Chatham Lodging Trust — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparative period is Q1 2016. Chatham is a self-advised lodging REIT focused on upscale extended-stay and premium-branded select-service hotels. At quarter-end it wholly owned 38 hotels with 5,712 rooms and held noncontrolling interests in two hotel joint ventures. Unless stated otherwise, financial amounts below are USD.
Financial and operating performance
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Total revenue | $69.2 million | $68.9 million | Up 0.5% |
| Operating income | $12.0 million | $11.0 million | Up about 9% |
| Net income | $4.6 million | $3.3 million | Up about 40% |
| Net income attributable to common shareholders | $4.6 million | $3.3 million | Basic EPS $0.12 vs. $0.09; diluted EPS $0.12 vs. $0.08 |
| FFO attributable to common shareholders and unit holders | $18.1 million | $17.7 million | Adjusted FFO was $18.1 million vs. $17.7 million |
| Adjusted EBITDA | $28.1 million | $27.6 million | Adjusted Hotel EBITDA was $27.3 million vs. $26.6 million |
| Cash from operations | $14.7 million | $14.1 million | Investing cash outflow $4.1 million; financing cash outflow $9.9 million |
| Cash and cash equivalents | $12.8 million | $12.1 million at year-end 2016 | Restricted cash was an additional $24.1 million |
| Total debt before debt issuance costs | $588.0 million | $585.1 million at year-end 2016 | Average rate approximately 4.5%; reported leverage ratio 40.1% |
| Quarterly common-share distribution | $0.33 per share | $0.31 per share | $0.11 monthly |
Room revenue was $64.4 million, up 0.7%. Same-property occupancy declined 1.3% to 76.7%, while ADR rose 2.5% to $163.26; RevPAR increased 1.2% to $125.26. The company reported hotel operating expenses of $36.3 million, broadly flat year over year. Operating margin, calculated from reported figures, was approximately 17.4% versus 16.0% in Q1 2016.
Material changes and liquidity
- Net income improved primarily alongside higher operating income and a smaller loss from unconsolidated real estate entities: $85,000 versus $647,000. Q1 2017 included $317,000 of income tax expense, compared with none in the prior-year quarter.
- Operating cash flow was $14.7 million. Hotel improvements and additions used $5.1 million; management reported total hotel capital investment of $6.9 million for the quarter. Distributions to shareholders and units were $12.8 million.
- At March 31, the $250 million revolving facility had $56.5 million drawn and $193.5 million available. The company reported compliance with financial covenants and a fixed-charge coverage ratio of 3.40 against a 1.5 covenant minimum.
- Mortgage debt was fixed-rate; the revolving facility was variable-rate. Management estimated that a 100-basis-point increase in variable rates would add approximately $0.6 million in annual interest expense, assuming borrowings remained at $56.5 million.
Outlook, risks and notable items
- Management projected 2017 RevPAR change of -1.0% to +1.0% versus 2016, citing modest economic growth, moderating indicators and rising hotel supply. U.S. upscale supply grew 6.1% in Q1 2017; management cautioned that supply growth combined with slower corporate demand could pressure RevPAR.
- The company expected an additional $20.1 million of 2017 spending on existing-hotel renovations and other expenditures. Two proposed Residence Inn expansions in Sunnyvale were not yet scheduled; preliminary total cost was estimated at $75–$80 million, subject to change and approvals.
- Hotel demand is seasonal, generally weaker in the first and fourth quarters. Other stated risks include lodging-market competition and fundamentals, operating costs, interest rates, and access to debt or equity financing.
- The company may be required to contribute additional capital to its joint ventures and could have exposure under guarantees for certain customary non-recourse debt carve-outs. The JVs made no cash distributions to Chatham in Q1 2017.
- All 38 wholly owned hotels were managed by Island Hospitality Management, which is 51% owned by CEO and Chairman Jeffrey Fisher. IHM also managed all NewINK JV hotels and 34 Inland JV hotels. This related-party relationship merits attention.
- No material litigation was reported, and the filing stated there were no material changes to the risk factors in the 2016 Form 10-K. Management said disclosure controls were effective.
Important facts for investors to verify
- Whether actual 2017 RevPAR performance tracked management’s -1% to +1% outlook, particularly given occupancy declines and elevated upscale supply growth.
- Whether cash generation can sustain the distribution and planned capital spending, including the proposed Sunnyvale expansions and remaining 2017 renovation budget.
- Debt maturities, revolver usage, covenant headroom, and exposure to variable-rate increases; confirm the reported leverage measure and debt amounts against the filing’s detailed schedules.
- Joint-venture cash needs, guarantees and distributions, and the effects of the merger-related fair-value adjustments on equity-method results.
- Related-party management fees and governance oversight, including the CEO’s ownership of IHM and its role across the company and joint-venture hotels.