WEST PALM BEACH, Fla.—Chatham Lodging Trust (NYSE: CLDT), a lodging real estate investment trust (REIT) that invests in upscale, extended-stay hotels and premium-branded, select-service hotels and owns 133 hotels wholly or through joint ventures, today announced results for the third quarter ended September 30, 2016. In addition, the company updated its guidance for 2016.
Third Quarter 2016 Key Metrics
- Net Income – Declined $0.9 million to $13.4 million. Net income per diluted share was $0.34, in line with the company’s revised guidance range of $0.33-$0.34 per share issued on October 10, 2016.
- Portfolio Revenue per Available Room (RevPAR) – Declined 2.1 percent, compared to the 2015 third quarter to $143 for Chatham’s 38, wholly owned hotels. Average daily rate (ADR) improved 1.8 percent to $170, and occupancy was down 3.9 percent to 84 percent.
- Adjusted EBITDA – Declined $2.2 million to $37.2 million.
- Adjusted FFO – Declined $1.9 million to $27.4 million. Adjusted FFO per diluted share was $0.71, within the company’s revised guidance of $0.70-$0.71 per share.
- Operating Margins – Experienced a 180 basis point reduction in comparable hotel gross operating profit margins (total revenue less total hotel operating expenses) to 50.6 percent, using comparable hotels regardless of ownership, and comparable hotel EBITDA margins dropped 310 basis points to 43.7 percent.
Consolidated Financial Results
The following is a summary of the consolidated financial results for the three and nine months ended September 30, 2016. RevPAR, ADR and occupancy for 2016 and 2015 are based on hotels owned as of September 30, 2016 ($ in millions, except per share, RevPAR, ADR, occupancy and margins):
Three Months Ended September 30,
Nine Months Ended September 30,
2016 2015 2016 2015 Net income $13.4 $14.4 $29.0 $28.7 Diluted net income per common share $0.34 $0.37 $0.74 $0.74 RevPAR $143 $146 $136 $136 ADR $170 $167 $165 $163 Occupancy 84% 87% 83% 83% Adjusted EBITDA $37.2 $39.4 $101.5 $100.5 GOP Margin 50.6% 52.4% 49.4% 51.0% Hotel EBITDA Margin 43.7% 46.8% 42.5% 44.8% AFFO $27.4 $29.3 $71.8 $71.5 AFFO per diluted share $0.71 $0.76 $1.86 $1.87 Dividends per share $0.33 $0.30 $0.97 $0.90
Operating Results
“Our 2015 third quarter was very strong with our occupancy reaching an historic high of 87 percent. Although we successfully increased room rates in the 2016 third quarter, our occupancy softened, resulting in a 2.1 percent RevPAR decline,” noted Jeffrey H. Fisher, Chatham’s president and chief executive officer. “Our RevPAR was adversely impacted more than expected due to restrained business travel, as well as new supply in several of our key markets and a significant worsening in demand in our oil-industry influenced Houston and western Pennsylvania markets. We have six hotels in those markets, and those properties experienced a 21 percent drop in RevPAR. Those markets negatively impacted our overall RevPAR performance by approximately 200 basis points, the major cause of our RevPAR decline.”
Third quarter RevPAR performance for certain key markets:
- Silicon Valley RevPAR rose 1.1 percent with a 7.2 percent increase in ADR
- RevPAR grew 3.7 percent at the four hotels acquired in 2015
- Denver hotels saw RevPAR rise 5.7 percent
- New supply was the primary driver behind RevPAR declines in the following markets:
- Homewood Suites Bloomington – 10.3 percent
- Residence Inn Anaheim – 10.2 percent
- Homewood Suites Carlsbad – 8.7 percent
- Homewood Suites Brentwood – 7.1 percent
“Our margins came under pressure as a result of weakening RevPAR combined with higher expenses related to wage and benefit costs, as well as rising guest acquisition costs, primarily from online travel agency commissions and guest rewards from the brands,” said Dennis Craven, Chatham’s chief operating officer. “The entirety of our margin decline was attributable to these expenses with wages and benefits impacting margins by approximately 120 basis points while guest acquisition costs increased 50 basis points.
“Given our unique relationship with Island Hospitality, we quickly implemented a number of cost saving initiatives to offset these challenges,” Craven said. “Some of these will not be fully realized until 2017, but our ability to implement changes swiftly is a strategic advantage.”
Joint Venture Investment Performance
During the quarter, the Innkeepers and Inland joint ventures contributed Adjusted EBITDA and Adjusted FFO of approximately $5.0 million and $3.1 million, respectively. For the nine months ended September 30, 2016, the joint ventures contributed Adjusted EBITDA and Adjusted FFO of approximately $13.3 million and $7.4 million, respectively.
Chatham received distributions of $2.5 million during the quarter from the joint ventures. For the nine months ended September 30, 2016, Chatham received distributions of $6.6 million from the joint ventures. Chatham invested $50.1 million for its approximate 10 percent interest in the two joint ventures.
