Chatham Lodging Trust — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods. Chatham is a REIT focused on upscale extended-stay and premium-branded select-service hotels. At quarter-end it owned 38 hotels with 5,712 rooms and held noncontrolling interests of 10.3% in the NewINK joint venture and 10.0% in the Inland joint venture.
Financial and operating performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $77.9 million | $78.0 million | $147.1 million | $146.9 million |
| Operating income | $10.9 million | $18.6 million | $22.9 million | $29.6 million |
| Net income attributable to common shareholders | $5.0 million | $12.2 million | $9.6 million | $15.5 million |
| Diluted EPS | $0.13 | $0.31 | $0.25 | $0.40 |
| Operating cash flow | Not separately presented | Not separately presented | $36.6 million | $39.6 million |
| Adjusted Hotel EBITDA | $32.6 million | $34.1 million | $59.9 million | $60.7 million |
Q2 same-property RevPAR declined 0.5% to $140.06: ADR rose 2.9% to $169.06, while occupancy fell 3.3% to 82.8%. For the first half, RevPAR increased 0.3% to $132.70, with ADR up 2.7% and occupancy down 2.3%. The filing reports no operating margin figure.
At June 30, cash and cash equivalents were $12.8 million, with $25.0 million of restricted cash. Total debt was $575.5 million before unamortized debt costs (carrying value $573.1 million); the company reported an average debt rate of approximately 4.6%, leverage of 38.8%, and $205.0 million of undrawn capacity under its $250 million revolving facility. Its fixed-charge coverage ratio was 3.30 against a 1.5 covenant minimum, and it was in compliance with financial covenants. Six-month capital improvements to wholly owned hotels were approximately $13.8 million per MD&A; cash flow investing outlays for hotel improvements were $12.9 million.
The company declared $0.33 per common share for Q2 and $0.66 for the first half, at a current monthly rate of $0.11 per share. Six-month investing cash outflow was $17.1 million and financing cash outflow was $18.8 million.
Material changes versus prior periods
- Revenue was nearly flat in Q2 and up 0.2% for the first half, while wholly owned hotel RevPAR softened in Q2 despite higher rates, as lower occupancy offset ADR growth.
- Operating income and net income declined materially, principally because of a $6.7 million impairment charge on the Washington SHS, Pennsylvania hotel, following weaker performance and continued economic weakness. The charge was recorded in both Q2 and first-half results.
- Q2 hotel operating expenses rose 2.9% to $39.1 million; management cited higher bonuses, utilities and management fees. First-half hotel operating expenses rose 1.6%.
- Adjusted Hotel EBITDA declined 4.5% in Q2 and 1.4% for the first half. Six-month operating cash flow fell by $3.0 million year over year.
- Common shares issued and outstanding increased to 39.2 million from 38.4 million at year-end, including shares sold through the ATM and dividend reinvestment plans.
Outlook, risks and unusual items
- Management projected 2017 RevPAR change of -1.0% to +1.0% versus 2016. It cited moderating economic indicators, slowing corporate demand, and rising supply; year-to-date 2017 U.S. upscale room supply growth was reported at 6.0%.
- Management expected approximately $13.1 million of additional renovations and other hotel expenditures for the remainder of 2017. Planned expansions at two Sunnyvale Residence Inns were not yet scheduled; estimated total cost was $75 million to $80 million, subject to change and approvals.
- The NewINK JV refinanced its hotel loan with an $850 million non-recourse loan at LIBOR plus 2.79%; the Inland JV refinanced with a $780 million non-recourse loan at LIBOR plus 3.3%. Chatham contributed $5.0 million to Inland JV to reduce its debt. Both loans have initial maturities in 2019 and three one-year extension options.
- The Operating Partnership has customary carve-out and environmental guarantees related to JV debt. Potential exposure can be significant in specified circumstances; most guarantees are capped at 15% of NewINK debt or 20% of Inland debt, subject to stated exceptions. The JVs may also require additional capital contributions.
- IHM, 51% owned by Chatham’s CEO, managed all 38 wholly owned hotels, all NewINK hotels and 34 Inland hotels. The related-party management arrangement and fees are disclosed in the filing.
- Management said it expected operating cash flow and available liquidity to meet short-term needs and expected covenant compliance for the remainder of 2017. It identified access to debt and equity financing, lodging demand and costs, interest rates, and acquisition opportunities among forward-looking risks. No material litigation or material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- Review the impairment valuation and the Washington SHS hotel’s subsequent operating performance, as further impairment may be possible if results or forecasts deteriorate.
- Track occupancy, ADR and RevPAR against management’s 2017 outlook and the industry’s supply and demand trends.
- Confirm the timing, approvals, budgets and funding plan for the proposed Sunnyvale expansions and planned 2017 hotel capital spending.
- Assess JV refinancing terms, potential capital calls, guarantee exposure and the company’s related-party management arrangements.
- Monitor debt maturities, variable-rate borrowing costs, covenant headroom, equity issuance and whether operating cash flow supports distributions and capital requirements.