Chatham Lodging Trust — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Unaudited results; amounts below are U.S. dollars. Chatham is a hotel REIT focused on upscale extended-stay and select-service properties. At quarter-end it owned 29 hotels with 4,342 rooms and held a 10.3% interest in the 47-hotel NewINK joint venture and a 5.0% interest in the Torrance joint venture.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Total revenue | $47.1 million | $30.7 million | $83.9 million | $56.5 million |
| Operating income | $5.0 million | $5.0 million | $7.5 million | $7.8 million |
| Net income | $65.3 million | $2.2 million | $63.6 million | $0.6 million |
| Net income attributable to common shareholders | $65.2 million | $2.2 million | $63.5 million | $0.6 million |
| Adjusted FFO | $14.8 million | $8.8 million | $22.3 million | $13.3 million |
| Adjusted EBITDA | $21.5 million | $13.7 million | $34.7 million | $23.1 million |
- Reported net income included a $66.7 million gain tied to the Innkeepers JV transaction: approximately $18.8 million from remeasurement of the Silicon Valley hotel interest and $47.9 million from Chatham’s promote interest. The gain was not a recurring hotel operating result.
- Revenue growth reflected both stronger operations and portfolio expansion. For 21 comparable hotels, room revenue rose 15.9% in Q2 and in the first half. Across the 29 hotels, Q2 RevPAR increased 9.6% to $133.37, with occupancy of 86.8% and ADR of $153.71. First-half RevPAR increased 8.9% to $123.13.
- Q2 total hotel operating expenses rose 45.4% to $23.5 million; total operating expenses rose to $42.1 million. Acquisition costs and other charges were $5.6 million for the quarter, including $4.8 million of Silicon Valley acquisition costs and $0.7 million related to an unsolicited offer and proxy settlement matters.
- First-half cash from operations was $15.1 million, compared with $12.1 million. Investing used $276.0 million, primarily for the Silicon Valley acquisitions; financing provided $268.6 million. Cash and cash equivalents were $11.9 million at quarter-end, versus $4.2 million at year-end 2013.
Balance sheet, debt and liquidity
- Total debt was $542.5 million at June 30, 2014: $444.5 million of mortgage debt and $98.0 million drawn on the $175 million revolving facility. Chatham reported $77 million of revolver availability and a 51% leverage ratio, up from 36% at December 31, 2013.
- Debt increased substantially alongside acquisitions. Chatham reported compliance with financial covenants and a 2.87 consolidated fixed-charge coverage ratio at quarter-end. The revolver matures November 5, 2016, with an option to extend one year; its minimum fixed-charge coverage covenant is 1.5x.
- On July 2, after quarter-end, Chatham obtained a $30 million, 10-year mortgage on its Savannah hotel at 4.62%. On July 9 it repaid $33 million on the revolver, using $29.4 million of net loan proceeds and excess cash.
- Cash from operations, cash balances and available borrowing capacity are identified as sources for near-term liquidity. Longer-term funding needs may be met through debt, equity issuance, asset sales or other sources. The company’s ATM plan had approximately $39 million of capacity remaining at quarter-end.
Changes, outlook and risks
- On June 9, Chatham completed the Innkeepers JV transaction, acquired four Silicon Valley Residence Inns for a net cash purchase price of approximately $265.3 million, and retained a 10.3% interest in the NewINK JV. The four hotels contributed $3.1 million of Q2 revenue after acquisition.
- Management projected 2014 RevPAR growth of 6.5%–7.5% at Chatham’s hotels, with ADR expected to account for approximately 60% of growth. Management cited improving lodging demand, expected U.S. economic growth and limited new supply. This is a projection, not a guarantee.
- Chatham expected to spend a further $8.3 million on existing-hotel capital improvements during the rest of 2014. It was considering approximately $59 million to redevelop or expand the four Silicon Valley hotels, potentially increasing their combined room count by 36% to 1,023. No final commitment was reported; execution, cost, approvals and disruption to hotel operations are risks.
- Management noted that hotel results are seasonal, generally weaker in the first and fourth quarters, and exposed to economic conditions, competition, operating costs and interest rates. A 1 percentage-point increase in variable rates was estimated to add approximately $1.0 million in annual interest expense, assuming the revolver balance remained $98 million.
- The NewINK JV may require additional capital contributions, and NorthStar has specified decision-making rights, including over certain dispositions and financing. Chatham also disclosed related-party management arrangements: its CEO owns 90% of Island Hospitality Management, which managed 27 wholly owned hotels and all NewINK hotels.
- Chatham said it was not aware of material litigation. It identified no material changes to previously disclosed risks other than the possible Silicon Valley redevelopment and expansion risks. Disclosure controls were reported effective.
Most important facts for investors to verify
- How much of reported earnings and per-share income came from the nonrecurring $66.7 million JV transaction gain; assess recurring results using operating metrics and supplemental measures alongside GAAP figures.
- Comparable-hotel RevPAR, occupancy and ADR trends, and how much reported revenue growth came from acquisitions rather than same-property performance.
- Post-quarter debt and cash balances after the Savannah mortgage and revolver repayment, along with covenant headroom, maturities and interest-rate exposure.
- Whether the proposed $59 million Silicon Valley redevelopment proceeds, its funding and expected return, and any operating disruption or cost overruns.
- NewINK JV capital-call terms, governance rights and promote thresholds, as well as the related-party management arrangements and associated fees.