Chatham Lodging Trust — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Chatham is a REIT focused on upscale extended-stay and premium-branded select-service hotels. It owned 40 hotels with 6,020 rooms and held noncontrolling interests in two hotel joint ventures.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $86.6 million | $79.6 million | $160.6 million | $150.5 million |
| Operating income | $19.1 million | $10.9 million | $29.4 million | $22.9 million |
| Net income | $13.5 million | $5.1 million | $16.4 million | $9.7 million |
| Net income per diluted common share | $0.29 | $0.13 | $0.35 | $0.25 |
| Adjusted FFO attributable to common shareholders and units | $27.4 million | $25.2 million | $43.9 million | $43.3 million |
| Net cash provided by operating activities | — | — | $38.0 million | $36.6 million |
- Q2 operating margin was approximately 22.1%, versus 13.7% a year earlier; the comparison benefited from a $6.7 million impairment charge recorded in Q2 2017. No impairment was recorded in 2018.
- Revenue increased 8.7% in Q2 and 6.7% for the half year, with acquisitions contributing substantially. At 37 comparable hotels, room revenue rose 1.0% in Q2 but fell 0.5% for the six-month period.
- Comparable RevPAR increased 0.8% in Q2, reflecting 0.6% ADR growth and 0.2% occupancy growth. For the first half, RevPAR declined 0.7%, as ADR fell 0.2% and occupancy fell 0.5%.
- Hotel operating expenses increased 9.9% in Q2 and 9.7% for the first half, driven by acquired hotels and, at comparable properties, higher labor and repair costs.
- Six-month investing cash outflow was $9.9 million, including $12.8 million in hotel improvements and $2.8 million of JV distributions. Financing cash outflow was $28.6 million, including $30.7 million in shareholder and unit distributions.
Debt and liquidity
- At June 30, gross debt before unamortized issuance costs was $533.0 million, including $506.0 million of fixed-rate mortgage debt and $27.0 million drawn on the variable-rate revolver. Average debt cost was approximately 4.6%.
- Cash and cash equivalents were $8.1 million; restricted cash was $27.9 million. The $250 million revolving facility had $223 million available.
- Management reported a 33.3% leverage ratio and a 3.3 fixed-charge coverage ratio, compared with a 1.5 minimum covenant. The company was in compliance with its financial covenants.
- The revolver was refinanced in March 2018, extending maturity to March 2023, with a one-year extension option. At current leverage, its rate was LIBOR plus 1.65%.
- The declared distribution was $0.33 per common share for Q2 and $0.66 for the first half, unchanged from the comparable 2017 periods.
Outlook, risks and unusual items
- Management projected 2018 RevPAR change of negative 1.5% to flat versus 2017, citing expected supply growth. It noted U.S. upscale room supply grew 6.0% in 2017 and industry supply was projected to grow 2.0% in 2018.
- Management expected to spend a further $20.3 million on renovations, discretionary and emergency hotel expenditures during the rest of 2018. Proposed expansions at two Sunnyvale Residence Inns were not yet scheduled; estimated total cost was $80–$90 million, subject to approvals and cost justification.
- Management said operating cash flow, cash balances and available borrowing capacity should meet near-term needs, and anticipated access to debt, equity or asset-sale proceeds for longer-term needs. Hotel seasonality typically produces lower activity in the first and fourth quarters.
- Risks cited include lodging-market weakness and supply growth, rising operating costs, interest rates, financing availability, acquisition execution and estimation uncertainty. A hypothetical 100-basis-point increase in variable rates was estimated to add about $0.3 million of annual interest expense at the reported revolver balance.
- Two related California wage-and-hour class actions against hotel manager Island Hospitality Management remained uncertified. The company recorded an estimated $0.2 million exposure, stated also as its estimated maximum possible loss.
- The company’s CEO owned 51% of Island Hospitality Management, which managed all 40 wholly owned hotels and properties in both JVs. JV loan guarantees are generally limited to customary nonrecourse carve-outs, but may create exposure in specified circumstances.
- Other charges included costs for abandoned acquisition due diligence and Hurricane Harvey. The 2015 outperformance-plan LTIP awards failed to meet the required TSR measures and were forfeited; remaining related compensation expense will continue to be amortized.
Most important facts for investors to verify
- How much of revenue and earnings growth reflects the three 2017 hotel acquisitions, versus comparable-property performance; assess the first-half RevPAR decline against management’s full-year outlook.
- Whether expense growth, particularly labor, repairs and property taxes, continues to outpace comparable-property revenue growth.
- Funding, timing and expected returns for the Sunnyvale expansions and remaining 2018 capital spending.
- Debt maturity and refinancing exposure, variable-rate sensitivity, covenant headroom, and any potential capital calls or guarantee exposure from the JVs.
- Progress and potential developments in the California litigation, and the implications of the related-party hotel-management arrangement.