Chatham Lodging Trust — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Financial amounts are in U.S. dollars; dollar figures below are rounded to millions unless otherwise noted.
Business context
Chatham is a self-advised REIT focused on upscale extended-stay and premium-branded select-service hotels. At quarter-end, it wholly owned 40 hotels with 6,092 rooms and held noncontrolling interests in two joint ventures owning 47 and 48 hotels. CEO Jeffrey Fisher owned 52.5% of Island Hospitality Management (IHM), which managed all 40 wholly owned hotels and many JV hotels.
Financial and operating performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $90.1M | $88.9M | $253.6M | $247.2M |
| Operating income | $19.9M | $20.4M | $45.9M | $49.8M |
| Net income | $10.1M | $14.7M | $21.3M | $31.0M |
| Net income attributable to common shareholders | $10.0M | $14.6M | $21.1M | $30.8M |
| Diluted earnings per share | $0.21 | $0.31 | $0.44 | $0.66 |
| FFO attributable to common shareholders and unit holders | $24.8M | $28.4M | $68.6M | $72.0M |
| Adjusted FFO | $28.6M | $28.4M | $72.4M | $72.3M |
Q3 same-property RevPAR at the 40 wholly owned hotels fell 0.3%: ADR rose 0.5% while occupancy declined 0.8%. For the first nine months, same-property RevPAR fell 0.5%, with ADR down 0.4% and occupancy flat. Adjusted Hotel EBITDA was $36.6M in Q3 and $98.9M for the nine months; these are company-defined non-GAAP measures.
Cash flow: Nine-month operating cash flow was $69.7M, compared with $71.4M in 2018. Investing used $35.7M, including $30.3M for hotel improvements and $6.9M for development, partly offset by $9.0M of hotel-sale proceeds. Financing used $39.9M, including $46.9M of shareholder and unit distributions. Cash, cash equivalents and restricted cash totaled $26.4M at September 30, versus $32.3M at year-end 2018; unrestricted cash was $10.3M.
Debt and liquidity: Total debt before deferred financing costs was $585.1M, including $499.1M of fixed-rate mortgage debt and $86.0M drawn on the variable-rate revolver. Average debt interest rate was approximately 4.6%; reported leverage was 34.0%. The $250M revolving facility had $164M available. The company reported compliance with its financial covenants, including a 3.2 fixed-charge coverage ratio versus a 1.5 minimum. Management estimated a 100-basis-point increase in variable rates would add about $0.9M of annual interest expense.
Distributions: Common-share dividends and LTIP-unit distributions were $0.33 per share/unit for Q3 and $0.99 year to date. The monthly rate was $0.11.
Material changes and unusual items
- Revenue grew 1.3% in Q3 and 2.6% year to date, but reported earnings fell. Net income declined to $10.1M in Q3 and $21.3M year to date.
- The company recorded a $2.8M Q3 loss from unconsolidated real estate entities, versus $0.7M of income a year earlier. The JVs recorded a $32.8M impairment on three hotels; the company cited JV floating-rate interest costs and impairment as drivers of the year-to-date decline in its JV results.
- Interest expense rose 5.1% in Q3 and 6.9% year to date, mainly because of greater revolver utilization.
- Two hotels were sold in May 2019 for combined proceeds of about $9.7M. Their combined sale accounting resulted in a $3.3M loss for the nine-month period. The company also acquired a Silicon Valley land parcel for $8.1M.
- The company adopted the new lease accounting standard in January 2019, recognizing lease liabilities of $25.7M and right-of-use assets of $23.1M at adoption. At September 30, lease liabilities were $23.8M.
Outlook, risks and contingencies
- Management projected 2019 RevPAR to decline 2.0%–1.5% versus 2018, citing elevated upscale hotel supply and softer growth in its markets. It noted U.S. hotel supply growth of 1.9% was projected for 2019.
- Management expected approximately $2.0M of additional hotel renovation and other capital spending for the remainder of 2019. The Los Angeles hotel under development was expected to cost approximately $65M including land; $15.2M had been incurred by quarter-end. The filing gives no clear completion date.
- Management expected operating cash flow and available liquidity to support operating obligations, interest and REIT distributions, while noting that future acquisitions and long-term funding may require debt, equity issuance or asset sales. It expected to meet financial covenants for the remainder of 2019 based on current projections.
- Risks include hotel seasonality, operating-cost and labor pressures, competition and new supply, interest-rate exposure, access to capital, and development delays or cost overruns. Hotel demand is generally lower in the first and fourth quarters.
- IHM faced two uncertified California wage-and-hour class actions. The company estimated its exposure under management-agreement indemnities at $0.1M; an unfavorable outcome could have a material effect.
- The IRS examination of the TRS’s 2016 tax return remained open. Management had not recorded a liability but said an unfavorable outcome could materially affect results, financial position or cash flows.
- The Operating Partnership has limited guarantees relating to certain JV non-recourse loans, including customary carve-outs. Additional JV capital contributions could also change ownership interests. The company disclosed no material off-balance-sheet arrangements other than JV non-recourse debt.
Important facts for investors to verify
- Whether the expected 2019 RevPAR decline, particularly at comparable hotels, is reflected in subsequent operating results.
- The nature, valuation assumptions and potential further effects of the JV hotel impairment, and the outlook for JV debt costs and distributions.
- Debt maturities, revolver borrowing levels, covenant headroom and sensitivity to interest-rate changes.
- Actual spending, timing and financing for the Los Angeles development and remaining hotel capital improvements.
- Developments in the California litigation and the open IRS examination.
- The sustainability of the $0.11 monthly distribution relative to operating cash flow, capital needs and debt service; non-GAAP FFO and EBITDA measures are not measures of cash available for distributions.