Chatham Lodging Trust quarterly report, Q3 FY2020

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Chatham Lodging Trust — Q3 2020 Form 10-Q

Reporting period: Three and nine months ended September 30, 2020. Unless stated otherwise, amounts below are in U.S. dollars; financial statement amounts are shown in millions. Chatham owned 40 hotels with 6,092 rooms and held minority interests in two hotel joint ventures.

Financial performance and position

  • Third-quarter revenue: $35.0 million, down 61.2% from $90.1 million a year earlier. Room revenue was $32.3 million, down 60.5%.
  • Third-quarter results: Operating loss was $10.2 million, versus operating income of $19.9 million; net loss attributable to common shareholders was $18.1 million, or $0.38 per share, versus income of $10.0 million, or $0.21 per share.
  • Nine-month revenue and earnings: Revenue was $115.4 million, down 54.5% from $253.6 million. Net loss attributable to common shareholders was $72.7 million, or $1.55 per share, versus income of $21.1 million, or $0.44 per share.
  • Hotel operating metrics: Same-property third-quarter occupancy was 52.5% versus 84.8%; ADR was $109.74 versus $172.04; RevPAR was $57.64 versus $145.96, a 60.5% decline. Nine-month same-property RevPAR fell 54.7%.
  • Supplemental non-GAAP measures: Adjusted Hotel EBITDA was $6.1 million in Q3 versus $36.6 million, and $20.1 million for nine months versus $98.9 million. Adjusted FFO attributable to common shareholders and units was a loss of $4.2 million in Q3 versus income of $28.6 million, and a loss of $10.4 million for nine months versus income of $72.4 million.
  • Cash flow: Nine-month operating cash flow was negative $12.8 million, investing cash flow negative $27.1 million, and financing cash flow positive $62.1 million. Investing included $13.9 million of hotel improvements and $13.2 million for development. Financing included $83.0 million of net revolving-credit borrowings; distributions were $16.2 million.
  • Liquidity and debt at September 30: Cash and cash equivalents were $31.6 million, restricted cash $10.8 million, and total debt before deferred financing costs $667.1 million. Debt included $173.0 million outstanding on a $250 million revolver, $3.9 million on a $40 million construction loan, and approximately $494.1 million of mortgage debt. Reported leverage was 37.7%; average debt interest rate was approximately 4.3%.
  • Balance sheet: Total assets were $1.429 billion and total equity was $694.9 million. Hotel properties under development were $33.7 million.

Material changes and unusual items

  • COVID-19-related travel and demand declines drove lower revenue and occupancy. Third-quarter hotel operating expenses fell 52.4%, less than the revenue decline; management cited cost reductions in response to weaker demand.
  • The company recorded a $15.3 million impairment of its Inland JV investment, reducing its carrying value to zero. It stopped recognizing further Inland JV equity-method losses from March 31, 2020.
  • Other charges for the first nine months were $2.8 million, primarily severance and accelerated vesting costs associated with the departure of the former Chief Investment Officer, as well as insurance deductibles.
  • Chatham suspended common-share dividends after the March 2020 payment. It declared $0.22 per share for the first nine months, compared with $0.99 in the prior-year period, and said it planned to pay dividends required to maintain REIT status.
  • Management reduced planned 2020 capital expenditures by approximately $10 million; it expected a further $1.7 million of existing-hotel spending for the remainder of the year. Estimated remaining costs for the Los Angeles hotel development were $36.3 million.

Liquidity, outlook, risks, and contingencies

  • On May 6, 2020, Chatham amended its credit facility, obtaining waivers of certain financial covenants through March 31, 2021 and access to the full $250 million facility, subject to a $25 million minimum-liquidity requirement. The amendment also added borrowing-base hotels and restricted additional debt, dividends, and capital expenditures. The company reported compliance with modified covenants at quarter-end.
  • Management said cash, revolver availability, cost reductions, deferred capital spending, and suspended dividends should be sufficient to meet obligations for the foreseeable future. It provided no quantified earnings or operating guidance and emphasized that the pandemic’s duration and effects were uncertain.
  • The NewINK JV had missed mezzanine interest payments beginning in April 2020. After quarter-end, CLNY contributed $5.9 million, and the JV used those funds and existing cash to bring senior debt payments current through October; mezzanine payments remained unpaid. The JV debt is generally non-recourse to Chatham, subject to customary carve-outs and guarantees.
  • The Inland JV failed to make debt-service payments beginning in April 2020; its hotels entered receivership. Its debt is generally non-recourse to Chatham, subject to customary carve-outs and guarantees. Neither JV default triggers a cross-default under Chatham’s debt agreements, according to the filing.
  • CLNY announced a proposed sale that includes the NewINK JV, with a stated $67.5 million gross equity sale price across six portfolios. Chatham’s expected proceeds were not disclosed, and the transaction remained subject to closing conditions, including debt assumption.
  • Chatham paid $0.1 million and $0.6 million in 2020 settlements related to California wage-and-hour class actions involving its affiliated hotel manager, IHM. The filing also describes customary potential exposure under JV debt carve-out guarantees.

Important facts for investors to verify

  • Current hotel demand, occupancy, ADR, and RevPAR trends, and the pace and cost of operating recovery.
  • Unrestricted cash, actual revolver availability, compliance with minimum liquidity requirements, and the timing of debt maturities and refinancing needs.
  • Whether NewINK continues to meet senior debt service and resolves mezzanine arrears; developments in the Inland JV receivership and any JV-related guarantee exposure.
  • Whether CLNY’s proposed portfolio sale closes and what, if any, proceeds Chatham receives.
  • The status of the dividend suspension, remaining Los Angeles development commitments, and any further impairment or contingency disclosures.