Chatham Lodging Trust — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. Chatham is a self-advised REIT focused primarily on upscale extended-stay and premium-branded select-service hotels. At quarter-end it wholly owned 39 hotels with 5,843 rooms and held noncontrolling interests in two hotel joint ventures.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $81.4m | $79.7m | $228.5m | $226.6m |
| Operating income | $20.4m | $19.5m | $43.3m | $49.0m |
| Net income | $14.5m | $13.4m | $24.2m | $29.0m |
| Net income attributable to common shareholders | $14.4m | $13.4m | $24.1m | $28.8m |
| Basic/diluted EPS | $0.36 / $0.36 | $0.35 / $0.35 | $0.62 / $0.61 | $0.75 / $0.74 |
| Adjusted FFO attributable to common share and unit holders | $27.0m | $27.5m | $70.3m | $72.0m |
| Adjusted EBITDA | $37.2m | $37.3m | $100.4m | $101.7m |
Operating margin was approximately 25.0% in Q3 2017 versus 24.4% in Q3 2016, and 19.0% for the first nine months of 2017 versus 21.6% in 2016. Net margin was approximately 17.8% and 16.9% for the respective third quarters, and 10.6% and 12.8% for the nine-month periods. FFO and EBITDA measures are non-GAAP and are not substitutes for cash flow or GAAP results.
- Comparable same-property RevPAR rose 1.0% in Q3, with occupancy up 0.5% and ADR up 0.5%. For the first nine months, RevPAR rose 0.8%; occupancy declined 1.4% while ADR increased 2.1%.
- Operating cash flow was $66.6m for the first nine months, versus $69.9m in 2016. Investing cash outflow was $77.0m, including the Portsmouth acquisition and hotel improvements; financing provided $9.6m.
- At September 30, cash and cash equivalents were $11.3m, restricted cash $27.7m, and total assets $1.345bn. Debt before unamortized financing costs was $604.5m, including $75.0m drawn on the revolving facility; $175.0m of facility capacity remained. Average debt rate was approximately 4.6%; reported leverage was 39.5% under the company’s stated measure.
- The company declared distributions of $0.33 per common share for Q3 and $0.99 for the first nine months. Common shares outstanding were 39.84m at quarter-end, up from 38.37m at year-end 2016.
Material changes versus comparable periods
- Q3 revenue increased 2.1%; comparable-hotel room revenue increased 1.5%. The newly acquired Hilton Garden Inn Portsmouth contributed $0.4m of revenue after its September 20 acquisition for approximately $43.4m.
- Q3 hotel operating expenses increased 4.7%, faster than revenue, with increases in room costs, repairs, utilities, and management fees. Lower depreciation helped support the higher reported operating income.
- Nine-month net income declined $4.8m, primarily reflecting a $6.7m impairment charge on the Washington SHS, Pennsylvania hotel. Revenue rose 0.9%, while operating income fell 11.6%.
- During the first nine months, the company issued shares for net proceeds of $29.7m and had net revolving-credit borrowings of $22.5m. The share issuances contributed to the increase in outstanding shares.
Outlook, risks, contingencies, and unusual items
- Management cited moderating economic and corporate-demand trends alongside rising hotel supply. It noted 2017 year-to-date U.S. supply growth of 1.8% overall and 6.0% in the upscale segment. Its stated 2017 RevPAR projection appears in the filing as “0.9% to +1.0%”; the lower-bound sign is unclear in the filing text.
- Management expected an additional $3.5m of renovations and other hotel expenditures for the remainder of 2017. Two proposed Sunnyvale Residence Inn expansions were not yet scheduled; anticipated total cost was $75m–$80m, subject to change and approvals.
- The Washington SHS impairment followed weaker operating performance and continued local economic weakness. Further impairment could result if performance, market conditions, or the contemplated holding period differs from assumptions.
- The company reported compliance with debt covenants; its fixed-charge coverage ratio was 3.29 against a 1.5 minimum. A hypothetical 100-basis-point increase in variable rates was estimated to add about $0.8m in annual interest expense, assuming the revolver balance remains $75m.
- The joint ventures may require additional capital. The Operating Partnership provided customary nonrecourse carve-out and environmental guarantees related to JV debt; exposure can be substantial in specified circumstances. The company also disclosed related-party management arrangements: CEO Jeffrey Fisher owns 51% of Island Hospitality Management, which managed all 39 wholly owned hotels at quarter-end.
- No material litigation was reported, and the filing stated there were no material changes to the prior annual report’s risk factors. Management said disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Comparable-property RevPAR trends and the extent to which operating-cost growth continues to exceed revenue growth.
- The assumptions and valuation supporting the $6.7m impairment, and whether further impairment indicators emerge.
- The final timing, budget, financing, and expected returns for the proposed Sunnyvale expansions and other capital spending.
- Debt maturities, variable-rate exposure, remaining revolver availability, and covenant headroom.
- Potential JV capital calls and guarantee exposure, along with related-party management fees and governance safeguards.
- Share issuance under the ATM and dividend reinvestment plans, its effect on dilution, and the sustainability of distributions relative to cash generation.