Capital Markets & Capital Structure
As of September 30, 2016, the company had net debt of $573.1 million (total consolidated debt less unrestricted cash). Total debt outstanding was $586.6 million at an average interest rate of 4.5 percent, comprised of $533.6 million of fixed-rate mortgage debt at an average interest rate of 4.7 percent and $53.0 million outstanding on the company’s $250 million senior unsecured revolving credit facility, which currently carries an interest rate of 2.7 percent.
Chatham’s leverage ratio was approximately 40 percent at September 30, 2016, based on the ratio of the company’s net debt to hotel investments at cost. The weighted average maturity date for Chatham’s fixed-rate debt is February 2024. As of September 30, 2016, Chatham’s proportionate share of joint venture debt and unrestricted cash was $168.0 million and $3.0 million, respectively.
On September 30, 2016, as defined in the company’s credit agreement, Chatham’s fixed charge coverage ratio, including its interest in the two joint ventures, was 3.4 times, and total net debt to trailing 12-month corporate EBITDA was 5.8 times. Excluding its interests in the two joint ventures with NorthStar, Chatham’s fixed charge coverage ratio was 3.6 times, and net debt to trailing 12-month corporate EBITDA was 5.2 times.
“Our hotel investments continue to generate significant free cash flow, enabling us to reduce our debt by $14.3 million during the quarter and $21.3 million through the first nine months of the year,” said Jeremy Wegner, Chatham’s chief financial officer. “We will continue to use our free cash flow after capital expenditures to reduce debt. With our well-positioned capital structure, strong coverage ratios and low cost of debt, we are prudently leveraged and remain insulated should the industry remain challenged.”
Dividend
During the 2016 first quarter, Chatham’s Board of Trustees increased its regular monthly dividend by 10 percent, or $0.01 per common share, to $0.11 per common share. Chatham currently pays a monthly dividend of $0.11 per common share. “Our 2016 cash dividend per share of $1.30 represent approximately 58 percent of our estimated Adjusted FFO per share based on the midpoint of our current guidance. We believe the dividend is well supported,” Craven noted.
Hotel Reinvestments/Expansions
No renovations were undertaken during the 2016 third quarter other than finishing up the renovation at the Courtyard by Marriott in Addison, Texas.
The 32-room expansion of the Residence Inn Palo Alto Mountain View in Silicon Valley opened in early October. “The tower expansion increases our hotel room count in Mountain View by 29 percent. The property has long been a market leader, and this expansion gives it a further competitive advantage in a market with high barriers to entry, as well as multiple demand generators. Silicon Valley is anchored by some of the best companies in America, and the high tech industry is one of the strongest industries in our economy.
“This is the first of three development opportunities at existing properties that we believe will drive significant incremental shareholder value,” Fisher highlighted. “In Mt. View, we effectively utilized a parcel of vacant land that was acquired approximately three years ago for less than $100 per square foot, or less than $50 thousand per added room, and land values have skyrocketed since then. Including land, our all-in per room investment was approximately $300 thousand per room, significantly below market value.”
2016 Guidance
“We are reducing our full-year Adjusted EBITDA and FFO per share guidance by approximately 3 percent and our RevPAR growth range by 70-100 basis points, based on the current outlook for the hotel industry and our portfolio. We expect the trends that have impacted us through the third quarter will continue for the balance of 2016,” Fisher concluded.
The company provides guidance, but does not undertake to update it for any developments in its business. Achievement of the results is subject to the risks disclosed in the company’s filings with the Securities and Exchange Commission. The company’s guidance reflects the following:
- Opening of the 32-room tower in Mountain View, Calif., in October.
- Closure of the SpringHill Suites in Savannah, Ga., for approximately one week related to Hurricane Matthew.
- No additional acquisitions, dispositions, debt or equity issuance.
Q4 2016 2016 Forecast RevPAR $115-$117 $130-$131 RevPAR growth -3.5 to -1.5% -0.7 to 0.0% Total hotel revenue $64.0-$65.2 M $287.8-$289.0 M Net income $1.0-$2.0 M $29.8-$30.8 M Net income per diluted share $0.03-$0.05 $0.77-$0.80 Adjusted EBITDA $23.6-$24.6 M $125.1-$126.1 M Adjusted funds from operation ("FFO") $13.6-$14.6 M $85.5-$86.5 M Adjusted FFO per diluted share $0.35-$0.38 $2.21-$2.24 Hotel EBITDA margins 35.1-35.6% 40.9-41.0% Corporate cash administrative expenses $1.8 M $8.6 M Corporate non-cash administrative expenses $0.7 M $3.0 M Interest expense (excluding fee amortization) $6.8 M $27.2 M Non-cash amortization of deferred fees $0.4 M $1.3 M Income taxes $0.0 M $0.2 M Chatham’s share of JV EBITDA $2.9-$3.1 M $16.2-$16.4 M Chatham’s share of JV FFO $0.9-$1.2 M $8.3-$8.6 M Weighted average shares outstanding 38.8 M 38.8 M Funds from operations (FFO), Adjusted FFO (AFFO), EBITDA and Adjusted EBITDA are non-GAAP financial measures within the meaning of the rules of the Securities and Exchange Commission. See the discussion included in this press release for information regarding these non-GAAP financial measures.
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