Chatham Lodging Trust — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Chatham is a self-advised hotel REIT focused on premium-branded, upscale extended-stay and select-service properties. At quarter-end it owned 23 hotels with 3,200 rooms and held minority interests in two joint ventures.
Financial results and key metrics
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $35.4 million | $27.0 million | $91.9 million | $76.2 million |
| Operating income | $6.0 million | $5.2 million | $13.8 million | $12.3 million |
| Operating margin | 17.0% | 19.4% | 15.0% | 16.1% |
| Net income | $2.5 million | $1.5 million | $3.1 million | $0.9 million |
| Diluted earnings per share | $0.11 | $0.10 | $0.15 | $0.05 |
| Adjusted FFO | $10.8 million | $6.4 million | $24.1 million | $15.2 million |
| Adjusted EBITDA | $15.6 million | $12.0 million | $38.7 million | $32.5 million |
Margins are calculated as reported operating income divided by revenue. Hotel RevPAR rose 3.8% in Q3 and 4.2% year to date; ADR increased 4.3% and 4.1%, respectively, while occupancy was 84.0% in Q3 (down from 84.5%) and 79.7% year to date (versus 79.8%). Excluding the Washington, D.C. hotel undergoing rebranding, RevPAR increased 6.5% in both periods.
Net cash provided by operating activities was $22.0 million for the first nine months, versus $10.4 million in 2012. Investing activities used $119.6 million, primarily for hotel acquisitions and improvements; financing activities provided $153.6 million. Cash and cash equivalents were $60.4 million at September 30, versus $4.5 million at year-end 2012.
Debt totaled $223.7 million at quarter-end: $175.2 million of mortgage debt and $48.5 million under the revolving facility. Management reported a 26% net-debt-to-hotel-investment-cost ratio, down from 51% at December 31, 2012, and compliance with covenants; the fixed-charge coverage ratio was 2.35x. The quarterly common distribution was $0.21 per share, or $0.63 year to date.
Material changes and drivers
- Revenue increased 31.0% for Q3 and 20.6% year to date. Management attributed most of the increase to five hotels not owned in the comparable 2012 periods; recently acquired hotels accounted for $8.0 million of the quarterly and $14.5 million of the nine-month revenue increase.
- Chatham acquired the Houston Courtyard, Pittsburgh Hyatt Place, Exeter Hampton Inn & Suites and Denver Tech Hilton Garden Inn in 2013 for total net assets of approximately $117.8 million. The acquisitions expanded the portfolio from 18 hotels at September 2012 to 23 at September 2013.
- Operating margin declined in both comparisons. Operating expenses, depreciation and acquisition-related charges increased as the portfolio grew; Q3 acquisition costs were $1.3 million and nine-month costs were $2.6 million.
- Interest expense fell 23.5% in Q3 and 25.4% year to date, reflecting loan refinancing, repayment of the Washington, D.C. mortgage and lower credit-facility borrowing costs. Year-to-date results included a $0.9 million loss on early debt extinguishment.
- Common shares issued and outstanding rose to 25.8 million from 13.9 million at year-end 2012, following three 2013 equity offerings. The September offering proceeds largely explain the elevated quarter-end cash balance.
Outlook, risks and unusual items
- Management projected 4% RevPAR growth at its hotels for 2013, with ADR expected to drive most of the increase. It cited industry forecasts of 5–6% RevPAR growth and expected lodging demand to exceed supply growth. This is operating commentary, not formal earnings guidance.
- Management expected to spend a further $1.2 million on hotel capital improvements during the remainder of 2013. It stated that operating cash, cash balances and, if needed, borrowing capacity should support near-term requirements and distributions; future acquisitions may require additional equity or debt.
- On October 1, 2013, Chatham repaid the $48.5 million revolver balance using offering proceeds. On October 31, it completed the $73.2 million acquisition of the 231-room Residence Inn Seattle Bellevue/Downtown, funded with available cash and revolver borrowings.
- The Washington, D.C. hotel’s renovations and period without a brand depressed reported RevPAR; it was rebranded as a Residence Inn on September 20, 2013. The Innkeepers JV’s debt refinancing generated a $9.3 million extinguishment/refinancing cost, of which Chatham’s share contributed to its JV loss.
- Management highlighted exposure to economic and lodging-market conditions, competition, operating-cost inflation, seasonality, interest rates and access to debt and equity capital. Hotel demand is generally lower in the first and fourth quarters. The company reported no material litigation and no material change to the prior annual report’s risk factors.
- Related-party consideration: the CEO owns 90% of Island Hospitality Management, which managed 21 of Chatham’s hotels and all Innkeepers JV hotels; Chatham disclosed management and related fees paid to the manager.
Important facts for investors to verify
- Separate acquisition-driven growth from same-property performance, including the impact and post-rebranding results of the Washington, D.C. hotel.
- Reconcile the post-quarter revolver repayment with the Bellevue acquisition funding, and monitor leverage, maturities and covenant headroom.
- Assess the recurring cash generation behind distributions, distinguishing operating cash flow from equity proceeds and joint-venture distributions.
- Review the joint-venture loss and distributions, including the effect of refinancing and financing-related distributions that may not recur.
- Evaluate dilution from the 2013 share offerings and governance/fee implications of the CEO-affiliated hotel manager.