Chatham Lodging Trust — Q2 2013 Form 10-Q
Business context and reporting period. Quarterly report for the three and six months ended June 30, 2013. Chatham is a self-advised lodging REIT focused on upscale extended-stay and select-service hotels. At quarter-end it owned 21 hotels with 2,911 rooms and held minority interests in two hotel joint ventures.
Key financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $30.7 million | $26.4 million | $56.5 million | $49.2 million |
| Operating income | $5.0 million | $4.4 million | $7.8 million | $7.1 million |
| Net income (loss) | $2.2 million | $1.2 million | $0.6 million | ($0.6 million) |
| Diluted income (loss) per share | $0.11 | $0.08 | $0.02 | ($0.05) |
| FFO | $7.7 million | $5.9 million | $11.1 million | $8.7 million |
| Adjusted FFO | $8.8 million | $5.9 million | $13.3 million | $8.8 million |
| Adjusted EBITDA | $13.7 million | $11.9 million | $23.1 million | $20.5 million |
Hotel RevPAR rose 3.5% in Q2 and 4.0% for the first half; ADR increased 4.1% and 3.9%, respectively. Occupancy was 82.9% in Q2 versus 83.5%, and 79.0% for the half versus 78.9%. The reported comparisons include the effects of hotels acquired after the prior-year periods; RevPAR reflects hotel operations regardless of ownership. Operating margin was approximately 16.3% in Q2 versus 16.7% a year earlier.
For the six months, cash from operations was $12.1 million, investing cash outflow was $82.4 million, and financing cash inflow was $84.5 million. Cash and cash equivalents were $18.7 million at June 30, compared with $4.5 million at year-end 2012. Capital improvements and additions to hotel properties used $7.1 million in cash during the half.
At June 30, debt comprised $175.8 million of mortgage debt and $30.5 million drawn on the $115 million revolving facility, or $206.3 million total. The company reported $84.5 million of remaining facility availability, compliance with covenants, and a 2.03x fixed-charge coverage ratio. Management reported leverage of approximately 45%, down from 51% at year-end 2012. Fixed-rate debt fair value was estimated at $177.9 million; a one-percentage-point increase in variable rates was estimated to add about $0.3 million of annual interest expense.
Material changes and notable items
- Revenue growth reflected hotel additions: Chatham acquired the 197-room Houston Courtyard in February for $34.8 million and the 178-room Pittsburgh Hyatt Place in June for $40.0 million. Management attributed $4.1 million of Q2 revenue growth and $6.5 million of first-half growth to three hotels not owned in the comparable 2012 periods.
- Two follow-on share offerings in January and June raised approximately $127.3 million net, before/including the associated offering costs as presented in the statements. The share count increased substantially; weighted-average basic shares were 18.1 million in Q2 versus 13.8 million in Q2 2012.
- Interest expense fell to $2.8 million in Q2 from $3.8 million, and to $5.7 million for the half from $7.7 million, reflecting refinancings, repayment of the Washington, D.C. mortgage and lower revolver rates. First-half results included a $0.9 million loss on early debt extinguishment.
- Q2 acquisition costs were $1.1 million. The company reported a $0.1 million Q2 loss from unconsolidated entities, compared with $0.7 million of income a year earlier, partly because of lower gains on joint-venture hotel asset sales.
Outlook, risks and contingencies
- Management projected 2013 RevPAR growth of 4.5% at Chatham’s hotels. It cited industry forecasts of 5%–6% growth, with ADR expected to provide most of the increase. These are forward-looking expectations, not guarantees.
- Management’s long-term goal is net debt below 35% of hotel investment at cost, while indicating it was comfortable with temporarily higher leverage during the lodging recovery. It expected covenant compliance for 2013 and said short-term needs could be met with operating cash, cash balances and, if needed, credit-facility borrowings or additional secured borrowing.
- Management expected approximately $2.5 million of additional 2013 improvements at existing hotels and approximately $2.5 million for rebranding its Washington, D.C. hotel as a Residence Inn. A July agreement to acquire a northeastern U.S. Hampton Inn & Suites for $15.2 million was subject to due diligence and customary closing conditions.
- Key disclosed risks include economic and lodging-industry conditions, competition, operating-cost increases, seasonality, interest rates, access to debt and equity financing, and the ability to identify and complete acquisitions. Management noted that hotel demand and cash flow are generally lower in the first and fourth quarters. No material litigation or material changes to the prior annual report’s risk factors were reported.
- Related-party consideration: the CEO owns 90% of Island Hospitality Management, which managed 19 wholly owned hotels at quarter-end and all 52 Innkeepers JV hotels. The filing also describes possible additional joint-venture capital contributions and certain Cerberus approval rights. No material off-balance-sheet arrangements were reported apart from non-recourse JV debt and customary carve-out exposures.
Investor verification points
- Check the contribution of acquired hotels versus comparable-property performance, including the effect of renovations and the unbranded Washington, D.C. hotel on reported RevPAR.
- Review the share-offering proceeds, increased weighted-average share count and per-share results when assessing growth and dilution.
- Verify debt maturities, refinancing terms, covenant headroom and the company’s path from approximately 45% leverage toward its stated long-term goal.
- Assess whether operating cash flow and planned capital spending support the monthly $0.07 per-share distribution; FFO and Adjusted FFO are non-GAAP measures and are not measures of liquidity or cash available for distributions.
- Monitor completion and funding of the proposed Hampton Inn & Suites purchase, Washington, D.C. rebranding costs, and potential capital calls or other obligations involving the joint ventures.