Chatham Lodging Trust — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Chatham is a self-managed REIT focused on upscale extended-stay and select-service hotels. At quarter-end it owned 18 hotels with 2,414 rooms and held a 10.3% interest in a Cerberus joint venture that owned 59 hotels. Year-over-year results reflect a larger owned portfolio: 18 hotels in 2012 versus 13 at June 30, 2011.
Financial and operating performance
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $26.4 million; prior year $14.9 million | $49.2 million; prior year $27.4 million |
| Operating income (loss) | $4.4 million; prior year loss $1.3 million | $7.1 million; prior year loss $0.5 million |
| Net income (loss) attributable to common shareholders | $1.2 million, or $0.08 per diluted share; prior year loss $1.9 million, or $0.14 per share | Loss of $0.6 million, or $0.04 per diluted share; prior year loss $2.0 million, or $0.15 per share |
| Net cash from operating activities | $6.3 million for the first six months; prior year $3.6 million | |
| Cash and cash equivalents | $8.5 million at June 30, 2012; $4.7 million at December 31, 2011 | |
| Debt and revolver borrowings | $160.6 million of mortgage debt and $53.5 million drawn on the revolving facility at June 30; respective year-end balances were $161.4 million and $67.5 million |
For the comparable hotel portfolio, Q2 occupancy was 85.5% versus 83.1%, ADR was $132.23 versus $127.38, and RevPAR was $113.11 versus $105.79. For the six-month period, occupancy was 81.1% versus 76.9%, ADR was $130.24 versus $125.62, and RevPAR was $105.68 versus $96.63. Management reported RevPAR growth of 6.9% in Q2 and 9.4% for the first half.
Hotel operating expenses were 53% of revenue in Q2 versus 56% a year earlier, and 55% for the first half versus 59%. Management attributed the improvement partly to higher ADR and the acquired “5 Sisters” hotels’ higher gross operating margins. Q2 Adjusted FFO was $5.9 million versus $3.3 million; first-half Adjusted FFO was $8.8 million versus $4.8 million. These are non-GAAP measures and are not substitutes for cash flow or GAAP earnings.
Cash, liquidity, debt and distributions
- First-half operating cash flow was $6.3 million. Investing activities provided $17.7 million, principally from $19.2 million of JV distributions, partly offset by $3.9 million of hotel improvements. Financing activities used $20.2 million, including net revolver repayments and $4.9 million of shareholder and unit-holder distributions.
- The $85 million secured revolving facility had $53.5 million outstanding and $31.5 million available at quarter-end; maximum borrowing availability under its borrowing base was reported as $78.7 million. The facility matures October 2013. Chatham reported compliance with its financial covenants and expected to remain compliant through 2012.
- Scheduled principal payments include $55.5 million in 2013 and $134.7 million in 2016. The filing also reports $277.7 million of contractual obligations, including estimated interest and ground-lease payments.
- Management’s long-term target is net debt to hotel investment cost below 35%, while stating it considered temporarily higher leverage acceptable during the lodging recovery. A 1 percentage-point increase in variable rates was estimated to add about $0.5 million of annual interest expense, assuming revolver borrowings stayed at $53.5 million.
- Quarterly distributions rose to $0.20 per common share and LTIP unit from $0.175 in 2011 and Q1 2012. The second-quarter distributions were paid July 27, 2012.
Outlook, commentary and risks
- Management projected 2012 company RevPAR growth of 6%–8%, with roughly two-thirds expected from ADR growth. It cited renovations at 13 of 18 hotels in 2011 and anticipated market-share gains. Industry analysts’ 2012 RevPAR forecast was 4%–7%. These are forward-looking expectations, not guaranteed results.
- Management expected an additional $4.4 million of 2012 capital improvements. It said short-term liquidity needs were expected to be met from operations, cash and, if needed, revolver borrowings; longer-term needs could require borrowing, securities issuance or asset sales. No full-year earnings or revenue guidance was provided.
- Hotel results are seasonal, generally stronger in the second and third quarters. Risks cited include economic and lodging-market weakness, competition, operating-cost increases, interest rates, access to financing and acquisition execution. The filing noted possible additional capital contributions to the JV and potential non-recourse carve-out liabilities. Future JV distributions depend on hotel operations and possible asset sales.
- The CEO owns 90% of Island Hospitality Management, which managed 15 Chatham hotels and 58 JV hotels; related management and accounting fees were $1.0 million for the first half. A fire occurred at the White Plains hotel in Q1; insurance coverage was accepted and management did not expect a casualty loss. The company reported no material litigation and no material risk-factor changes.
Key facts for investors to verify
- How much of reported revenue and earnings growth reflects the enlarged portfolio versus same-hotel operating improvement.
- The source, recurrence and timing of JV distributions, including proceeds from mortgage financing and hotel sales, and whether future distributions or capital calls affect liquidity.
- Ability to refinance or repay the revolver at its October 2013 maturity and manage the substantial scheduled 2016 mortgage principal.
- Whether the 6%–8% RevPAR outlook and planned capital spending are achieved, and how renovation-related comparisons affect reported growth.
- The terms and oversight of related-party management arrangements, and the effect of distributions on cash available for debt service and investment.