Chatham Lodging Trust — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. Chatham is a self-advised REIT focused on upscale extended-stay and select-service hotels. At quarter-end, it owned 30 hotels with 4,540 rooms and held minority interests in two joint ventures.
Key financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $60.7 million | $35.4 million | $144.6 million | $91.9 million |
| Operating income | $14.7 million | $6.0 million | $22.2 million | $13.8 million |
| Net income attributable to common shareholders | $8.7 million | $2.5 million | $72.2 million | $3.1 million |
| Diluted earnings per share | $0.31 | $0.11 | $2.67 | $0.15 |
| Adjusted FFO | $20.1 million | $10.8 million | $42.4 million | $24.1 million |
| Operating cash flow | Not separately reported | Not separately reported | $37.5 million | $22.0 million |
Q3 operating margin was approximately 24.2%, compared with 17.0% a year earlier, calculated from reported operating income and revenue. For comparable hotels, Q3 RevPAR rose 10.5% to $141.82, with occupancy of 88.1% and ADR of $160.44. For the nine months, comparable-hotel RevPAR increased 9.4% to $129.47.
Reported nine-month net income includes a $66.7 million gain from the Innkeepers/NewINK transaction; without that gain, reported earnings are not a like-for-like indicator of recurring performance. Adjusted FFO, a non-GAAP measure, increased for both periods. The company cautions that FFO and EBITDA measures are not substitutes for GAAP results or cash available for distributions.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $67.1 million; restricted cash was $15.3 million.
- Mortgage debt was $473.9 million, up from $222.1 million at year-end 2013. Revolver borrowings were zero, with $175 million of stated borrowing availability.
- Reported leverage was 37.5%, compared with 36.0% at December 31, 2013. The company reported compliance with financial covenants and a 3.02 fixed-charge coverage ratio.
- Nine-month investing cash outflow was $317.2 million, primarily for hotel acquisitions. Financing cash inflow was $342.5 million, supported by debt issuance and equity offerings.
- Common-share dividends were $0.08 monthly beginning in April 2014; declared distributions totaled $0.69 per share for the first nine months.
Material changes and unusual items
- Revenue growth reflected both acquisitions and stronger comparable-hotel performance. The company acquired four Silicon Valley hotels in June and the Cherry Creek Hyatt Place in August; it also added hotels during the second half of 2013.
- On June 9, 2014, the Innkeepers JV transaction transferred 47 hotels to the NewINK JV and resulted in Chatham acquiring four Silicon Valley hotels. The transaction generated the $66.7 million remeasurement and sale-related gain.
- A September follow-on offering of 6.9 million shares generated approximately $144.7 million in net proceeds. Shares outstanding increased to approximately 34.0 million at quarter-end from 26.3 million at 2013 year-end.
- Nine-month acquisition costs and other charges were $7.4 million, including $1.9 million related to an unsolicited offer and proxy-settlement matters.
Outlook, risks and contingencies
- Management projected 2014 RevPAR growth of 5.5%–7.5% at its hotels, with ADR expected to account for about 60% of growth. It cited industry RevPAR growth, economic conditions and limited new supply; this is operating outlook, not earnings guidance.
- A NorthStar joint venture had agreed to acquire a 52-hotel portfolio for approximately $1.1 billion. Chatham expected to hold a 10% interest and contribute equity, and was negotiating an option to buy four hotels from the portfolio for approximately $107 million. Closing was expected in Q4 2014.
- Management was considering redevelopment and expansion of the four Silicon Valley hotels, potentially adding 272 rooms at an estimated aggregate cost of $59 million; approvals and commencement timing were not certain.
- Risks discussed include lodging seasonality, economic and industry demand, competition, operating-cost increases, interest rates, and access to debt and equity financing. Management also noted that additional joint-venture capital calls could affect ownership interests. No material litigation was reported.
- Related-party consideration: Island Hospitality Management, 90% owned by the CEO, managed 28 wholly owned hotels and all NewINK JV hotels at quarter-end.
Important facts for investors to verify
- Reconcile the $66.7 million transaction gain to recurring performance and review adjusted FFO alongside GAAP cash flows.
- Confirm completion terms and financing for the Inland JV acquisition and the proposed four-hotel purchase. The filing gives differing expected JV financing and Chatham equity-contribution estimates: approximately $818 million and $28 million in the notes versus $860 million and $29 million in MD&A.
- Assess acquisition-driven leverage, refinancing and interest-rate exposure, covenant headroom, and the sustainability of dividends relative to operating cash flow and capital needs.
- Track comparable-hotel RevPAR, ADR, and occupancy against management’s 2014 outlook, separating same-hotel growth from the effects of acquired properties.
- Evaluate the proposed Silicon Valley expansion’s approvals, funding, expected returns, and execution risks, as well as the related-party hotel-management arrangements.