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 136 hotels wholly or through joint ventures, today announced results for the third quarter ended September 30, 2018. The company also provided updated guidance for 2018.
Third Quarter 2018 Key Metrics
- Portfolio Revenue per Available Room (RevPAR) – Increased 1.1 percent to $147, compared to the 2017 third quarter, for Chatham’s 40, comparable wholly owned hotels (excludes the Residence Inn Charleston Summerville which opened in August 2018). Average daily rate (ADR) declined 1.0 percent to $171, while occupancy rose 2.3 percent to 86 percent.
- Net Income - Improved $0.2 million to $14.7 million. Net income per diluted share was $0.31 versus $0.36 in the 2017 third quarter.
- Adjusted EBITDA – Advanced $1.4 million to $38.6 million, within guidance and compared to $37.2 million in the 2017 third quarter.
- Adjusted FFO – Rose $1.3 million, to $28.4 million, versus $27.0 million in the 2017 third quarter. Adjusted FFO per diluted share was $0.61, compared to guidance of $0.58-$0.62 per share.
- Operating Margins – Experienced a 90-basis point decline to 48.1 percent in comparable gross operating profit margins. Comparable Hotel EBITDA margins were off 110 basis points to 41.3 percent, within guidance range of 41 to 42 percent.
- Acquisition – Acquired the 96-room Residence Inn by Marriott Charleston Summerville, S.C., for $20.8 million, or approximately $217,000 per room.
Consolidated Financial Results
The following is a summary of the consolidated financial results for the three and nine months ended September 30, 2018. RevPAR, ADR and occupancy for 2018 and 2017 are based on the company’s 40 comparable hotels owned as of September 30, 2018
Operating Results
“Our third quarter results finished at the upper end of our FFO per share guidance expectations,” said Jeffrey H. Fisher, Chatham’s president and chief executive officer. “This was driven by RevPAR growth above our guidance expectations, despite tough comparisons at our eight hotels in Houston, Dallas and Florida that benefitted from hurricane-related business in the last month of the 2017 third quarter. Continuing a trend, we see improving conditions in many of our markets.”
Chatham’s six largest markets comprise approximately 60 percent of its hotel EBITDA. Third quarter RevPAR performance for these key markets:
- Silicon Valley RevPAR improved 1.5 percent to $205 at its four hotels.
- RevPAR at its two San Diego hotels increased 2.2 percent.
- Washington, D.C. RevPAR jumped 2.5 percent at its three hotels.
- RevPAR at its three coastal hotels in Maine and New Hampshire advanced 4.1 percent.
- At its four Houston hotels, RevPAR rose 2.5 percent.
- Two Los Angeles-area hotels experienced a 3.3 percent RevPAR increase.
“We will continue to face tough RevPAR comps in the 2018 fourth quarter as we will be comparing to strong results in Texas and Florida due to hurricane-related business in 2017. We are encouraged that October RevPAR is forecast to rise approximately 3 percent,” Fisher commented.
Gross operating profit margins were down 90 basis points to 48.1 percent at its 40 comparable hotels, compared to the 2017 third quarter. The primary reason for the margin decline was increased payroll and benefit costs.
At its 37 comparable Island-managed hotels, which further excludes hotels acquired in 2018 and 2017, gross operating profit margins were down 60 basis points to 48.4 percent. On a per occupied room basis, payroll and benefits costs increased 3.6 percent in the quarter, and this reduced margins by 70 basis points.
“From a trend perspective, the increase in third quarter payroll and benefit costs was 60 basis points below the 4.2 percent increase we experienced throughout 2017. We feel the most significant increases are behind us,” said Dennis Craven, Chatham’s chief operating officer. “Additionally, on the revenue side, in collaboration with Island Hospitality, we are continuing to benefit from the implementation of other revenue initiatives and room revenue management strategies.
“On the macro level, new supply in our scale market tracts is up 2.1 percent for the last twelve months, which would be the lowest level for our portfolio since 2014. If GDP growth remains healthy, our portfolio is well-positioned to experience enhanced RevPAR growth,” Craven concluded.
