Chatham Lodging Trust — Q3 2015 Form 10-Q
Business context and period. The filing covers the quarter and nine months ended September 30, 2015. Chatham is a self-advised REIT focused on upscale extended-stay and select-service hotels. At quarter-end it owned 38 hotels with 5,675 rooms and held minority interests in three hotel joint ventures. Unless noted, dollar amounts below are in millions.
Key financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $78.2 | $60.7 | $209.4 | $144.6 |
| Operating income | $20.1 | $14.7 | $46.6 | $22.2 |
| Net income | $14.4 | $8.8 | $28.7 | $72.4 |
| Net income per diluted share | $0.37 | $0.31 | $0.74 | $2.67 |
| Hotel EBITDA | $36.1 | $28.0 | $92.5 | $60.9 |
| Cash from operations | — | $64.7 | $37.5 |
Hotel operating performance: Q3 comparable-hotel room revenue increased 5.5%; portfolio RevPAR rose 5.3%, principally from a 5.4% increase in ADR, while occupancy was unchanged at 87.5%. For the first nine months, RevPAR increased 6.1%, with ADR up 7.0% and occupancy down 0.9%. Hotel EBITDA margin was approximately 46.1% in Q3 versus 46.2%; nine-month margin was approximately 44.2% versus 42.1%.
Balance sheet and liquidity: At September 30, cash was $16.1, total debt was $603.2 ($543.2 mortgage debt and $60.0 revolver borrowings), total assets were $1,341.9, and total equity was $706.6. The revolver had $115.0 of available capacity. Management reported a 41.2% leverage ratio, covenant compliance, and a fixed-charge coverage ratio of 3.29 against a 1.50 minimum. The company reported $178.7 of investing cash outflow, including $169.4 for four hotel acquisitions; financing cash inflow was $115.0. Capital improvements and additions used $13.7 in the nine-month period.
Distributions: The company declared $0.30 per common share for Q3 and $0.90 per share year to date, up from $0.24 and $0.69, respectively, in the comparable 2014 periods.
Material changes and unusual items
- Revenue rose 29.0% in Q3 and 44.8% year to date, reflecting both acquisitions and same-hotel growth. Management attributed $13.9 of Q3 revenue growth and $58.3 of nine-month growth to hotels acquired during or after the comparable periods. Same-hotel RevPAR gains were more modest.
- Nine-month 2015 net income was lower than 2014 primarily because 2014 included a $66.7 gain related to the Innkeepers transaction and Silicon Valley hotel acquisitions. Excluding that prior-period gain, 2015 results improved; the filing reports nine-month Adjusted FFO of $71.5 versus $42.4.
- Chatham acquired the Residence Inn San Diego Gaslamp, Residence Inn Dedham, Residence Inn Ft. Lauderdale, and Hilton Garden Inn Marina del Rey during 2015. It also issued 4.03 million common shares in a January offering, generating approximately $118.8 in net proceeds.
- Debt increased from $550.2 at year-end 2014 to $603.2 at September 30, 2015. The company assumed a $22.6 mortgage in the Marina del Rey acquisition. Most mortgage debt is fixed-rate; the $60.0 revolver is variable-rate and matures in November 2016.
Outlook, commentary, and risks
- Management projected 2015 company RevPAR growth of 5.75%–6.0%, with all growth expected from ADR. It cited expected lodging-demand growth exceeding supply growth and forecast industry RevPAR growth of 4%–6% for 2016. These are expectations, not guaranteed results.
- Management expected to invest a further $2.6 in existing-hotel capital improvements during the remainder of 2015. It planned Silicon Valley hotel expansions adding 272 rooms, with estimated total costs of $70–$80 million; the first 32-room expansion was underway. Final project budgets were not yet available.
- The company described seasonal variation, generally with lower revenue, operating income, and cash flow in Q1 and Q4. Risks include economic and lodging-market changes, competition, operating-cost increases, interest rates, and access to acquisition financing.
- A California wage-and-hour class action involving hotels managed by Island Hospitality Management (IHM) remains pending. Chatham accrued $637,000, which it estimated as its maximum possible loss. IHM is partly owned by the CEO and by NorthStar affiliates, and manages 36 wholly owned hotels plus many JV hotels; related-party management fees for owned hotels were $6.9 million year to date.
- Joint-venture ownership interests may be affected by additional capital calls. The filing also identifies potential non-recourse debt carve-out obligations and long-term ground-lease commitments. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How much of reported growth and future earnings depends on acquired properties versus same-hotel performance, and whether ADR gains can continue without occupancy deterioration.
- Acquisition financing, rising debt and interest costs, the revolver’s November 2016 maturity, and the company’s ability to preserve covenant headroom and liquidity.
- The cost, timing, funding plan, and expected returns of the $70–$80 million Silicon Valley expansion program.
- Developments in the California litigation and any additional joint-venture capital requirements or related-party arrangements.
- Whether operating cash flow can support distributions, property investment, and debt service; the filing cautions that FFO and EBITDA measures are not substitutes for GAAP cash flow or measures of funds available for distributions.