Chatham Lodging Trust — Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Chatham is a REIT focused on upscale extended-stay and premium-branded select-service hotels. At quarter-end it owned 39 hotels with 5,914 rooms.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $87.9m (+36.7%) | $64.3m | $224.5m (+53.1%) | $146.7m |
| Operating income (loss) | $18.8m | $4.4m | $31.7m | $(11.4)m |
| Net income (loss) | $12.4m | $(1.4)m | $12.0m | $(7.4)m |
| Net income (loss) attributable to common shareholders | $10.1m; $0.21/share | $(3.3)m; $(0.07)/share | $5.9m; $0.12/share | $(9.2)m; $(0.19)/share |
| Operating margin | 21.4% | 6.9% | 14.1% | (7.8%) |
| Cash from operations | Not separately stated for quarter | Not separately stated for quarter | $50.5m | $18.4m |
Operating margins are calculated from reported operating income before hotel-sale gains divided by total revenue. Q3 same-property RevPAR rose 34.0% to $150.31, reflecting 21.9% higher ADR and 9.8% higher occupancy. For the nine months, same-property RevPAR rose 44.3% to $126.82, with ADR up 29.9% and occupancy up 11.0%.
Adjusted Hotel EBITDA, a non-GAAP measure, was $38.2m in Q3 versus $22.5m, and $88.3m for nine months versus $41.6m. Management cautions that non-GAAP measures are not substitutes for GAAP results or cash flow and do not measure liquidity.
Balance sheet, cash flow and capital
- At September 30, total debt before deferred financing costs was $472.6m, versus $544.9m at December 31, 2021. Debt consisted of $433.2m of mortgage debt and a $39.3m construction loan; the revolving facility had no balance. Reported leverage ratio was 27.2%, and weighted-average interest rate was approximately 5.0%.
- Cash and cash equivalents were $19.9m and restricted cash was $14.3m. Nine-month operating cash flow of $50.5m and investing inflows of $32.5m were offset by $78.7m of financing outflows.
- Investing cash flow included $79.6m of net hotel-sale proceeds, a $31.0m hotel acquisition, $12.4m of hotel improvements and $4.0m for development. The company expected about $7.0m of additional hotel renovations and other expenditures in the remainder of 2022.
- Management reported $100.8m of principal and interest obligations due within 12 months of quarter-end, including $69.6m of mortgage principal maturities. Three lenders had enforced cash-trap provisions; Chatham said it did not expect them to impair short-term liquidity.
- On October 28, 2022, after quarter-end, Chatham entered into a $215m unsecured revolving facility and a $90m unsecured delayed-draw term loan facility, replacing its prior $250m revolver. The new facilities have initial maturities in 2026 and 2025, respectively, with extension options.
Material changes and management outlook
- Revenue and hotel performance improved substantially versus 2021, which management attributed primarily to recovery in travel demand. Q3 revenue also reflected hotels acquired and opened; four hotels sold in May 2022 no longer contributed Q3 revenue.
- In 2022, Chatham acquired Hilton Garden Inn Destin Miramar Beach for $31.0m, opened Home2 Suites Woodland Hills, and sold four hotels for total reported proceeds of approximately $80.2m. The sales generated a $2.1m gain. The 2021 comparison includes a $23.8m gain from selling the NewINK joint-venture interest, affecting year-over-year comparisons.
- Management expected continued significant U.S. lodging RevPAR growth for the remainder of 2022 versus 2021 and 2020, with some markets potentially exceeding 2019 levels. This is management’s outlook, not a specific company earnings forecast.
- Common dividends remained suspended; none were declared in the quarter or first nine months. The company continued quarterly Series A preferred dividends, totaling $1.24218 per preferred share for the nine months.
- Chatham exited its credit-facility covenant waiver period at the end of Q2 and reported compliance with covenants at September 30. Management said existing cash and credit availability were expected to meet short-term needs; long-term needs may be funded through borrowing, equity issuance or asset sales.
Risks, contingencies and unusual matters
- Management identified continuing COVID-19 uncertainty, potential recession and weaker lodging demand, inflation and rising operating and borrowing costs, interest-rate exposure, capital-market access, competition, and seasonality as risks. Inflation could raise costs faster than room rates can be increased.
- Four mortgage loans were below cash-trap thresholds, and three lenders had enforced cash traps. A 100-basis-point increase in LIBOR was estimated to add approximately $0.1m of annual interest based on quarter-end floating-rate balances.
- All 39 hotels were managed by Island Hospitality Management, which is wholly owned by Chatham’s chairman, president and CEO. Management fees were $3.0m in Q3 and $7.6m for nine months; amounts due to IHM were $1.2m at quarter-end.
- A lawsuit related to the sale of Residence Inn Mission Valley had been settled by the plaintiffs and was awaiting dismissal. Chatham said potential future costs were not probable and estimable; it incurred $145,000 of legal costs in the first nine months.
- The taxable REIT subsidiary maintained a full valuation allowance against net deferred tax assets and expected taxable losses in 2022. The company reported no income tax expense for the periods shown.
Most important facts for investors to verify
- Execution and borrowing costs under the October 2022 refinancing, including any delayed-draw term-loan funding and extension terms.
- Near-term mortgage maturities, repayment or refinancing plans, and whether cash-trap restrictions expand or ease.
- Whether lodging recovery, RevPAR gains and hotel margins persist as inflation affects labor, utilities, insurance and other costs.
- Cash available after required debt service, capital spending and preferred dividends, and any decision on resuming common dividends.
- Related-party management arrangements and fees paid to IHM, given the CEO’s ownership of the manager.