Chatham Lodging Trust — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Chatham is a lodging REIT focused on upscale extended-stay and premium select-service hotels. At quarter-end it owned 40 hotels with 6,092 rooms and held minority interests in two hotel joint ventures.
Financial and operating performance
- Q2 revenue: $87.9 million, up 2.9% from $85.4 million. Growth primarily reflected two hotels acquired in 2018; comparable-hotel room revenue declined.
- Q2 earnings: Operating income was $16.1 million versus $19.1 million; net income was $9.5 million versus $13.5 million; diluted EPS was $0.20 versus $0.29. Net margin was approximately 10.8%, compared with 15.8% a year earlier. The filing reports a $3.3 million loss on hotel sales in Q2 2019.
- Q2 hotel metrics: Same-property RevPAR fell 0.3%, as ADR declined 0.7% and occupancy increased 0.4%. Industry RevPAR rose 1.1%.
- Six-month results: Revenue was $163.6 million, up 3.3%; net income was $11.2 million versus $16.4 million; diluted EPS was $0.23 versus $0.35. Same-property RevPAR declined 0.7%. Adjusted FFO was $43.8 million versus $43.9 million.
- Cash flow: Six-month operating cash flow was $37.8 million, compared with $38.0 million. Investing used $13.8 million, including hotel improvements and development; financing used $29.4 million, including $31.2 million of shareholder and unit distributions.
- Margins and non-GAAP measures: Q2 operating margin after the hotel-sale loss was approximately 18.4% versus 22.4%; excluding that loss, it was approximately 22.1%. Q2 Adjusted EBITDA was $38.7 million versus $37.6 million. The company cautions that its non-GAAP measures are not substitutes for GAAP results or cash flow.
- Debt and liquidity: Debt before financing costs was $580.0 million, with an average interest rate of approximately 4.6%. Leverage was 34.2%. Cash, cash equivalents and restricted cash totaled $26.9 million, including $8.8 million of unrestricted cash; $171.0 million remained available under the $250 million revolver. The company was compliant with financial covenants; its fixed-charge coverage ratio was 3.2 against a 1.5 minimum.
- Distributions: Declared distributions were $0.33 per common share for Q2 and $0.66 for the first half, unchanged from the comparable 2018 amounts.
Changes, outlook and significant items
- Revenue growth was partly offset by softer comparable-property performance and higher operating costs. Q2 interest expense increased 7.0%, mainly due to greater revolver utilization; income from unconsolidated entities declined, principally because of higher floating-rate JV interest expense.
- The company sold hotels in Altoona and Washington, Pennsylvania, in May for combined proceeds of approximately $9.0 million; proceeds were used to repay the revolver. The sales generated a reported $3.3 million net loss in the quarter.
- Management projected 2019 RevPAR to decline 1.0%–2.0% from 2018, citing elevated room-supply growth, particularly in the upscale segment. It expected to spend a further $9.0 million on existing-hotel capital projects during the rest of 2019.
- Chatham was developing a Los Angeles hotel, with estimated total project costs of approximately $65 million; $10.8 million had been incurred by June 30. Management cautioned that development can face delays, cost overruns, permitting and financing risks.
- Management expected operating cash flow and available liquidity to cover near-term obligations and distributions, and cited capacity for acquisitions. Results are seasonal, generally stronger in the second and third quarters. The filing identifies economic conditions, lodging demand and supply, operating costs, interest rates, financing access and development execution as risks.
- Two California wage-and-hour class actions against hotel manager Island Hospitality Management remained pending; no class had been certified. The company recorded an estimated $0.1 million exposure for its indemnification obligations. An IRS examination of the TRS’s 2016 tax year also remained open; management had not recorded a liability.
- Adoption of lease accounting in 2019 added right-of-use assets and lease liabilities; at June 30, these were $21.6 million and $23.9 million, respectively.
Most important facts for investors to verify
- Whether comparable-hotel RevPAR and ADR stabilize against the company’s 2019 decline outlook and elevated upscale supply.
- Whether operating cash flow, capital spending and distributions remain sustainable, given first-half cash use in investing and financing.
- Revolver utilization, debt maturities and interest-rate exposure; management estimated a 100-basis-point rate increase would add about $0.8 million of annual interest expense at the quarter-end floating-debt balance.
- Los Angeles development budget, timing, funding and completion risks.
- Outcomes of the California litigation and IRS examination, and any resulting financial exposure.