Chatham Lodging Trust quarterly report, Q2 FY2016

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Chatham Lodging Trust — Q2 2016 Form 10-Q

Reporting period: Three and six months ended June 30, 2016; balance sheet compared with December 31, 2015. Chatham is a self-advised REIT focused on upscale extended-stay and premium-branded select-service hotels. At quarter-end it wholly owned 38 hotels with 5,680 rooms and held minority interests in two hotel joint ventures.

Financial and operating performance

  • Revenue: Q2 revenue was $78.0 million, up 7.7% year over year; first-half revenue was $146.9 million, up 11.8%. Acquisitions made after the comparable 2015 periods contributed $5.2 million of Q2 growth and $13.1 million of first-half growth.
  • Comparable hotel performance: Same-property RevPAR increased 0.6% in Q2 and 1.5% for the first half. Q2 occupancy was 85.7% and ADR was $164.28; first-half occupancy was 81.7% and ADR was $161.89. The first-half RevPAR increase reflected 0.6% ADR growth and 0.9% occupancy growth.
  • Profit: Q2 operating income was $18.6 million versus $18.2 million; net income was $12.3 million versus $12.8 million. Net income attributable to common shareholders was $12.2 million, or $0.32 basic and $0.31 diluted per share, compared with $12.8 million, or $0.33 per share, in Q2 2015. For the first half, operating income was $29.6 million versus $26.7 million; common-shareholder net income was $15.5 million, or $0.40 per basic and diluted share, versus $14.2 million, or $0.37 per share.
  • Supplemental measures: Q2 Adjusted Hotel EBITDA was $34.1 million versus $33.0 million; first-half Adjusted Hotel EBITDA was $60.7 million versus $56.7 million. First-half FFO attributable to common shareholders was $44.1 million versus $41.3 million, while Adjusted FFO was $44.4 million versus $42.2 million. These are non-GAAP measures, not substitutes for cash flow or liquidity.
  • Cash flow and investment: First-half operating cash flow was $39.6 million, compared with $37.5 million. Investing activities used $10.9 million, including $11.8 million of hotel improvements and additions, partly offset by $4.1 million of JV distributions. Financing activities used $34.4 million, including $27.5 million of distributions. Management separately reported $18.1 million of first-half hotel capital investments, including Silicon Valley expansions; the filing does not reconcile that broader figure directly to cash-flow-statement improvements and additions.
  • Margins and costs: Total hotel operating expenses rose 10.7% in Q2 and 14.7% in the first half. At comparable hotels, expenses rose 2.8% in Q2 and 3.9% in the first half. Management cited higher salary and benefits costs, including housekeeping, as well as higher property taxes. Q2 RevPAR growth at Chatham’s wholly owned hotels lagged industry growth of 3.5%.
  • Debt and liquidity: Gross debt before unamortized financing costs was $600.8 million, with an average interest rate of about 4.4%; net leverage was 41.0% under the company’s stated definition. Cash and cash equivalents were $15.3 million, and $183.7 million was available on the $250 million revolving facility. The company reported covenant compliance and a fixed-charge coverage ratio of 3.47 versus a 1.5 minimum. A 100-basis-point increase in floating rates was estimated to add about $0.7 million of annual interest expense.
  • Distributions: Common-share and LTIP distributions declared were $0.33 per quarter and $0.64 for the first half. The monthly distribution increased from $0.10 to $0.11 in March 2016.

Changes, outlook, and risks

  • Revenue growth was substantially acquisition-driven; same-property gains were more modest. Q2 same-property RevPAR growth slowed to 0.6% from 6.4% in the prior-year quarter, while industry RevPAR growth slowed to 3.5% from 6.5%.
  • Management projected 2016 RevPAR growth of 0%–1% at its hotels, with ADR expected to account for all growth. It expected modest overall lodging-industry improvement, but cautioned that new supply and slowing corporate demand could pressure RevPAR. These are management expectations, not guaranteed results.
  • Management expected approximately $11.3 million in additional 2016 spending on renovations and other existing-hotel needs. The planned expansion of three Silicon Valley hotels was expected to cost approximately $80–$85 million in total. The Mountain View 32-room expansion was nearing completion; work on two Sunnyvale hotels was expected to begin in late 2016.
  • Liquidity depends on operating cash flow, available cash and credit, and access to debt or equity financing. Management expected to meet short-term needs and covenants based on current projections, but acquisition plans and long-term obligations may require additional financing, equity issuance, or asset sales.
  • Risks include lodging-market weakness, competitive supply, rising operating costs and interest rates, seasonality, and the availability and cost of capital. Chatham also disclosed potential obligations under guarantees relating to JV debt and possible additional JV capital contributions. No material litigation was reported; the company stated that risk factors had not materially changed from its 2015 Form 10-K.
  • Unusual or relevant items included a $4,000 loss on early extinguishment of debt after paying off the Altoona mortgage early, and a $299,000 release of a deferred-tax valuation allowance. No hotels were acquired in the first half of 2016.

Important facts for investors to verify

  • How much of future revenue and earnings growth is expected to come from comparable-hotel performance versus acquisitions?
  • Whether expense growth, particularly labor and property taxes, continues to outpace same-property revenue growth.
  • Progress, total funding needs, and returns for the Silicon Valley expansion program and planned renovation spending.
  • Debt maturities, revolving-credit availability, covenant headroom, and any JV guarantee or capital-call exposure.
  • Whether actual 2016 RevPAR performance meets management’s 0%–1% projection, given industry supply, corporate demand, and seasonal variability.
  • The sustainability of distributions relative to operating cash flow, capital needs, debt service, and REIT taxable-income requirements.