Chatham Lodging Trust — Q1 2013 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2013. Chatham is a self-advised lodging REIT focused on upscale extended-stay and select-service hotels. At quarter-end it owned 20 hotels with 2,733 rooms and held a 10.3% interest in a joint venture owning 54 hotels. The Houston Courtyard, a 197-room hotel, was acquired February 5 for approximately $34.8 million.
Financial and operating highlights
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Total revenue | $25.8 million | $22.8 million |
| Operating income | $2.8 million | $2.6 million |
| Net loss | $1.6 million | $1.7 million |
| Basic and diluted loss per share | $0.10 | $0.13 |
| Cash from operating activities | $4.7 million | $0.04 million |
| FFO / Adjusted FFO | $3.4 million / $4.5 million | $2.8 million / $2.9 million |
| EBITDA / Adjusted EBITDA | $7.7 million / $9.4 million | $8.1 million / $8.6 million |
Hotel metrics improved year over year: occupancy was 76.3% versus 76.0%, ADR was $132.17 versus $127.25, and RevPAR was $100.83 versus $96.77, a 4.2% increase. Management attributed some RevPAR weakness relative to industry growth to renovations at three hotels, particularly the Washington, D.C. property, which operated without a brand for two months during rebranding.
Operating cash flow was $4.7 million; investing cash flow was negative $37.2 million, principally reflecting the Houston acquisition and hotel improvements; financing cash flow was positive $33.1 million, including equity proceeds and mortgage refinancing activity. Cash and cash equivalents were $5.1 million at quarter-end.
Total debt was $228.6 million: $132.1 million of mortgage debt and $96.5 million drawn on the revolving facility, down from $239.2 million at December 31, 2012. The company reported $18.5 million of remaining revolver availability, compliance with financial covenants, and a 2.03x fixed-charge coverage ratio against a 1.5x minimum. Common distributions were $0.21 per share for the quarter.
Changes and notable items
- Revenue rose approximately 13% year over year, reflecting stronger room revenue and a larger owned portfolio; the company owned 20 hotels at quarter-end versus 18 a year earlier.
- Interest expense declined $1.0 million, helped by refinancing, repayment of the Washington, D.C. mortgage, and lower revolver rates. A $0.9 million noncash loss on early debt extinguishment partly offset that benefit.
- The January follow-on offering generated approximately $49.7 million in net proceeds. The company refinanced or repaid several mortgages and increased revolver borrowings during the quarter.
- Operating income was $2.8 million, but operating margin was approximately 10.8%, compared with 11.6% a year earlier. Adjusted FFO and Adjusted EBITDA increased, while reported EBITDA declined.
Outlook, risks and contingencies
- Management projected 2013 company RevPAR growth of 4.5%; cited industry forecasts were 5%–6%. It expected ADR to account for most growth and noted that hotel demand and cash flow are seasonal, generally weaker in Q1 and Q4.
- Management described the lodging recovery as supportive of growth, but identified economic conditions, competition, operating costs, interest rates, financing access, acquisition execution and lodging fundamentals as risks. A one-percentage-point increase in floating rates was estimated to add about $1.0 million of annual interest expense.
- Management intended to reduce leverage over time toward a long-term net-debt-to-hotel-cost target below 35%; it reported a current level of approximately 45%, down from 51% at year-end 2012. The company expected to meet its covenants in 2013 and stated that operations, cash, credit availability and future financing would support liquidity needs.
- Scheduled debt principal payments include $103.0 million in 2015. The revolver matures November 5, 2015, with a possible one-year extension. Ground-lease minimum payments total approximately $12.4 million, most after 2017.
- Planned remaining-2013 capital spending was approximately $3.9 million for existing hotels plus approximately $3.7 million to rebrand the Washington, D.C. hotel. On April 25, the company obtained a $20 million, 4.18% mortgage on the Houston hotel. A joint venture in which Chatham invested $1.6 million acquired a Torrance, California hotel in April for $31 million.
- No material litigation was reported, and the filing reported no material changes to the prior annual report’s risk factors. IHM, which manages 18 wholly owned hotels and all JV hotels, is 90% owned by Chatham’s CEO; management and related fees are a related-party consideration.
Important facts for investors to verify
- Confirm the company’s reported “No” response to whether it had filed all required reports during the prior 12 months and been subject to reporting requirements for 90 days; the filing text provides no explanation.
- Assess the 2015 debt maturity concentration, revolver extension conditions, and the company’s access to refinancing or other capital.
- Monitor whether RevPAR meets the 4.5% 2013 projection, particularly after the Washington, D.C. rebranding and renovation disruptions.
- Review the related-party management relationship with IHM and the JV’s potential capital-call and non-recourse carve-out obligations.
- Treat FFO, Adjusted FFO, EBITDA and Adjusted EBITDA as supplemental non-GAAP measures, not substitutes for GAAP earnings or operating cash flow; verify cash available after capital spending, debt service and distributions.