Chatham Lodging Trust — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing, not a standalone fourth-quarter report. Chatham is a REIT focused on upscale extended-stay and select-service hotels. At year-end it owned 18 hotels with 2,414 rooms and held a 10.3% interest in a joint venture (JV) owning 64 hotels with 8,329 rooms.
Financial and operating performance
| Metric | 2011 | 2010 |
|---|---|---|
| Total revenue | $73.1 million | $25.5 million |
| Operating income (loss) | $0.1 million | ($0.5 million) |
| Net loss attributable to common shareholders | ($9.1 million); ($0.69) per share | ($1.2 million); ($0.20) per share |
| Cash from operating activities | $8.9 million | $5.3 million |
| Cash used in investing activities | ($112.5 million) | ($201.5 million) |
| Cash from financing activities | $103.5 million | $201.0 million |
Hotel operating expenses were 58% of revenue in 2011, versus 59% in 2010. Portfolio ADR was $126.26, occupancy 78.5%, and RevPAR $99.08, compared with $124.19, 77.6%, and $96.37, respectively, in 2010. Chatham reported portfolio RevPAR growth of 2.8%; industry RevPAR increased 8.2%, with renovations at 13 of Chatham’s 18 hotels cited as a drag.
FFO was $3.7 million and adjusted FFO was $11.9 million; EBITDA was $11.1 million and adjusted EBITDA was $22.6 million. These are non-GAAP measures, and the filing cautions they are not substitutes for GAAP results or measures of cash available for distributions.
Balance sheet, liquidity, and capital allocation
- Year-end debt was $228.9 million, up from $50.1 million; cash and cash equivalents were $4.7 million, with an additional $5.3 million of restricted cash. Total assets were $458.7 million and shareholders’ equity was $216.1 million.
- Debt included $161.4 million of fixed-rate mortgages and $67.5 million outstanding on the revolving credit facility. The filing reports $17.5 million of revolver availability, while also stating borrowing availability was capped at $75 million; the latter figure implies $7.5 million of headroom against the $67.5 million drawn balance. Verify the availability figures.
- Net operating cash funded only part of the year’s hotel investments and capital spending. Investing outflows included $62.0 million for the five 2011 hotel acquisitions, $37.0 million for the JV investment, and $12.7 million of hotel improvements. Financing included $69.4 million net proceeds from a share offering.
- Quarterly dividends were $0.175 per share, or $0.70 for 2011. The filing characterizes $0.66 per share of 2011 distributions as return of capital for tax purposes.
Material changes, outlook, and risks
Revenue rose substantially as the portfolio expanded, including five hotels acquired in July 2011 for $195 million, with $134.2 million of mortgages assumed. The February 2011 follow-on offering raised approximately $69.4 million net. Chatham also invested $37 million in the Cerberus JV in October. The 2010 comparison is not like-for-like: Chatham had no hotel operations before its April 2010 IPO and acquired its 13 hotels at different points during 2010.
Management projected 2012 RevPAR growth of 6%–8% at Chatham’s hotels, compared with industry forecasts of 4%–7%, citing the expectation that renovations and improved economic conditions would support performance. This is a projection, not formal earnings guidance. Management noted 13 hotels were renovated in 2011.
- Chatham’s long-term leverage target was below 35% of hotel investment cost, but the board temporarily raised its target to 55%, excluding the JV. Credit-facility covenants allowed a consolidated leverage ratio of up to 60% through 2012, stepping down thereafter.
- Floating-rate debt was $67.5 million; management estimated a 1 percentage-point rate increase would add about $0.7 million of annual interest expense. The company was in compliance with its financial covenants at year-end.
- Key risks include the cyclical and competitive hotel market, refinancing and interest-rate exposure, ongoing renovation and brand-standard spending, REIT qualification and distribution requirements, and dependence on third-party hotel managers. CEO Jeffrey Fisher owns 90% of Island Hospitality Management, which manages ten wholly owned hotels and all but one JV hotel; the filing identifies potential conflicts of interest.
- The Operating Partnership may be liable for certain JV non-recourse loan carve-outs. The company reported no material litigation and no impaired or held-for-sale hotels at year-end. New ADA accessibility guidelines taking effect in March 2012 could require costly property modifications.
- Subsequent to year-end, the JV obtained $130 million of mortgage financing and distributed approximately $13.1 million to Chatham, about 35% of its initial JV investment; Chatham said it would use part of the proceeds to reduce revolver borrowings.
Important facts for investors to verify
- Reconcile the filing’s $17.5 million reported revolver availability with the stated $75 million borrowing-base limit and $67.5 million outstanding.
- Review comparable-property operating performance and whether renovation-related RevPAR weakness reversed; distinguish portfolio growth from underlying hotel performance.
- Assess the timing and refinancing of debt maturities, particularly the scheduled 2013 revolver maturity and 2016 mortgage maturities, along with covenant headroom.
- Examine JV capital-call terms, financing, distributions, guarantees, and the extent of Chatham’s control over JV decisions.
- Evaluate the sustainability and cash coverage of distributions, including the substantial return-of-capital tax characterization, and consider the limitations of adjusted FFO and adjusted EBITDA.
- Review related-party management arrangements with IHM and any costs or obligations arising from renovation, franchise, ADA, or other property requirements.