Chatham Lodging Trust — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual filing; selected fourth-quarter results are noted below. Chatham is a REIT focused on premium-branded upscale extended-stay and select-service hotels. It owned 25 hotels with 3,591 rooms at year-end and also held noncontrolling interests in two joint ventures.
Financial performance and position
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $126.2 million | $100.5 million |
| Operating income | $17.4 million | $14.7 million |
| Net income (loss) | $3.0 million | $(1.5) million |
| Basic and diluted EPS | $0.13 | $(0.12) |
| Net cash from operations | $31.6 million | $14.9 million |
| Cash used in investing activities | $235.2 million | $13.0 million |
| Cash provided by (used in) financing | $203.3 million | $(2.0) million |
| Cash and cash equivalents at year-end | $4.2 million | $4.5 million |
| Mortgage debt / revolving credit facility | $222.1 million / $50.0 million | $159.7 million / $79.5 million |
- Revenue grew 25.6%; reported hotel RevPAR increased 4.6%, with ADR up 3.8% and occupancy up 0.8 percentage points to 79.5%. Excluding the Washington, D.C. hotel undergoing renovations and rebranding, RevPAR rose 6.3%.
- Operating margin was approximately 13.8%, versus 14.6% in 2012; net margin was approximately 2.4%, versus a net loss in 2012. These figures reflect GAAP results and the acquired portfolio’s changing size.
- FFO was $26.5 million and adjusted FFO was $31.7 million, compared with $17.8 million and $18.1 million, respectively, in 2012. These are non-GAAP measures and are not substitutes for operating cash flow or liquidity.
- Year-end restricted cash was $4.6 million. The company reported $125 million of availability under its $175 million secured revolving credit facility.
- Dividends declared were $0.84 per common share for 2013, up from $0.775 in 2012. The Board authorized a $0.07 monthly dividend for the first quarter of 2014.
Material changes versus 2012
- Chatham grew its wholly owned portfolio from 19 to 25 hotels, acquiring six hotels during 2013 for approximately $229.6 million in aggregate cash consideration. The additions included hotels in Houston, Pittsburgh, Exeter, Denver, Bellevue and Savannah.
- Most of the revenue increase reflected acquired hotels. The filing attributes approximately $14.0 million of the increase in room revenue to six recently acquired hotels and $6.5 million to the Portland hotel acquired in late 2012.
- Hotel operating expenses rose 24.7%, broadly in line with revenue growth; excluding recently acquired hotels, the filing reports a 3.8% increase.
- Interest expense fell 20.9%, to $11.6 million, partly due to refinancing at lower rates and lower revolving-facility borrowings. The company also recorded a $0.9 million loss on early extinguishment of debt.
- Three common-share offerings and their over-allotments raised approximately $192.4 million net in 2013. Shares issued and outstanding increased from 13.9 million at year-end 2012 to 26.3 million at year-end 2013.
- Fourth-quarter revenue was $34.3 million versus $16.9 million in 2012; net income (loss) attributable to common shareholders was $(0.2) million versus $(2.4) million.
Outlook, risks and unusual items
- Management projected 2014 hotel RevPAR growth of 5%–6%, with most growth expected from ADR. It cited an improving lodging environment and expected growth in the broader economy, business travel and corporate profits. This is management’s expectation, not a guarantee.
- Management expected approximately $16.0 million of capital improvements to existing hotels in 2014. Capital needs may increase due to renovations, property-improvement plans, brand standards or regulatory requirements.
- The December 2013 amendment extended the $175 million revolving facility maturity to November 5, 2016, with a one-year extension option. The facility has financial covenants and limits distributions; the company reported compliance at year-end.
- Interest-rate exposure includes $50 million of floating-rate facility debt; the filing estimates a one-percentage-point rate increase would add approximately $0.5 million of annual interest expense, assuming that balance remains unchanged.
- The filing gives two year-end leverage-ratio figures: 38% in the business discussion and 36% in MD&A. The stated long-term target is below 35%, although the Board permitted temporarily higher leverage. The basis or reconciliation of the differing 2013 figures is not clear in the supplied filing text.
- Chatham’s joint ventures carried $969.0 million of mortgages and notes payable at year-end, while Chatham held minority interests and lacked sole control. Its Operating Partnership may bear pro rata exposure under certain non-recourse carve-out provisions.
- The company’s CEO owns 90% of Island Hospitality Management (IHM), which managed 23 wholly owned hotels and all 51 Innkeepers JV hotels. Chatham paid IHM approximately $3.4 million in management, revenue-management and accounting fees in 2013; the filing identifies potential conflicts of interest.
- An IRS examination of one taxable REIT subsidiary for tax years 2011 and 2012 remained open as of the filing date. Management did not record a liability, but an unfavorable result could materially affect results, financial position or cash flows.
- Other key risks include lodging-cycle and competition exposure, dependence on third-party managers and franchise brands, capital and refinancing needs, REIT qualification requirements, and environmental, ADA and insurance liabilities. The filing reported no material litigation and no hotel impairment at year-end.
- Management and the auditor concluded that internal control over financial reporting was effective as of December 31, 2013; the auditor issued an unqualified opinion on the financial statements.
Investor verification priorities
- Reconcile the 36% versus 38% leverage figures and confirm the calculation and applicable debt covenants.
- Review acquisition economics and comparable-property performance separately from growth attributable to new hotels, including the Washington, D.C. renovation and rebranding impact.
- Assess liquidity after planned capital spending, dividends and debt service; distinguish unrestricted cash from restricted cash and confirm facility availability and covenant headroom.
- Evaluate dilution from 2013 equity issuance and whether portfolio and FFO growth support per-share returns and the dividend.
- Review joint-venture leverage, capital-call provisions and potential guarantee exposure, as well as the announced 2014 decision by Innkeepers JV owners to offer all 51 hotels for sale.
- Assess related-party management arrangements with IHM and the status and potential exposure of the IRS examination.