Strategic Capital Recycling Program and Hotel Investments
In August 2018, Chatham acquired at opening the new 96-room Residence Inn Charleston Summerville, S.C., for $21 million. The hotel sits adjacent to the 96-room Courtyard by Marriott that Chatham acquired in 2017. These hotels are located in Nexton, an emerging, mixed-use community in the heart of a rapidly expanding area just outside of Charleston. The hotels are the highest quality and closest accommodations to Volvo’s first American factory, which is expected to open later this year. Additionally, and importantly for continued economic expansion in the area, Volvo already has announced plans to expand the facility with a second production line with completion estimated in 2020.
Chatham funded the purchase using available cash and borrowings on its unsecured credit facility. The hotel is managed by Island Hospitality Management, which is 51 percent owned by Fisher. Chatham estimates it acquired the property at a year two net operating income capitalization rate of approximately eight percent.
During the third quarter, the company substantially completed the renovations of the Residence Inn Mountain View, Calif. The company commenced the renovation of the Homewood Suites Dallas, Texas, in the third quarter and expects to complete those improvements in the fourth quarter. Chatham intends to invest approximately $25 million renovating and upgrading its hotels in 2018.
Capital Markets & Capital Structure
As of September 30, 2018, the company had net debt of $524.5 million (total consolidated debt less unrestricted cash). Total debt outstanding was $534.8 million at an average interest rate of 4.6 percent, comprised of $504.8 million of fixed-rate mortgage debt at an average interest rate of 4.7 percent and $30.0 million outstanding on the company’s $250 million senior unsecured revolving credit facility, which currently carries a 4.2 percent interest rate.
Chatham’s leverage ratio was approximately 32.6 percent on September 30, 2018, 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, with the earliest maturity in 2021. As of September 30, 2018, Chatham’s proportionate share of joint venture debt and unrestricted cash was $165.4 million and $3.1 million, respectively. At Chatham’s current leverage level, the borrowing cost under the new facility is LIBOR plus 1.65 percent.
“During the quarter, we reduced our net debt by $0.4 million, bringing the year-to-date reduction to $6.6 million and lowered our leverage ratio to 33 percent,” remarked Jeremy Wegner, Chatham’s chief financial officer. “Our strategy remains to effectively recycle capital and be a net acquirer of assets in 2018. Year-to-date, we have not sold any hotels and acquired one hotel for $21 million. We will continue to harvest cash flow from operations and distributions from our joint ventures to reduce our net debt until we deploy capital into more accretive hotel investments.”
Joint Venture Investments
During the 2018 third quarter, the Innkeepers and Inland joint ventures contributed Adjusted EBITDA and Adjusted FFO of approximately $4.9 million and $2.5 million, respectively, compared to 2017 third quarter Adjusted EBITDA and FFO of approximately $4.9 million and $2.9 million, respectively. Both Adjusted EBITDA and Adjusted FFO were within the company’s previous guidance for the quarter. The decrease in adjusted FFO is attributable to increased interest expense driven by rising LIBOR borrowing rates.
Chatham received distributions from its joint venture investments of $1.4 million during the 2018 third quarter.
Dividend
Chatham currently pays a monthly dividend of $0.11 per common share. Chatham’s 2018 dividend per share of $1.32 represents approximately 69 percent of its 2018 adjusted FFO per share, based on the midpoint of its guidance for 2018.
2018 Guidance
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 2018 guidance reflects the following assumptions:
- Industrywide RevPAR growth of 2.5 to 3 percent in 2018
- Marriott International forecast North American RevPAR growth of 2 to 3 percent; Hilton Hotels & Resorts estimated North American RevPAR growth of 2 to 3 percent
- STR projected North American industry RevPAR growth of 2.9 percent
- Renovations commencing during the fourth quarter at the following hotels:
- Residence Inn Sunnyvale, Calif., #1; Residence Inn Tysons Corner, Va.; and the Homewood Suites Farmington, Conn.
- No additional acquisitions, dispositions, debt or equity issuance
About Chatham Lodging Trust
Chatham Lodging Trust is a self-advised, publicly-traded real estate investment trust focused primarily on investing in upscale, extended-stay hotels and premium-branded, select-service hotels. The company owns interests in 136 hotels totaling 18,616 rooms/suites, comprised of 41 properties it wholly owns with an aggregate of 6,117 rooms/suites in 15 states and the District of Columbia and a minority investment in two joint ventures that own 95 hotels with an aggregate of 12,499 rooms/suites. Additional information about Chatham may be found at chathamlodgingtrust.com.
