guidance on January 1, 2019, recognizing a $22.9 million right-of-use asset and $25.6 million lease liability at March 31. The TRS expected taxable losses in 2019 and retained a valuation allowance on most deferred tax assets. An IRS examination of the TRS’s 2016 tax year remained open.
- The quarterly common-share dividend remained $0.33 per share, or $0.11 monthly. Management cautioned that REIT distributions are determined by the Board and that non-GAAP measures such as FFO and Adjusted EBITDA are not substitutes for GAAP results or cash flow.
Important facts for investors to verify
- Whether comparable-hotel RevPAR and pricing trends improve, and how much reported growth depends on acquired hotels.
- Whether labor, operating and interest costs continue to outpace revenue growth, and whether planned capital spending remains on budget.
- Extension, refinancing or repayment outcomes for the two JV loans maturing in 2019, including any capital calls or guarantee exposure.
- Revolver usage, interest-rate exposure, covenant headroom and the company’s ability to fund dividends and investment needs.
- Developments in the California lawsuits and IRS examination, and the implications of the related-party relationship with Island Hospitality Management.