Chatham Lodging Trust quarterly report, Q3 FY2012

Chatham Lodging Trust — Q3 2012 Form 10-Q

Reporting period: Three and nine months ended September 30, 2012. Chatham is a self-advised hotel REIT focused on upscale extended-stay and select-service hotels. At quarter-end it owned 18 hotels with 2,414 rooms and held a 10.3% interest in a Cerberus joint venture (JV) that owned 56 hotels.

Financial and operating performance

Dollar amounts are in millions except per-share data and hotel metrics.

Metric	Q3 2012	Q3 2011	Nine months 2012	Nine months 2011
Total revenue	$27.0	$23.6	$76.2	$51.0
Operating income	$5.2	$2.2	$12.3	$1.7
Net income (loss)	$1.5	$(1.0)	$0.9	$(2.9)
Diluted earnings (loss) per share	$0.10	$(0.07)	$0.05	$(0.22)
Net cash from operating activities	Not separately provided for the quarter	$10.4	$8.4

Q3 hotel RevPAR rose 5.8% to $114.09; occupancy was 86.2% versus 84.4%, and average daily rate (ADR) increased 3.6% to $132.29. For the nine-month period, RevPAR rose 8.1% to $108.50, occupancy was 82.9% versus 79.4%, and ADR was $130.96 versus $126.37.
Q3 operating margin was approximately 19.4% versus 9.3%; nine-month operating margin was approximately 16.1% versus 3.2%. These are calculated as operating income divided by total revenue.
Adjusted FFO was $6.4 million for Q3 versus $4.5 million, and $15.2 million for the nine months versus $9.3 million. Adjusted EBITDA was $12.0 million for Q3 versus $8.1 million, and $32.5 million for the nine months versus $15.1 million. These are non-GAAP measures; the filing cautions they are not substitutes for GAAP results or measures of liquidity.
Cash and cash equivalents were $5.7 million at September 30, up from $4.7 million at year-end 2011; restricted cash was $2.6 million. Nine-month cash flow was $10.4 million from operations, $19.1 million from investing activities, and $(28.4) million from financing activities. Investing cash inflow primarily reflected $20.9 million of JV distributions, including financing proceeds and hotel-sale proceeds.
Total debt was approximately $208.7 million: $160.2 million of mortgage debt and $48.5 million drawn on the revolver. Debt was down from approximately $228.9 million at December 31, 2011. The company reported $5.7 million of cash and was compliant with financial covenants at quarter-end.
Common distributions were $0.20 per share for Q3, up from $0.175 in Q3 2011. Nine-month distributions were $0.575 per share versus $0.525. The Q3 distribution was paid October 26, 2012.

Changes versus prior comparable periods

Revenue and earnings improved, with Q3 net income turning positive and nine-month results moving from a loss to a profit. Growth reflected stronger hotel performance and, particularly for the nine-month comparison, the fuller contribution of the five hotels acquired in July 2011.
Q3 RevPAR growth of 5.8% exceeded the company-reported industry increase of 5.1%; for the nine months, the company’s 8.1% growth also exceeded the industry’s 6.9% increase. The filing notes that five hotels were undergoing significant renovations in 2011, affecting comparisons.
Q3 hotel operating expenses increased in dollars but declined to 53% of revenue from 54%. Nine-month hotel operating expenses declined to 54% of revenue from 57%.
Interest expense rose to $3.6 million in Q3 from $3.1 million and to $11.3 million for the nine months from $4.5 million. The filing attributes the increase mainly to loans associated with 2011 acquisitions and higher average revolver borrowings and rates.
Capital improvements were $4.5 million in the first nine months versus $9.6 million a year earlier; management expected an additional $2.8 million of 2012 improvements.

Outlook, risks, contingencies and notable items

Management projected 2012 RevPAR growth of 6%–8% at its hotels. It expected industry RevPAR growth of 4%–7% in 2012 and stated that growth should continue in 2013, but at a slower pace than in 2011 and 2012. The filing provides no numerical earnings guidance.
Management’s long-term goal is net debt to hotel investment cost below 35%, while stating it and the Board were comfortable with higher leverage during the lodging recovery. It expected to meet 2012 credit-facility covenants based on current projections.
On November 5, 2012, after quarter-end, the company amended its revolver: facility size increased from $85 million to $95 million, maturity extended to November 5, 2015 with a one-year extension option, and the applicable margin and unused fee were reduced. The amended minimum fixed-charge coverage ratio was 1.5x. These are subsequent-event terms, not quarter-end terms.
Before that amendment, the revolver was scheduled to mature in October 2013. The debt schedule shows $50.5 million of principal due in 2013 and $134.7 million in 2016. The amendment extended the revolver maturity but did not eliminate other scheduled debt obligations.
The company estimated that a one-percentage-point increase in variable rates would add approximately $0.5 million of annual interest expense, assuming revolver borrowings remain at $48.5 million. Its long-term funding needs may require additional borrowing, securities issuance, or asset sales; access to capital and acquisition opportunities are not assured.
JV distributions depend on hotel operations, asset sales and financing activity. Additional capital calls could change Chatham’s ownership interest. The company also described limited non-recourse carve-out exposure related to JV debt.
Hotel results are seasonal, generally weaker in the first and fourth quarters. Other stated risks include economic and lodging-market weakness, competition, higher operating costs, interest-rate changes, financing availability and renovation or franchise requirements.
A fire occurred at the White Plains hotel in Q1; the hotel was insured and the carrier accepted coverage, and the company expected no casualty loss. The company reported no material litigation and no material change to previously disclosed risk factors.

Important facts for investors to verify

Whether RevPAR, ADR, occupancy and expense trends continued after Q3, and how much reported growth reflects comparable hotel operations versus the 2011 acquisition timing.
Current debt balances, covenant headroom and the terms and availability of the amended revolver; distinguish stated borrowing availability from the $36.5 million described as available under the pre-amendment $85 million facility.
The timing and funding plan for 2013 and 2016 debt maturities, hotel capital improvements, and any additional capital needs at the JV.
Whether operating cash flow can support distributions and investment needs, given that JV distributions included proceeds from financing and hotel sales and are not necessarily recurring.
Performance against management’s 2012 RevPAR outlook and any subsequent outlook for 2013; the filing does not give numerical earnings guidance.