Chatham Lodging Trust — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This annual filing also reports fourth-quarter results. Dollar figures below are in millions unless noted otherwise.
Business context and reporting period
Chatham is a self-managed REIT focused on upscale extended-stay and premium-branded select-service hotels. At year-end it owned 40 hotels with 6,092 rooms and held noncontrolling interests in two joint ventures owning 94 hotels. Its 10.3% NewINK JV and 10.0% Inland JV interests are accounted for under the equity method. All 40 wholly owned hotels were managed by Island Hospitality Management (IHM), which is 52.5% owned by CEO Jeffrey Fisher.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $328.3 | $324.2 |
| Operating income before hotel sale gains or losses | $56.7 | $58.2 |
| Net income | $18.9 | $30.9 |
| Net income attributable to common shareholders | $18.7 | $30.6 |
| Basic and diluted EPS | $0.39 | $0.66 |
| Net cash from operating activities | $86.2 | $86.2 |
| Capital improvements to existing hotels | $35.9 | $31.4 |
| Common dividends declared per share | $1.32 | $1.32 |
Revenue increased 1.3%, but operating income before hotel sale results declined 2.6%. Approximate operating margin on that basis was 17.3%, versus 17.9% in 2018; net margin declined to about 5.8% from 9.5%. These are calculations from reported GAAP figures. Adjusted FFO attributable to common share and unit holders was $87.8 million, down from $90.7 million.
Year-end cash and cash equivalents were $6.6 million, with $13.6 million in restricted cash. Total debt before unamortized financing costs was $586.9 million: $496.9 million of mortgage debt and $90.0 million drawn on the $250 million revolving facility. The company reported approximately 34.1% leverage, an average debt rate of 4.6%, and $160 million of remaining revolver availability; it was in compliance with financial covenants. The fixed-charge coverage ratio was 3.0 against a 1.5 covenant minimum.
Material changes versus the prior comparable period
- Same-property RevPAR for the 40 wholly owned hotels fell 1.6%, as occupancy decreased 0.3 percentage points to 80.2% and ADR fell 1.3% to $166.47. Industry RevPAR increased 0.9% in 2019, according to the filing.
- Annual revenue rose $4.1 million, largely reflecting a full year of contribution from two hotels acquired in 2018. Comparable hotels were down $3.0 million in total revenue; comparable room revenue declined $5.5 million, or 1.8%.
- Net income decreased $12.0 million. Key factors included a $5.5 million larger loss from unconsolidated real estate entities, higher interest expense, higher depreciation, and a $3.3 million loss on hotel sales versus a small loss in 2018.
- The company sold hotels in Altoona and Washington, Pennsylvania, in May 2019. It recorded a $4.4 million loss on the Altoona sale and a $1.1 million gain on the Washington sale.
- Three NewINK JV hotels and one Inland JV hotel were impaired by the ventures. Chatham recorded a $6.4 million loss from unconsolidated real estate entities, including $4.2 million of its share of JV impairment losses.
- Year-end total debt increased modestly from $585.1 million to $586.9 million before financing costs; cash from operations was essentially unchanged. Dividends remained $1.32 per share, but the tax characterization shifted to 77.0% ordinary income and 23.0% return of capital, versus 86.7% and 13.3%, respectively, in 2018.
Fourth-quarter results
For the quarter ended December 31, 2019, revenue was $74.7 million, compared with $77.0 million in fourth-quarter 2018. Operating income was $7.5 million versus $8.3 million. The company reported a $2.3 million net loss attributable to common shareholders, or a $0.05 loss per share, compared with a $0.2 million loss, or approximately break-even per share, in the prior-year quarter.
Outlook, commentary, risks and unusual items
- Management projected 2020 RevPAR change of -1.25% to +0.25% versus 2019, citing elevated supply growth in the upscale segment. Overall U.S. room supply grew 2.0% in 2019; upscale supply grew 4.9%.
- Management expected approximately $22.9 million of 2020 renovations and other capital expenditures for existing hotels. It was developing a Los Angeles hotel with estimated total costs of approximately $65 million, including land; $20.5 million had been incurred by year-end, leaving an estimated $44.5 million.
- Liquidity and financing risks include floating-rate revolver exposure, refinancing and maturity risk, and possible limits on distributions under debt covenants. A 100-basis-point increase in variable rates was estimated to raise annual interest expense by about $0.9 million, assuming the year-end $90 million balance. The company also identified the planned transition away from LIBOR after 2021 as a risk.
- Other material risks include hotel demand and room-supply fluctuations, labor and operating-cost inflation, recurring renovation needs, reliance on third-party managers and franchise brands, and joint-venture capital calls and limited decision control. IHM concentration and its CEO ownership create related-party and conflict-of-interest considerations.
- The filing discussed the emerging Coronavirus outbreak as a potential threat to travel and hotel demand; its effect was uncertain as of the report date. The filing also disclosed California wage-and-hour class actions involving IHM. Settlements in two cases were approved, with $0.1 million of estimated company exposure accrued; settlements in related cases were awaiting court approval, with $0.6 million accrued.
- The company adopted lease accounting in 2019, recording lease liabilities of $25.7 million and right-of-use assets of $23.1 million at adoption. This was an accounting presentation change, not a new financing source.
Most important facts for investors to verify
- Whether RevPAR and comparable hotel performance stabilize against continued upscale room-supply growth, and how actual 2020 results compare with the stated outlook.
- Whether projected hotel renovation and Los Angeles development costs remain within budget and can be funded without undue borrowing or equity dilution.
- The terms and outcomes of upcoming debt maturities, the LIBOR transition, and any changes in revolver availability or covenant headroom.
- The performance and capital needs of the two JVs, including the effect of recorded hotel impairments and any additional capital contributions or guarantee exposure.
- The resolution and final cost of IHM-related litigation, and the governance and economic implications of the CEO’s ownership of the manager that operates the portfolio.
- Dividend coverage by recurring cash flow after capital expenditures and debt service; GAAP net income, FFO and Adjusted FFO are not substitutes for cash available for distributions.