Business Context and Reporting Period
Company: Chatham Lodging Trust (REIT)
Reporting Period: Quarter and six months ended June 30, 2011
Portfolio: 13 hotels (1,650 rooms) across 9 states as of June 30, 2011. The company focuses on premium-branded upscale extended-stay and select-service hotels.
Recent Capital Activity: Completed a follow-on equity offering in February 2011, raising approximately $69.4 million in net proceeds.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended June 30, 2011 |
6 Months Ended June 30, 2011 |
|---|---|---|
| Total Revenue | $14,902 | $27,390 |
| Net Loss (GAAP) | $(1,936) | $(1,955) |
| Funds From Operations (FFO) | $1,855 | $3,268 |
| Adjusted FFO | $3,253 | $4,751 |
| EBITDA | $2,522 | $4,723 |
| Adjusted EBITDA | $4,313 | $6,992 |
| Cash and Cash Equivalents | $14,971 | $14,971 |
| Restricted Cash | $15,637 | $15,637 |
| Total Debt | $12,174 | $12,174 |
| Available Credit Facility | $84.3 million | $84.3 million |
Note: All financial figures are in thousands except per share data. The company reported a net loss due to significant non-cash depreciation and amortization expenses.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased significantly from $4.7 million (3 months ended June 30, 2010) to $14.9 million (3 months ended June 30, 2011). This is primarily due to owning 13 hotels for the full quarter in 2011 versus only 6 hotels for 69 days in 2010.
- Operating Expenses: Hotel operating expenses rose from $2.7 million to $8.3 million for the quarter, consistent with the expanded portfolio. As a percentage of revenue, operating expenses decreased slightly from 57% to 56%.
- Net Loss: Net loss attributable to common shareholders increased from $(0.6) million to $(1.9) million for the quarter. This increase is driven by higher depreciation ($3.8 million vs $0.4 million) and interest expense ($0.6 million vs $0) associated with the larger asset base and assumed debt.
- Liquidity: Cash and cash equivalents increased from $4.8 million (Dec 31, 2010) to $15.0 million (June 30, 2011), bolstered by the February 2011 equity offering.
- Debt Reduction: Total debt decreased from $50.1 million (Dec 31, 2010) to $12.2 million (June 30, 2011) after using equity proceeds to pay down the revolving credit facility.
Outlook, Risks, and Subsequent Events
- Major Acquisitions (Subsequent Events):
- "Five Sisters" Acquisition: On July 14, 2011, the company closed on the acquisition of 5 hotels for $195 million. Funding included $134.2 million in assumed debt, available cash, and a $57 million draw on the credit facility.
- Joint Venture: Selected as the winning bidder (via a JV with Cerberus) to acquire 64 hotels from Innkeepers USA Trust for approximately $1.125 billion. Chatham's expected investment is $37 million for a <10% interest.
- Capital Expenditures: The company expects to invest approximately $13 million in capital improvements on existing hotels in 2011, plus $1 million on the newly acquired "Five Sisters."
- Leverage Policy: The Board temporarily increased the target leverage ratio to 55% (excluding the JV) to capitalize on acquisition opportunities during the lodging recovery cycle.
- Risks: Standard REIT risks including interest rate fluctuations, economic downturns affecting occupancy, and the ability to secure financing for future acquisitions. The company is currently in compliance with all financial covenants.
Investor Verification Checklist
- Acquisition Closing: Verify the final closing terms and financing structure for the "Five Sisters" acquisition and the 64-hotel JV deal.
- Capital Expenditure Execution: Monitor the $13 million PIP (Property Improvement Plan) spending to ensure it aligns with budget and does not strain liquidity.
- Debt Covenants: Confirm continued compliance with the amended credit facility covenants (leverage ratio of 60% through 2012, fixed charge coverage of 1.7x) following the new acquisitions.
- Dividend Sustainability: Assess whether Adjusted FFO per share supports the current dividend rate of $0.175 per quarter given the increased debt service from new acquisitions.
- Occupancy Trends: Track RevPAR and occupancy rates for the new portfolio to ensure they meet the "upscale extended-stay" performance expectations.