Chatham Lodging Trust — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unless noted otherwise, dollar amounts are in millions. Chatham is a self-advised lodging REIT focused on upscale extended-stay and premium-branded select-service hotels. At quarter-end it owned 38 hotels with 5,680 rooms and held minority interests in two hotel joint ventures.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $79.7 | $78.3 | $226.6 | $209.7 |
| Operating income | $19.5 | $20.2 | $49.0 | $46.9 |
| Net income | $13.4 | $14.4 | $29.0 | $28.7 |
| Net income attributable to common shareholders | $13.4 | $14.3 | $28.8 | $28.5 |
| Diluted EPS | $0.34 | $0.37 | $0.74 | $0.74 |
| Adjusted FFO attributable to common shareholders | $27.4 | $29.3 | $71.8 | $71.5 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $69.9 | $64.7 |
Margins: Calculated GAAP operating margin was 24.4% in Q3 2016 versus 25.8% in Q3 2015, and 21.6% for the first nine months versus 22.4%. Q3 Adjusted Hotel EBITDA was $34.5 million, compared with $36.2 million a year earlier.
Cash, debt and liquidity: September 30 cash and cash equivalents were $13.5 million, with another $24.9 million in restricted cash. Debt before unamortized financing costs was $586.6 million, including $53.0 million drawn on the $250 million revolving facility; reported remaining facility availability was $197 million. Management reported 40.2% leverage, average debt cost of approximately 4.5%, and compliance with financial covenants; fixed-charge coverage was 3.40 against a 1.5 minimum. Nine-month investing cash outflow was $16.1 million and financing cash outflow was $61.3 million.
Changes versus comparable periods
- Q3 revenue rose 1.8%, but the three hotels acquired in 2015 contributed $3.5 million of the increase; revenue at the 35 comparable hotels fell $2.1 million. Comparable RevPAR declined 2.1%, as ADR rose 1.8% while occupancy fell 3.9%.
- Q3 operating income fell 3.7% and common-shareholder net income fell 6.7%; diluted EPS declined from $0.37 to $0.34. Higher comparable room costs, property taxes and lower joint-venture income weighed on results.
- Nine-month revenue increased 8.0%, largely because of four hotels acquired in 2015. Comparable RevPAR increased only 0.2%; comparable hotel operating expenses rose 2.6%. Net income increased modestly, while diluted EPS was unchanged.
- Nine-month operating cash flow increased to $69.9 million. Cash used for hotel improvements and additions was $17.1 million; management separately reported $22.8 million of hotel capital investments, including Silicon Valley expansions.
Outlook, risks and notable items
- Management projected full-year 2016 RevPAR to decline 0%–0.7% and Q4 RevPAR to decline 1.5%–3.5%. The filing cites moderating economic and corporate-demand trends and 6.0% third-quarter supply growth in the upscale segment, versus 1.6% across U.S. rooms overall. No broader revenue or earnings guidance is provided.
- Management expects lower hotel revenue, operating income and cash flow generally in the first and fourth quarters, with higher results in the second and third quarters. It said operating cash flow should support operating needs, interest and REIT distributions; longer-term needs may be funded with debt, equity or asset sales.
- Management expected $6.2 million of additional hotel renovation, discretionary and emergency spending for the rest of 2016. Planned expansions at three Silicon Valley hotels were estimated at $80–$85 million in total; $10.2 million had been spent by quarter-end.
- Risks include lodging demand and supply trends, operating-cost inflation, seasonality, interest rates and access to financing. The company may need to contribute capital to its joint ventures and could be responsible for certain pro rata debt amounts under customary guaranty carve-outs. No material litigation or material change in previously disclosed risk factors was reported.
- Related-party consideration: CEO and Chairman Jeffrey Fisher owns 51% of Island Hospitality Management, which managed 36 wholly owned hotels and hotels in both joint ventures. Five management agreements were amended in July, including an increase in base management fees from 2.5% to 3.0%.
- The quarterly distribution was $0.33 per common share; nine-month distributions were $0.97 per share. A valuation-allowance release contributed to the lower 2016 year-to-date effective tax rate.
Important facts for investors to verify
- How much of reported revenue growth reflects acquisitions, and whether comparable RevPAR and occupancy trends stabilize against increased upscale room supply.
- Whether room, labor and property-tax costs continue to outpace comparable-hotel revenue growth.
- Debt maturities, variable-rate exposure and revolver availability: the filing estimates that a 100-basis-point rate increase would add about $0.53 million of annual interest expense at the quarter-end revolver balance.
- Funding and returns for the planned Silicon Valley expansions, ongoing renovations and distributions; non-GAAP FFO and EBITDA measures do not represent operating cash flow or funds available for distributions.
- Joint-venture capital-call and guaranty exposure, related-party management arrangements, and the assumptions supporting management’s RevPAR outlook.