Chatham Lodging Trust — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018; unaudited. Chatham is a self-advised REIT focused on upscale extended-stay and premium-branded select-service hotels. It wholly owned 41 hotels with 6,116 rooms and held minority interests in two hotel joint ventures.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $90.2m | $83.0m | $250.5m | $233.4m |
| Operating income | $20.4m | $20.4m | $49.8m | $43.3m |
| Net income | $14.7m | $14.5m | $31.0m | $24.2m |
| Net income attributable to common shareholders | $14.6m | $14.4m | $30.8m | $24.1m |
| Diluted EPS | $0.31 | $0.36 | $0.66 | $0.61 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $71.4m | $66.6m |
Q3 revenue rose 8.8%, while operating income was essentially flat and net income increased 1.4%. Calculated operating margin declined to about 22.6% from 24.5%; net margin was about 16.3% versus 17.5%. For the first nine months, revenue increased 7.3%, net income rose 28.2%, and operating margin improved to about 19.9% from 18.6%. Nine-month FFO attributable to common shareholders and units was $72.0m versus $70.3m; Adjusted FFO was $72.3m versus $70.3m.
Q3 same-property RevPAR for 40 hotels increased 1.1%, as occupancy rose 2.3% and ADR declined 1.0%. For the nine-month period, same-property RevPAR decreased 0.1%, reflecting a 0.5% ADR decline partially offset by higher occupancy. Management attributed softer property-level trends partly to new supply in its markets. Reported revenue growth was substantially affected by acquisitions: three hotels bought in 2017 contributed $7.1m of Q3 revenue growth, while comparable-hotel revenue grew more modestly.
Financial position and liquidity
- At September 30, 2018, total assets were $1.405bn, total liabilities $582.9m and total equity $822.2m.
- Total debt was $533.0m, at an average interest rate of approximately 4.6%; $503.0m was mortgage debt and $30.0m was drawn on the revolving facility. The facility had $220.0m of availability. Unrestricted cash was $10.3m; restricted cash was $28.4m.
- Leverage was 32.6% under management’s definition. The company reported covenant compliance and a 3.3 fixed-charge coverage ratio versus a 1.5 minimum covenant.
- Nine-month capital improvements were $23.3m. Cash distributions to shareholders and units were $46.1m; declared distributions were $0.99 per common share and LTIP unit for the nine months.
- Cash from operations of $71.4m less investing outflows of $40.5m and financing outflows of $28.8m resulted in a $2.2m increase in cash, cash equivalents and restricted cash.
Changes, outlook and risks
- Q3 diluted EPS fell to $0.31 from $0.36 despite slightly higher net income; weighted-average diluted shares increased to 46.4m from 39.6m. Common shares outstanding at period-end rose to 46.5m from 45.4m at year-end 2017, with equity issued through ATM and dividend reinvestment programs.
- Nine-month net income benefited from the absence of the prior-year $6.7m impairment charge. Conversely, income from unconsolidated joint ventures fell to $0.9m from $2.0m, which management attributed mainly to higher interest and amortization expense on floating-rate JV debt.
- Management projected 2018 company RevPAR change of -0.5% to 0.0% versus 2017, citing expected industry supply growth. This is the stated outlook in the filing; no earnings or full-year financial guidance is provided in the supplied text.
- Management expected an additional $9.8m of hotel renovations and other capital spending during the remainder of 2018. Planned expansions at two Sunnyvale, California Residence Inns were estimated at $80m–$90m, but timing, approvals and final budgets remained uncertain.
- Risks include lodging-market softness, increased room supply, rising operating costs, seasonality, financing and interest-rate exposure, and the ability to source acquisitions and capital. A 100-basis-point increase in variable rates was estimated to add about $0.3m of annual interest expense, assuming the $30m revolver balance remained unchanged.
- Two related California wage-and-hour class actions against Island Hospitality Management remained pending; no class had been certified. The company recorded an estimated $0.2m exposure. The IRS was examining the TRS tax return for 2016; management recorded no liability but noted an unfavorable outcome could materially affect results, financial position or cash flows.
- The CEO owns 51% of Island Hospitality Management, which managed all 41 wholly owned hotels and many JV hotels. Management fees and related-party arrangements merit investor review. The company also provides customary carve-out guarantees related to JV debt in specified circumstances.
Key facts for investors to verify
- Whether comparable-hotel RevPAR, ADR and expense trends improve, and how much reported growth continues to depend on acquired properties.
- Full-year operating performance against the stated RevPAR outlook and the impact of new supply and labor, utility and maintenance costs.
- Debt maturities, revolver usage, covenant headroom, variable-rate exposure and the funding plan for hotel improvements and proposed Sunnyvale expansions.
- Dividend coverage against recurring cash generation and capital needs; FFO and EBITDA are non-GAAP measures and are not substitutes for cash flow or liquidity.
- Developments in the California litigation, IRS examination, joint-venture financing and guarantees, and related-party management arrangements.