Chatham Lodging Trust — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparative period is Q1 2017. Chatham is a self-advised lodging REIT focused on upscale extended-stay and premium-branded select-service hotels. At quarter-end it wholly owned 40 hotels with 6,020 rooms and held minority interests in two hotel joint ventures.
Financial and operating performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $74.0 million | $70.8 million | +4.5% |
| Operating income | $10.3 million | $12.0 million | -14.6% |
| Operating margin | 13.9% | 17.0% | Calculated from reported revenue and operating income |
| Net income | $2.9 million | $4.6 million | -38.2% |
| Net income attributable to common shareholders | $2.8 million | $4.6 million | Basic and diluted EPS: $0.06 vs. $0.12 |
| Adjusted FFO attributable to common shareholders and units | $16.5 million | $18.1 million | -8.5% |
| Adjusted EBITDA | $26.4 million | $28.1 million | -6.1% |
| Cash from operating activities | $13.4 million | $14.7 million | -8.4% |
| Cash, cash equivalents and restricted cash at quarter-end | $38.8 million | $36.9 million at year-end 2017 | |
| Total debt before unamortized financing costs | $541.2 million | $540.5 million at year-end 2017 |
Wholly owned same-property RevPAR fell 2.4% to $122.31, as occupancy declined 1.3% to 75.6% and ADR fell 1.2% to $161.74. By contrast, industry RevPAR increased 3.5%. Revenue growth reflected the three hotels acquired in 2017; comparable hotel room revenue declined 2.4%. Hotel operating expenses rose 9.5% to $39.7 million, with management citing acquired properties and increasing labor costs. Average diluted shares increased to 46.0 million from 38.6 million, contributing to the year-over-year EPS comparison.
Capital improvements were $6.9 million, versus $5.1 million a year earlier. Financing cash outflow included $15.3 million of distributions to shareholders and units. The quarterly distribution remained $0.33 per common share and LTIP unit.
Debt, liquidity and capital
- At March 31, debt comprised $507.2 million of property mortgage loans and $34.0 million drawn on the revolving credit facility. The company reported a 33.6% leverage ratio and an average debt rate of approximately 4.6%.
- The $250 million unsecured revolving facility had $216 million available. Chatham refinanced it in March 2018, extending maturity to March 2023 with a one-year extension option; management said pricing was reduced by 0–15 basis points versus comparable prior-facility pricing. The rate at its then-current leverage was LIBOR plus 1.65%.
- The company reported covenant compliance and a 3.2 fixed-charge coverage ratio, compared with a 1.5 minimum covenant. A 100-basis-point increase in variable rates was estimated to add approximately $0.3 million of annual interest expense, assuming the $34 million balance remained outstanding.
- Q1 share issuance through the dividend reinvestment and stock purchase plan generated $10.5 million gross proceeds from 466,497 shares. No shares were issued under the ATM plan during the quarter.
Outlook, risks and unusual items
- Management projected 2018 RevPAR change of -1.5% to +0.5% versus 2017. It cited healthy economic indicators but warned that room supply growth could pressure performance; upscale supply grew 6.0% in 2017, and industry-wide supply growth was projected at 2.0% for 2018.
- Management expected to spend a further $26.1 million on existing-hotel renovations and other capital expenditures during the remainder of 2018. Two planned Sunnyvale Residence Inn expansions were not yet scheduled; preliminary combined cost estimates were $80–$90 million and remained subject to change.
- Management expects seasonal softness in the first and fourth quarters and stronger results in the second and third quarters. Its liquidity outlook relies on operating cash, existing balances and facility borrowing as needed; longer-term needs may be met through borrowing, securities issuance or asset sales.
- The quarter included a $0.8 million loss from unconsolidated real estate entities, versus $0.1 million a year earlier, largely attributed to higher JV interest expense. The company reported no Q1 hotel impairment; it had recorded a $6.7 million impairment on its Washington, Pennsylvania hotel in 2017 and said further impairment could arise if performance or forecasts weaken.
- Two related California wage-and-hour class actions name hotel manager Island Hospitality Management. No class had been certified; the company estimated its exposure at $0.2 million, also its stated maximum possible loss as of March 31.
- Related-party consideration: Island Hospitality Management is 51% owned by CEO and Chairman Jeffrey Fisher and managed all 40 wholly owned hotels. Q1 fees paid or accrued to it were approximately $2.4 million.
Important facts for investors to verify
- Whether weak same-property RevPAR and expense growth persist, particularly against continued lodging supply increases.
- Whether the 2018 RevPAR outlook, remaining capital spending estimate and proposed Sunnyvale expansion costs and timing are updated.
- Debt maturities, variable-rate exposure, facility availability and compliance with covenants as borrowing or investment needs change.
- The effect of share issuance and distributions on per-share results, and whether operating cash flow supports the distribution and planned capital needs.
- Developments in the California litigation and performance, debt costs, capital requirements and potential contribution obligations associated with the unconsolidated joint ventures.