Business Context and Reporting Period
Chatham Lodging Trust filed this unaudited Form 10-Q for the quarter ended March 31, 2015. The REIT invests primarily in upscale extended-stay and select-service hotels. At quarter-end, it owned 35 hotels with 5,355 rooms and held minority interests in three hotel joint ventures.
Year-over-year results are substantially affected by acquisitions: the company owned 25 hotels at the start of Q1 2014, versus 35 at March 31, 2015. The newly acquired hotels contributed significantly to revenue and expense growth.
Financial and Operating Highlights
Dollar amounts below are in millions except per-share data and hotel operating statistics.
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total revenue | $58.916 | $36.866 |
| Operating income | $8.429 | $2.496 |
| Net income (loss) | $1.419 | ($1.732) |
| Net income (loss) attributable to common shareholders | $1.411 | ($1.732) |
| EPS, basic and diluted | $0.04 | ($0.07) |
| Cash provided by operating activities | $12.764 | $4.978 |
| Cash used in investing activities | ($95.987) | ($3.439) |
| Cash provided by financing activities | $84.944 | $0.061 |
| FFO attributable to common shareholders (non-GAAP) | $14.700 | $5.762 |
| Adjusted FFO (non-GAAP) | $14.972 | $7.430 |
| Adjusted EBITDA (non-GAAP) | $24.410 | $13.203 |
Hotel EBITDA was $23.639 million, or approximately 40.1% of revenue, compared with $12.615 million, or approximately 34.2%, in Q1 2014. These are non-GAAP measures and are not substitutes for cash flow or GAAP results.
For the 35 hotels in the reported portfolio, occupancy was 75.7% versus 77.4%; ADR was $155.66 versus $142.54; and RevPAR was $117.87 versus $110.30, a 6.9% increase. The company said comparable-hotel room revenue rose 3.2% and comparable RevPAR rose 3.1%. Excluding the Maitland hotel, where rooms were out of service for water-pipe replacement, portfolio RevPAR growth was 7.9%.
At March 31, cash and cash equivalents were $16.798 million, restricted cash was $14.684 million, and total debt was approximately $527.151 million, including $5 million drawn on the revolving facility. The company reported $170 million of availability under its $175 million facility, a 38.8% leverage ratio under its stated definition, and a 3.11 fixed-charge coverage ratio. Mortgage debt carried an average rate of approximately 4.7%; all financial covenants were met.
Common distributions declared were $0.30 per share for the quarter, up from $0.21 a year earlier. The monthly distribution was raised to $0.10 per share in January 2015.
Material Changes Versus the Prior Period
- Revenue increased 59.8%, with $20.832 million of the increase attributed to ten hotels acquired since Q1 2014. The Gaslamp acquisition alone contributed $1.449 million of quarterly revenue and $0.985 million of operating income after its February 25, 2015 purchase.
- Operating expenses rose alongside the expanded portfolio. For the 25 hotels owned throughout both periods, total hotel operating expenses increased 1.1%.
- Interest expense rose 82.3% to $6.813 million, primarily because of debt associated with acquisitions completed after Q1 2014.
- Investing cash outflow included $90.155 million for the Gaslamp acquisition and $4.470 million of hotel improvements. Financing included proceeds from a January share offering and net repayments on the revolver.
- On January 27, 2015, the company completed a 4.025 million-share offering, generating approximately $120.750 million gross and $118.821 million net of offering costs.
Outlook, Risks, and Unusual Items
- Management projected 2015 RevPAR growth of 5%–7%, with all expected growth coming from ADR. It cited improving lodging demand, moderate new supply, and expected U.S. GDP growth of approximately 2.3%–2.7%. These are forward-looking expectations, not guarantees.
- The company expected seasonal softness in the first and fourth quarters, with stronger revenue, operating income, and cash flow generally in the second and third quarters.
- Management expected to invest an additional $11.969 million in existing-hotel capital improvements during the remainder of 2015. It was also planning a 272-room expansion across the four Silicon Valley hotels, with estimated aggregate cost of approximately $63 million; approvals and commencement timing remained prerequisites.
- Management said operating cash, existing cash, and borrowing capacity were expected to meet short-term liquidity needs. Longer-term needs, including acquisitions and debt maturities, could be funded through additional borrowing, equity or debt issuance, or asset sales.
- A California wage-and-hour class action involving hotels managed by Island Hospitality Management remains pending. The company accrued $0.295 million, which it estimated as its maximum possible loss; outcomes could differ from estimates.
- Island Hospitality Management is partly owned by the CEO and NorthStar affiliates and manages company and joint-venture hotels. The filing reports related-party management and other fees; investors should consider the associated governance and conflict-of-interest implications.
- Hotel operations are exposed to economic and lodging-industry conditions, competition, operating-cost increases, interest-rate and financing risks, acquisition execution, and seasonality. The company reported no material changes to the risk factors in its 2014 Form 10-K.
Most Important Facts to Verify
- Separate acquisition-driven growth from same-property performance, particularly the reported RevPAR growth and the effect of the Maitland pipe replacement.
- Review the assumptions and limitations behind FFO, Adjusted FFO, EBITDA, and Hotel EBITDA; these non-GAAP measures do not represent available cash for distributions.
- Confirm liquidity and debt capacity against the $16.798 million unrestricted cash balance, $170 million revolver availability, debt maturities, and hotel capital needs.
- Assess whether the $0.30 quarterly distribution is supported by recurring cash generation after debt service and capital expenditures.
- Track the Silicon Valley expansion’s approvals, cost, funding, construction schedule, and expected returns, along with the class-action exposure and related-party management arrangements.