Business context and reporting period
Chatham Lodging Trust’s Form 10-K covers the fiscal year ended December 31, 2016; it is an annual report, not a quarter-only filing. The REIT invests primarily in upscale extended-stay and premium-branded select-service hotels. At year-end, it wholly owned 38 hotels with 5,712 rooms and held minority interests in two hotel joint ventures.
Financial and operating results
Unless otherwise noted, amounts are in millions of dollars.
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $293.8 | $277.0 |
| Operating income | $58.9 | $55.5 |
| Net income | $31.7 | $33.2 |
| Net income attributable to common shareholders | $31.5; $0.82 basic EPS | $33.0; $0.87 basic EPS |
| Cash from operating activities | $87.7 | $81.8 |
| Cash used in investing activities | $21.1 | $182.4 |
| Cash from (used in) financing activities | ($75.5) | $106.5 |
Operating margin was approximately 20.1%, broadly unchanged year over year. Adjusted Hotel EBITDA, a company-defined non-GAAP measure for wholly owned hotels, was $119.3 million versus $117.6 million; it is not a measure of cash available for distributions. Hotel RevPAR for the 38-hotel same-property portfolio declined 0.1%: ADR rose 1.2% to $162.89 while occupancy fell 1.2% to 80.6%.
At December 31, 2016, cash and cash equivalents were $12.1 million and restricted cash was $25.1 million. Total company debt was $585.1 million, with an average rate of approximately 4.5%; the reported leverage ratio was approximately 40%, down from 41% in 2015. The $250 million unsecured revolving facility had $197.5 million available. The company reported compliance with its financial covenants and a 3.4x fixed-charge coverage ratio against a 1.5x minimum. Dividends declared were $1.30 per common share for 2016.
Material changes versus the prior comparable period
- Revenue rose 6.1%, but management attributed the entire increase to four hotels acquired during 2015; revenue at properties held throughout both years was flat.
- Same-property RevPAR declined despite higher ADR, as occupancy weakened. Hotel operating expenses rose 8.6%; management said margins declined for hotels owned throughout both periods, citing, among other factors, higher employee compensation and benefits.
- Common-shareholder net income fell to $31.5 million from $33.0 million. Contributing factors included lower income from unconsolidated real estate entities and the absence of the 2015 gain on the Torrance joint venture sale; the 2016 tax benefit partly offset the decline.
- Operating cash flow increased to $87.7 million. Investing cash outflow was substantially lower because 2016 had no hotel acquisitions, compared with $169.4 million of hotel purchases in 2015.
- The monthly dividend increased from $0.10 to $0.11 in March 2016. The 2015 quarterly dividend figure included a special $0.08 payment declared in December 2015 and paid in January 2016.
Outlook, commentary, risks and unusual items
- Management projected 2017 RevPAR change of -1.0% to +1.0%. It cited moderating economic indicators and faster supply growth in the upscale segment, which grew 5.6% in 2016; it warned that continued supply growth and slower corporate demand could pressure RevPAR.
- Management expected approximately $27 million of 2017 capital improvements. Potential expansions at two Sunnyvale hotels were estimated at $75 million to $80 million, but timing, approvals and final costs were uncertain.
- The NewINK and Inland joint ventures had substantial floating-rate, interest-only loans with stated 2017 maturities after extension options exercised in 2016. Their reported year-end balances were $840 million and $817 million, respectively. These are joint-venture obligations, not included in Chatham’s consolidated debt total; Chatham disclosed potential pro-rata exposure under specified non-recourse carve-outs.
- Interest-rate sensitivity: management estimated a 100-basis-point increase would add approximately $0.5 million of annual interest expense on the $52.5 million revolver balance, assuming that balance remained unchanged.
- IHM managed 36 of Chatham’s 38 wholly owned hotels at year-end; the remaining two were transferred from Concord to IHM effective January 1, 2017. CEO Jeffrey Fisher owns 51% of IHM, creating potential related-party conflicts that investors should consider.
- The filing identifies lodging cyclicality, competition and new supply, capital needs, refinancing and interest-rate exposure, joint-venture governance and REIT qualification as significant risks. No material litigation was reported; management and the auditor concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Whether 2017 RevPAR and occupancy trends align with management’s -1.0% to +1.0% outlook, particularly at same-property hotels.
- Refinancing progress and terms for the joint ventures’ 2017 loan maturities, including any Chatham guarantee or capital-call exposure.
- Actual capital spending, returns and timing for the planned hotel improvements and proposed Sunnyvale expansions.
- Related-party management fees, performance and governance safeguards for IHM, given the CEO’s ownership interest and IHM’s portfolio concentration.
- Dividend coverage by operating cash flow after recurring capital expenditures, debt service and joint-venture funding needs; non-GAAP FFO and EBITDA measures do not represent available cash.