Chatham Lodging Trust — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also provides unaudited fourth-quarter results; it is an annual report, not a standalone quarterly filing.
Business context
Chatham is a REIT focused on upscale extended-stay and premium-branded select-service hotels. At year-end, it owned 42 hotels with 6,283 rooms and held noncontrolling interests of 10.3% in the 47-hotel NewINK JV and 10.0% in the 48-hotel Inland JV. IHM, 51% owned by the CEO, managed all wholly owned hotels and most JV hotels.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue | $324.2 million | $301.8 million |
| Operating income | $58.1 million | $56.4 million |
| Net income attributable to common shareholders | $30.6 million | $29.5 million |
| Diluted earnings per share | $0.66 | $0.73 |
| Net cash provided by operating activities | $86.2 million | $86.7 million |
| Cash dividends declared per common share | $1.32 | $1.32 |
- Revenue rose 7.4%, but growth was substantially acquisition-driven. Comparable-hotel RevPAR increased 0.9%, with occupancy up 1.0% and ADR down 0.1%. Revenue growth in the 37 hotels owned throughout both years was $4.7 million.
- Operating margin was approximately 17.9%, compared with 18.7% in 2017. Hotel operating expenses increased 9.6% to $170.6 million. GAAP net income increased, while diluted EPS declined amid a larger weighted-average share count.
- FFO attributable to common shareholders and units was $85.8 million; Adjusted FFO was $90.7 million. Adjusted Hotel EBITDA was $124.2 million. These are non-GAAP measures and are not substitutes for cash flow or liquidity.
- Year-end cash and cash equivalents were $7.2 million, with restricted cash of $25.1 million. The $250 million revolving facility had $81.5 million drawn and $168.5 million available. Operating cash flow was $86.2 million; investing cash use was $96.4 million, including $70.0 million for hotel acquisitions and $31.4 million of hotel improvements.
- Total debt was $585.1 million, at an average rate of approximately 4.6%; reported leverage was 34.7%, up from 34.0%. Mortgage debt was $503.6 million and revolving-facility borrowings were $81.5 million. The company reported compliance with financial covenants and a fixed-charge coverage ratio of 3.3 versus a 1.5 minimum.
Material changes and unusual items
- 2018 acquisitions were the Residence Inn Summerville, South Carolina, for $20.8 million and the Courtyard Dallas Downtown for $49.0 million. The prior year included three acquisitions and the sale of the Carlsbad hotel; this limits direct year-over-year comparability.
- Other charges increased to $3.8 million, primarily from writing off planning costs for Silicon Valley hotel expansions that the company decided not to pursue at this time. There was no hotel impairment charge in 2018; 2017 included a $6.7 million impairment.
- Income from unconsolidated real estate entities shifted from $1.6 million of income to a $0.9 million loss, attributed mainly to higher JV interest and amortization expense and an impairment at one NewINK JV hotel.
- In March 2018, Chatham refinanced its revolving credit facility, extending stated maturity to March 2023 with a one-year extension option and reducing pricing by 0–15 basis points at comparable leverage levels. At year-end, pricing was LIBOR plus 1.65%.
- Fourth-quarter revenue was $77.0 million versus $71.2 million a year earlier. Common shareholders had a net loss of $0.2 million versus income of $5.4 million; reported diluted EPS was $0.00, rounded.
Outlook, risks and contingencies
- Management projected 2019 RevPAR change of -1.5% to +0.5% versus 2018, citing elevated supply growth in the upscale segment. It expected approximately $31.9 million of 2019 capital improvements.
- Key operating risks include lodging-cycle and economic weakness, rising hotel supply, competition from hotels and alternative lodging, labor and other operating-cost inflation, seasonal cash-flow variability, and recurring renovation and brand-improvement requirements.
- Interest-rate exposure includes floating-rate revolving debt; management estimated that a 100-basis-point increase would add approximately $0.8 million in annual interest expense at the year-end balance. The filing also identifies uncertainty around the transition from LIBOR after 2021.
- JVs involve substantial third-party debt, potential capital calls, limited company control and customary carve-out guarantees by the Operating Partnership. The company’s JV interests may also face refinancing and operating risks.
- The CEO’s ownership of IHM creates related-party conflicts, and the concentration of hotel management in IHM adds operational exposure. IHM is a defendant in two uncertified California wage-and-hour class actions; Chatham accrued $0.1 million for its estimated exposure under indemnification obligations.
- The IRS was examining the TRS tax return for 2016. The company recorded no related liability, but disclosed that an unfavorable outcome could materially affect results, financial position and cash flows. REIT qualification and the ability to sustain distributions are also subject to statutory, operating and financing conditions.
Important facts for investors to verify
- Whether the 2019 RevPAR outlook and comparable-hotel performance held up against continued upscale room-supply growth.
- Cash available for dividends after capital spending, debt service and JV funding needs; the stated $1.32 annual dividend is not guaranteed.
- Debt maturities, floating-rate exposure, covenant headroom and refinancing requirements, including debt at the JVs and related guarantees.
- Returns from the 2018 acquisitions and the effect of acquisition-driven growth, operating-cost increases and planned capital work on hotel-level margins.
- Developments in the IRS examination and California lawsuits, and oversight of IHM given its management concentration and related-party relationship.