Chatham Lodging Trust — Q1 2016 Form 10-Q
Business context and period: The filing covers the three months ended March 31, 2016. Chatham is a self-advised lodging REIT focused on upscale extended-stay and premium-branded select-service hotels. At quarter-end it wholly owned 38 hotels with 5,678 rooms and held noncontrolling interests in the NewINK and Inland joint ventures.
Financial and operating performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $68.850 million | $58.949 million | +16.8% |
| Operating income | $10.989 million | $8.462 million | +29.9% |
| Net income | $3.322 million | $1.419 million | More than doubled |
| Net income attributable to common shareholders | $3.300 million | $1.411 million | — |
| Diluted earnings per share | $0.08 | $0.04 | — |
| Operating cash flow | $14.070 million | $12.764 million | — |
| FFO attributable to common shareholders | $17.683 million | $14.700 million | — |
| Adjusted FFO attributable to common shareholders | $17.709 million | $14.972 million | — |
| Adjusted EBITDA | $27.556 million | $24.410 million | — |
For the 34 hotels owned throughout both periods, room revenue increased 3.3%; comparable-hotel RevPAR rose 2.1%. Across the 38 hotels presented, occupancy was 77.7% versus 76.2%, ADR was $159.26 versus $158.21, and RevPAR was $123.74 versus $120.57. Acquisitions made during or after Q1 2015 contributed $7.861 million of the total revenue increase.
Cash and cash equivalents were $12.479 million at March 31, down from $21.036 million at year-end; restricted cash was $21.420 million. Investing cash outflow was $6.153 million, including $4.593 million of hotel improvements. Financing cash outflow was $16.474 million, including $14.730 million of distributions. The quarterly dividend/distribution was $0.31 per common share or LTIP unit, up from $0.30 a year earlier.
Total debt before unamortized financing costs was $606.059 million, with an average interest rate of approximately 4.4%. The company reported a 41.4% leverage ratio and $70.580 million outstanding on its $250 million revolving facility, leaving approximately $179.420 million available. It reported compliance with financial covenants and a 3.51 consolidated fixed-charge coverage ratio.
Material changes and management commentary
- Four hotels acquired during or after Q1 2015 contributed materially to year-over-year revenue and expense growth. No hotel acquisitions were completed in Q1 2016.
- Comparable-hotel operating expenses rose 4.3%; comparable room expenses rose 8.8%, mainly due to higher salaries and benefits.
- Loss from unconsolidated real estate entities increased to $0.647 million from $0.256 million. Management attributed the increase primarily to renovation-related losses at Inland JV and losses at NewINK JV.
- Management projected 2016 RevPAR growth of 2%–3.5% at its hotels, with all projected growth expected to come from ADR. It cited industry RevPAR growth of 2.7% in Q1 2016 and Marriott’s 2016 projection of 3%–5% industry growth.
- Management expected approximately $11.2 million of additional renovation, discretionary and emergency spending for the remainder of 2016. Silicon Valley hotel expansions were estimated at $80–$85 million in total; $5.7 million had been spent through March 31, with approximately $7.1 million more expected during the remainder of 2016. Two Sunnyvale projects were expected to begin in late 2016.
- The company said it expected operating cash flow, existing cash and, if needed, revolver borrowings or hotel encumbrances to meet short-term liquidity needs. It expected to meet covenants for the rest of 2016 based on current projections. Management noted typical seasonality, with weaker first and fourth quarters and stronger second and third quarters.
Risks, contingencies and unusual items
- Risks cited include lodging and economic downturns, competition, rising operating costs, seasonality, interest-rate changes, and access to debt or equity financing. The filing reported no material changes to the risk factors in the 2015 Form 10-K.
- Joint-venture interests may require additional capital contributions. The company also described potential repayment exposure under customary non-recourse carve-out guarantees and possible changes in ownership interests.
- The company’s 2016 capital program and long-term Silicon Valley expansions are significant prospective cash demands; final project budgets were not yet available.
- A California wage-and-hour class action settlement was court-approved in February 2016; the company reported paying its full liability, with no remaining accrual at quarter-end.
- IHM, which managed 36 wholly owned hotels and hotels in both joint ventures, is 51% owned by CEO Jeffrey Fisher; NorthStar affiliates own 45%. The filing reports related-party management and other payments.
- TRS 1 continued to carry a full valuation allowance against gross deferred tax assets. Management said improved results could allow a release during 2016 and expected increased TRS Lessee taxes in 2016.
Important facts for investors to verify
- Whether comparable-hotel RevPAR and ADR trends support the 2016 RevPAR projection, and whether operating-cost growth continues to exceed comparable revenue growth.
- Actual spending, funding sources and returns for hotel renovations and the estimated $80–$85 million Silicon Valley expansion program.
- Revolver availability, debt maturities, covenant headroom and interest-rate exposure; the filing estimated that a 100-basis-point increase in variable rates would add approximately $0.705 million of annual interest expense at the quarter-end balance.
- Joint-venture operating performance, renovation losses, capital-call risk and any obligations under JV debt guarantees.
- The sustainability of the increased distribution in light of operating cash flow, capital requirements and debt service. FFO, Adjusted FFO and EBITDA are non-GAAP measures and are not substitutes for cash flow or liquidity.