Chatham Lodging Trust — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Chatham is a self-advised hotel REIT focused on premium-branded 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 joint venture owning 64 hotels.
Financial and operating results
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Total revenue | $22.8 million | $12.5 million |
| Operating income | $2.6 million | $0.8 million |
| Net loss attributable to common shareholders | $(1.7) million; $(0.13) per diluted share | $(19,000); $0.00 per share |
| Net cash from operating activities | $36,000 | $0.9 million |
| FFO / Adjusted FFO | $2.8 million / $2.9 million | $1.4 million / $1.5 million |
| EBITDA / Adjusted EBITDA | $8.1 million / $8.6 million | $2.2 million / $2.7 million |
Hotel portfolio ADR was $128.02, occupancy 76.7%, and RevPAR $98.25, compared with $123.54, 70.7%, and $87.37, respectively, in Q1 2011. Company RevPAR increased 12.5%; management attributed about two-thirds of the increase to occupancy. Hotel operating expenses were 58% of total revenue versus 63% a year earlier. Operating income margin was approximately 11.6%, compared with 6.0%.
At March 31, cash and cash equivalents were $8.8 million, with an additional $3.7 million of restricted cash. Debt totaled $223.0 million, down from $228.9 million at December 31, 2011; it included $62.0 million outstanding on the revolving facility and approximately $161.0 million of mortgage debt. The filing reports $23.0 million available under the facility in its liquidity discussion and maximum borrowing availability of $78.7 million in the debt note. The company was in compliance with financial covenants. Total assets were $447.4 million and total equity $213.6 million.
Changes and drivers versus prior year
- Revenue rose primarily because the company owned 18 hotels in Q1 2012 versus 13 in Q1 2011; the 2011 period excluded five hotels acquired during 2011. Pro forma revenue, as if those acquisitions had occurred at the start of 2011, was $19.9 million for Q1 2011.
- Interest expense increased to $3.8 million from $0.8 million, chiefly due to new or assumed loans and revolving-credit borrowings. Depreciation and amortization rose to $3.3 million from $1.4 million as the portfolio expanded. The company also recorded a $0.6 million share of loss from its unconsolidated JV.
- Operating cash flow was nearly zero. Investing cash flow of $12.7 million included $13.1 million of JV distributions, comprising $11.8 million of net proceeds from mortgage financing, partly offset by hotel improvements. Management cautioned that future JV distributions depend on hotel performance and potential asset sales.
Outlook, risks, and notable items
- Management projected 2012 portfolio RevPAR growth of 6%–8%, with ADR expected to contribute about two-thirds of growth; industry forecasts cited were 4%–7%. Management pointed to renovations at 13 of 18 hotels during 2011 and expected recovery of rooms previously unavailable, while noting actual results could differ.
- Management expected to spend an additional $7.7 million on hotel capital improvements in 2012. It said it expected to meet debt covenants during 2012 and anticipated funding near-term needs from operations, cash, and, if needed, the credit facility.
- Scheduled debt principal payments include $64.0 million in 2013, primarily associated with the revolving facility’s October 2013 maturity. The company’s long-term stated target is net debt below 35% of hotel investment at cost, while management said it was comfortable with higher leverage during the recovery.
- On May 7, 2012, the board approved an increase in the quarterly dividend from $0.175 to $0.20 per share beginning in Q2 2012. Q1 distributions of $0.175 per share/unit were paid April 27.
- Risks include hotel-industry seasonality, economic and lodging-demand changes, competition, operating-cost inflation, interest rates, access to financing, acquisition execution, and capital requirements. A hypothetical one-percentage-point increase in variable rates was estimated to add about $0.6 million of annual interest expense at the quarter-end balance.
- The company reported no material litigation and no material changes to the risk factors in its 2011 Form 10-K. The JV arrangement may require additional capital contributions; certain non-recourse debt carve-outs could create limited repayment exposure. Related-party manager Island Hospitality Management is 90% owned by the company’s CEO.
Important facts for investors to verify
- Reconcile the filing’s different descriptions of revolving-credit availability ($23.0 million available versus $78.7 million maximum borrowing availability) and confirm current borrowing-base capacity and covenant headroom.
- Review the 2013 revolving-facility maturity and refinancing plans, along with the company’s ability to fund capital spending, distributions, and debt service from recurring cash flow.
- Assess the sustainability and source of JV distributions, including the $11.8 million tied to mortgage financing, and the possibility of future capital calls or loss contributions.
- Compare reported GAAP results and operating cash flow with non-GAAP FFO, Adjusted FFO, and EBITDA; these supplemental measures are not measures of liquidity or cash available for distributions.
- Track whether projected 2012 RevPAR growth, occupancy recovery, and the planned $7.7 million of additional improvements materialize, while accounting for seasonality and the prior-year renovation comparison.