Chatham Lodging Trust — FY 2014 Form 10-K
Reporting period: Year ended December 31, 2014. This is an annual filing, not a standalone fourth-quarter report. Chatham is a REIT focused on upscale extended-stay and select-service hotels.
Business context and portfolio
- At year-end, Chatham wholly owned 34 hotels with 5,115 rooms across 15 states and Washington, D.C. It also held noncontrolling interests of 10.3% in NewINK, 10.0% in Inland, and 5.0% in the Torrance joint venture.
- During 2014, it acquired four Silicon Valley hotels, one Cherry Creek hotel, and four hotels in Houston and Burlington; it also formed or invested in joint ventures that own larger hotel portfolios.
- The company leases its wholly owned hotels to taxable REIT subsidiaries, which engage third-party managers. CEO Jeffrey Fisher owns 90% of Island Hospitality Management (IHM), a significant manager of company and joint-venture hotels.
Financial and operating performance
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Total revenue | $197.2 million | $126.2 million |
| Operating income | $26.7 million | $17.4 million |
| Net income attributable to common shareholders | $66.9 million | $3.0 million |
| Basic earnings per share | $2.32 | $0.13 |
| Net cash from operating activities | $49.3 million | $31.6 million |
| Cash used in investing activities | $453.0 million | $235.2 million |
| Cash from financing activities | $414.5 million | $203.3 million |
| Cash and cash equivalents at year-end | $15.1 million | $4.2 million |
- Reported 2014 net income included a $65.8 million gain from remeasurement and sale of the Innkeepers investment. It is not a measure of recurring hotel earnings.
- Revenue rose 56.2%, reflecting both acquisitions and improved hotel performance. On the disclosed 34-hotel operating comparison, occupancy was 81.6% versus 79.9%, ADR was $150.64 versus $141.72, and RevPAR was $122.91 versus $113.21.
- Hotel EBITDA was $83.6 million, or approximately 42.4% of revenue, versus $48.7 million in 2013. Adjusted EBITDA was $84.6 million versus $51.4 million; Adjusted FFO was $55.1 million versus $31.7 million. These are non-GAAP measures and are not substitutes for cash flow or liquidity.
- Interest expense increased 84.4% to $21.4 million, primarily reflecting higher debt used to fund acquisitions. Hotel operating expenses were $101.0 million; depreciation and amortization was $34.7 million; acquisition costs and other charges were $10.4 million.
- Common-share dividends declared were $0.93 per share for 2014, up from $0.84 in 2013. The monthly dividend increased from $0.07 to $0.08 in April 2014.
Debt, liquidity, and capital
- Year-end mortgage debt was $527.7 million and revolving-credit borrowings were $22.5 million, for $550.2 million of consolidated debt. The stated leverage ratio rose to approximately 44% from 36% in 2013.
- The $175 million secured revolving facility matured November 5, 2016, with a one-year extension option. Chatham reported $152.5 million of availability and compliance with financial covenants at year-end; its fixed-charge coverage ratio was 3.15.
- Management stated that operating cash, cash balances, and the facility were expected to meet short-term needs, while future acquisitions and maturities could be funded with additional debt, equity, or asset sales. The filing also reports a $10 million minimum unrestricted-cash requirement related to certain joint-venture debt guarantees.
- 2014 financing included $340.5 million of new mortgage proceeds and $150.7 million of net proceeds from the September common-share offering, plus $20.8 million raised through the ATM plan. Common shares outstanding increased to 34.2 million from 26.3 million.
Outlook, material changes, and risks
- Management projected 2015 RevPAR growth of 5%–7% at Chatham’s hotels, with all projected growth attributed to ADR. It cited expected economic and lodging-industry improvement; these are forward-looking expectations, not guarantees.
- Planned 2015 capital improvements were approximately $16.8 million. Chatham also planned a 272-room expansion across its four Silicon Valley hotels, with an estimated cost of approximately $59 million, subject to approvals.
- A subsequent event: Chatham acquired a San Diego hotel for approximately $90 million on February 26, 2015, funded with available cash. It also completed a January 2015 share offering for net proceeds of $119 million.
- Key risks include lodging-demand and supply cycles, acquisition financing and higher leverage, refinancing and floating-rate exposure, required hotel renovations and brand standards, and limited control over joint ventures. A 100-basis-point rise in variable rates was estimated to add about $0.2 million of annual interest expense at the year-end balance.
- Potential conflicts arise from IHM’s relationship to the CEO and its management of many Chatham and joint-venture hotels. A California wage-and-hour class action involving IHM-managed hotels had a recorded company exposure estimate of $0.287 million, also stated as the estimated maximum possible loss for the company.
- Management reported effective disclosure controls and internal control over financial reporting; the independent auditor issued an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Separate recurring operating performance from the $65.8 million Innkeepers-related gain; review FFO, Adjusted FFO, and cash flows alongside GAAP earnings.
- Reconcile the filing’s RevPAR growth disclosures: the hotel-comparison table implies approximately 8.6% growth, while the narrative also cites 8.2% for wholly owned hotels.
- Review debt maturities, refinancing plans, covenant headroom, joint-venture guarantees, and the effect of capital spending on dividends and liquidity.
- Assess the economics, approvals, funding, and execution risks of the Silicon Valley expansion and the subsequent San Diego acquisition.
- Review related-party management arrangements, joint-venture capital-call exposure, and developments in the California litigation.