Chatham Lodging Trust annual report, FY2015

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Chatham Lodging Trust — FY 2015 Form 10-K

Reporting period: Year ended December 31, 2015; quarterly figures below refer to Q4 2015. Chatham is a REIT focused on upscale extended-stay and premium-branded select-service hotels. At year-end it owned 38 hotels with 5,678 rooms and held minority interests in the NewINK and Inland joint ventures.

Financial and operating performance

  • Revenue: $277.0 million, up 40.4% from $197.2 million. Growth included contributions from acquisitions; room revenue at hotels owned throughout both years increased $6.7 million, or 3.6%.
  • Hotel indicators: Comparable portfolio occupancy was unchanged at 81.6%; ADR rose 5.7% to $161.00 and RevPAR rose 5.8% to $131.41. Industry RevPAR rose 6.3%.
  • Profit: Operating income was $55.5 million versus $26.7 million. Net income attributable to common shareholders was $33.0 million, or $0.86 diluted per share, versus $66.9 million, or $2.30. The prior-year result included a $65.8 million gain tied primarily to the Innkeepers JV transaction.
  • Supplemental measures: Adjusted FFO was $87.6 million versus $55.1 million; adjusted EBITDA was $126.5 million versus $84.6 million. These non-GAAP measures are not substitutes for GAAP earnings or cash flow.
  • Q4: Revenue was $67.5 million versus $52.6 million; net income attributable to common shareholders was $4.5 million versus a $5.7 million loss. Diluted EPS was $0.12 versus $(0.16).
  • Cash flow: Operating cash flow was $81.8 million, compared with $49.3 million. Investing used $182.4 million, including $169.4 million for hotel acquisitions and $20.3 million for hotel improvements. Financing provided $106.5 million, including $120.8 million of share-issuance proceeds and $45.3 million of distributions.
  • Margins: Operating income was approximately 20.0% of revenue versus 13.5%. Management said comparable-property margins expanded as expense growth was below revenue growth. Hotel EBITDA was $117.6 million, approximately 42.5% of revenue; the filing cautions that non-GAAP measures do not reflect capital needs or debt service.
  • Debt and liquidity: Mortgage debt was $542.3 million and revolving-credit borrowings were $65.6 million, for total reported debt of $607.9 million. Leverage, as defined by the Company, declined to about 41% from 44%. Cash and cash equivalents were $21.0 million; restricted cash was $19.3 million. Revolver availability was $184.4 million under a $250 million unsecured facility. The Company reported covenant compliance and a 3.51x fixed-charge coverage ratio.
  • Distributions: Regular 2015 dividends totaled $1.20 per share; a separate $0.08 special dividend was declared in December and paid in January 2016. Selected financial data reports $1.28 declared per share for 2015, including that special dividend.

Material changes versus 2014

  • Revenue rose substantially, partly because four hotels were acquired in 2015 and prior-year acquisitions contributed for a fuller year. Same-property RevPAR growth of 5.8% was below the 6.3% industry increase.
  • Operating income and operating margin improved. GAAP net income fell by more than half, principally because 2014 included the $65.8 million JV-related gain; it is not a like-for-like decline in hotel operations.
  • Operating cash flow increased, while acquisition spending fell from the exceptionally high 2014 level. Total debt rose to $607.9 million from $550.2 million, while the stated leverage ratio decreased.
  • Regular monthly dividends increased from $0.08 per share in 2014 to $0.10 in 2015, with an additional $0.08 special dividend declared at year-end.

Outlook, risks and unusual items

  • Management projected 2016 hotel RevPAR growth of 3%–4%, with all projected growth coming from ADR; it cited expected GDP growth of approximately 2.3% and moderate new room supply. These are forward-looking estimates, not guarantees.
  • Expected 2016 capital improvements were approximately $19 million. Planned Silicon Valley hotel expansions were estimated at $80–$85 million, but final budgets were not available; the Mountain View 32-room expansion was progressing, and Sunnyvale work was expected to begin in late 2016.
  • The new unsecured revolver matures November 25, 2019, with a possible one-year extension. Its floating rate is LIBOR plus 155–230 basis points; covenants include a 60% maximum leverage ratio and 1.5x minimum fixed-charge coverage. Distribution limits may constrain dividends.
  • Key risks include lodging-cycle and supply changes, acquisition financing and capital needs, interest-rate exposure, franchise-required upgrades, reliance on third-party managers, and joint-venture capital calls or partner decisions. CEO Jeffrey Fisher owns 51% of IHM, which managed 36 of the Company’s 38 wholly owned hotels, creating related-party and manager-concentration risks.
  • A California wage-and-hour class action involving IHM and an affiliate remained pending. The Company recorded $171,000 as its estimated exposure and stated this was also its estimate of maximum possible loss. A Florida state tax examination of a TRS for 2009–2013 remained open; an unfavorable outcome could materially affect results, financial position or cash flows.
  • The Company reported no hotel impairment or properties held for sale at year-end. Management and the auditor concluded internal control over financial reporting was effective; the auditor issued an unqualified opinion on the financial statements.

Important facts for investors to verify

  • How much of revenue, earnings and cash-flow growth reflects acquisitions versus organic hotel performance, and whether RevPAR growth keeps pace with the industry.
  • Whether the $19 million planned capital program and $80–$85 million expansion estimate remain current, and how the projects will be funded.
  • Debt maturities, variable-rate exposure, revolver availability and compliance with financial and dividend covenants.
  • Progress and potential exposure in the California class action and Florida tax examination.
  • Terms, oversight and performance of IHM-related arrangements and the Company’s NewINK and Inland JV investments, including potential capital calls.
  • Dividend coverage from recurring cash generation after maintenance capital expenditures and debt service; the filing notes REIT distribution requirements do not ensure a particular dividend level.