Chatham Lodging Trust — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a standalone fourth-quarter filing; fourth-quarter figures are noted separately where relevant. Chatham is a REIT focused on upscale extended-stay and premium-branded select-service hotels. At year-end, it owned 40 hotels with 6,018 rooms and held noncontrolling interests in two hotel joint ventures.
Financial and operating performance
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $298.9 million | $293.8 million |
| Operating income | $53.0 million | $58.9 million |
| Net income | $29.7 million | $31.7 million |
| Net income attributable to common shareholders | $29.5 million | $31.5 million |
| Diluted EPS | $0.73 | $0.81 |
| FFO attributable to common shareholders and unit holders | $85.7 million | $88.5 million |
| Adjusted FFO attributable to common shareholders and unit holders | $86.3 million | $89.0 million |
| Adjusted EBITDA | $126.7 million | $128.0 million |
| Cash from operating activities | $86.7 million | $87.7 million |
Hotel operating trends: Same-property occupancy declined 1.1% to 79.8%, while ADR rose 1.9% to $166.82 and RevPAR increased 0.7% to $133.05. Management said company RevPAR growth lagged the industry, primarily because of new supply in its markets. The reported operating-income margin was approximately 17.7%, versus 20.1% in 2016; net margin was approximately 9.9%, versus 10.8%.
Fourth quarter: Revenue was $70.3 million, operating income was $9.7 million, and net income attributable to common shareholders was $5.4 million, compared with $67.2 million, $9.9 million, and $2.7 million, respectively, in fourth-quarter 2016.
Financial position, debt and liquidity
- Year-end total assets were $1.392 billion and total liabilities were $582.4 million. Cash and cash equivalents were $9.3 million; restricted cash was $27.2 million.
- Total debt outstanding before deferred financing costs was $540.5 million, including $508.5 million of mortgage debt and $32.0 million drawn on the $250 million unsecured revolving credit facility. The company reported approximately $218 million of undrawn revolver availability and an average debt rate of approximately 4.6%.
- Management’s net-debt-to-hotel-investment-at-cost leverage ratio was approximately 34%, down from 40% at year-end 2016. The company was in compliance with its financial covenants; fixed-charge coverage was 3.2x against a 1.5x minimum covenant.
- Cash flow from investing activities was negative $160.6 million, reflecting acquisitions, capital improvements and a $5.0 million JV investment. Financing activities provided $71.2 million, including $150.7 million of common-equity proceeds and $52.6 million of distributions to shareholders and LTIP holders.
Changes versus the prior year
- Revenue increased 1.7%, but hotel operating expenses rose 4.6%; net income attributable to common shareholders fell about 6% and diluted EPS fell from $0.81 to $0.73.
- Same-property RevPAR growth was 0.7%, with higher ADR more than offsetting lower occupancy. Three hotels acquired during 2017 contributed $3.5 million of revenue; the Homewood Suites Carlsbad was sold in December.
- Operating results included a $6.7 million impairment charge on the SpringHill Suites Washington, Pennsylvania, and a $3.3 million gain on the Carlsbad sale. Adjusted measures also declined year over year.
- Debt declined from $585.1 million to $540.5 million, while common shares outstanding rose from 38.4 million to 45.4 million, primarily reflecting equity issuance. Operating cash flow was nearly flat.
Outlook, risks and unusual items
- Management projected 2018 RevPAR change of negative 1.5% to positive 0.5%, citing projected room-supply growth and the potential for continued pressure on RevPAR.
- Management expected approximately $33 million of 2018 capital improvements. Planned expansions at two Sunnyvale Residence Inns were estimated at $80 million to $90 million in total, but timing, approvals and final costs remained uncertain.
- The company expected to acquire an additional Summerville, South Carolina hotel for $20.8 million in the second quarter of 2018, subject to due diligence and customary closing conditions.
- Key risks include lodging-market cyclicality, rising hotel supply and operating costs, ongoing renovation needs, interest-rate and refinancing exposure, and the ability to maintain distributions. The company depends heavily on IHM, which managed all 40 wholly owned hotels; IHM is 51% owned by CEO Jeffrey Fisher, creating concentration and related-party conflict risks.
- The Operating Partnership provided customary carve-out guarantees and environmental indemnities related to JV debt. The filing describes potential guarantee exposure, including full debt exposure in certain circumstances; most other covered circumstances are capped at 15% of NewINK JV debt or 20% of Inland JV debt.
- An IHM-related California wage-and-hour class action had not been certified. The company accrued $0.2 million, its stated estimate of maximum possible loss as of year-end.
- The Tax Cuts and Jobs Act reduced the federal corporate tax rate applicable to the company’s taxable REIT subsidiaries beginning in 2018. The company recorded a $0.6 million reduction in deferred tax assets and related tax expense in 2017.
- The board authorized monthly dividends of $0.11 per share for the first quarter of 2018. Future distributions remain subject to board discretion, operating performance, debt covenants and capital needs.
Most important facts for investors to verify
- Whether 2018 RevPAR performance falls within management’s projected range, particularly given supply growth and weaker occupancy.
- Whether operating-cost growth, including labor, franchise and maintenance costs, continues to outpace revenue growth.
- Capital spending needs and the costs, timing, funding and expected returns of the proposed Sunnyvale expansions and planned acquisition.
- Debt maturities, floating-rate exposure, revolver availability and compliance with covenants; also assess the JV-related guarantees and potential capital calls.
- The sustainability of the dividend relative to operating cash flow, capital requirements and the credit-facility distribution limit.
- Progress and potential exposure in the IHM litigation, and governance safeguards for the related-party management arrangements.
- Reconcile reported GAAP results with FFO and Adjusted FFO; the filing cautions that these non-GAAP measures are not liquidity measures or substitutes for cash flow.