Business context and reporting period
Chatham Lodging Trust, a self-managed REIT focused on upscale extended-stay and select-service hotels, reported unaudited results for the quarter and nine months ended September 30, 2011. At quarter-end it owned 18 hotels with 2,414 rooms in 10 states and Washington, D.C. Comparisons with 2010 are not fully like-for-like: the company completed its IPO in April 2010, owned fewer hotels, and acquired five hotels in July 2011.
Financial and operating metrics
Amounts below are in millions except per-share and hotel operating metrics.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $23.6 | $8.4 | $51.0 | $13.0 |
| Operating income (loss) | $2.2 | $(0.3) | $1.7 | $(1.0) |
| Net loss attributable to common shareholders | $(1.0) | $(0.3) | $(2.9) | $(0.9) |
| Loss per diluted share | $(0.07) | $(0.03) | $(0.22) | $(0.17) |
| Interest expense | $3.1 | $0.02 | $4.5 | $0.02 |
Q3 portfolio ADR was $127.64, occupancy 84.4%, and RevPAR $107.76, versus $127.09, 80.5%, and $102.29, respectively. Nine-month ADR was $126.35, occupancy 79.5%, and RevPAR $100.38; the filing’s comparison for 2010 covers 161 days and reports $124.82, 78.9%, and $98.51. Hotel operating expenses were 54% of revenue in Q3 versus 59%, and 57% for the nine months versus 58%.
Net cash provided by operating activities for the nine months was $8.4 million, investing cash outflow was $75.0 million, and financing cash inflow was $70.0 million. Cash and cash equivalents were $8.2 million at September 30. Debt was $192.9 million, including $161.9 million of fixed-rate mortgages and $31.0 million drawn on the revolving facility. Shareholders’ equity was $224.6 million. The company reported $54 million available under its revolving facility in its liquidity discussion; the debt note separately states maximum borrowing availability of $75 million.
Non-GAAP results: nine-month FFO was $5.7 million and Adjusted FFO $9.3 million; EBITDA was $10.3 million and Adjusted EBITDA $15.1 million. Management cautions that these measures are not substitutes for GAAP results or measures of liquidity or cash available for distributions.
Material changes versus prior comparable periods
- Revenue increased substantially, primarily because of the larger owned portfolio, including the five July acquisitions, rather than solely same-property growth.
- Q3 RevPAR at company hotels rose 5.4%; nine-month RevPAR rose 1.9%. Management said six hotels undergoing significant renovations adversely affected growth. For context, industry RevPAR rose 7.9% in Q3 and 8.3% for the nine months, according to Smith Travel Research.
- Operating results improved to operating income, but net losses widened as interest expense rose sharply with new and assumed borrowing, and acquisition costs remained significant.
- Hotel property investment increased to $402.6 million net from $208.1 million at year-end 2010; debt increased to $192.9 million from $50.1 million.
- The company issued 4.6 million common shares in February 2011, generating approximately $69.4 million net proceeds. Weighted-average common shares increased, contributing context for per-share comparisons.
Outlook, risks, contingencies, and unusual items
- No quantified earnings or operating guidance was provided. Management expected continued lodging-industry improvement if U.S. economic growth continued and new hotel supply remained limited, while noting that industry performance remained below pre-2008 peaks.
- The board temporarily raised the targeted leverage ceiling to 55% (excluding the company’s pro rata JV assets and liabilities); the long-term target is net debt to hotel investment cost below 35%. The credit facility was amended to permit leverage up to 60% through 2012, declining to 55% in 2013. The company reported covenant compliance at quarter-end.
- On October 27, 2011, a Cerberus–Chatham joint venture completed the acquisition of 64 hotels for approximately $1.02 billion, including about $675 million of assumed mortgage debt at a weighted-average rate of 6.71%, maturing in 2017. Chatham invested $37 million for an approximately 10.3% interest, funded through the revolving facility, and will manage the JV. Further capital calls may change its ownership; Cerberus has approval rights over specified matters.
- On November 7, 2011, Chatham terminated its contract to buy a Pittsburgh hotel and forfeited a $0.6 million deposit.
- Management identified economic conditions, competition, lodging demand and seasonality, financing availability, interest rates, acquisition execution, and estimation uncertainty as risks. Additional disclosed JV risks include limited decision authority, partner funding or disputes, and difficulty exiting an impasse.
- The company reported no material litigation. Ground-lease minimum future payments totaled $12.7 million, largely due after five years. Hotel manager IHM is 90% owned by the CEO; IHM managed 10 company hotels, and the company paid it $0.9 million in management and accounting fees for the nine months.
- Quarterly distributions were $0.175 per common share and LTIP unit; the third-quarter distribution, approximately $2.5 million in aggregate, was paid October 14, 2011. Management noted seasonal patterns generally bring lower revenue and cash flow in the first and fourth quarters.
Important facts for investors to verify
- Reconcile the facility’s stated $54 million available liquidity with the debt note’s $75 million maximum borrowing availability, and determine the facility balance and remaining capacity after the $37 million JV investment.
- Review the JV’s capital-call exposure, governance and approval provisions, property-level debt, and effect on Chatham’s leverage and liquidity.
- Assess whether renovation-related disruption and planned capital spending affect hotel-level RevPAR, margins, and cash generation; the filing expected additional 2011 improvements of $4.8 million.
- Evaluate debt maturities and refinancing exposure, including the scheduled $33.0 million principal amount in 2013 and the substantial fixed-rate debt due thereafter.
- Consider the impact of acquisition costs and related-party hotel management arrangements when assessing recurring performance and comparing non-GAAP measures.