Chatham Lodging Trust Announces Third Quarter 2019 Results

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 135 hotels wholly or through joint ventures, today announced results for the third quarter ended September 30, 2019. The company also updated its full-year guidance for 2019 and provided 2019 fourth quarter guidance.

Third Quarter 2019 Highlights and Key Metrics

• Portfolio Revenue per Available Room (RevPAR) - Declined 0.3 percent to $148, compared to the 2018 third quarter, for Chatham’s 40 comparable wholly owned hotels. Average daily rate (ADR) rose 0.5 percent to $173.4, and occupancy lessened 0.8 percent to 85.2 percent.
• Net Income - Declined $4.6 million to $10.1 million, compared to the 2018 third quarter, driven by the company’s proportionate share of impairment losses in its unconsolidated joint ventures. Net income per diluted share was $0.21 versus $0.31 for the same period a year earlier.
• Adjusted EBITDA - Rose $0.8 million, or 2.0 percent higher than the 2018 third quarter, to $39.4 million, above the company’s guidance of $37.1-$39.1 million.
• Adjusted FFO - Improved $0.2 million, to $28.6 million, versus $28.4 million in the 2018 third quarter. Adjusted FFO per diluted share was $0.60, exceeding the upper end of the company’s guidance of $0.55-$0.59 per share.
• Operating Margins -For its 40 comparable hotels, despite a RevPAR decline, comparable gross operating profit margins increased 10 basis points to 48.2 percent versus the 2018 third quarter. Hotel EBITDA margins declined 10 basis points to 41.2 percent over the same period last year.

The following chart summarizes the consolidated financial results for the three and nine months ended September 30, 2019 and 2018 based on all hotels owned during those periods ($ in millions, except margin percentages):

The below chart summarizes key hotel financial statistics for the 40 comparable hotels owned as of September 30, 2019 (does not include two hotels sold earlier this year):

Operating Results

“Third quarter RevPAR declined slightly and finished at the upper end of our guidance range as RevPAR in our four largest markets experienced solid gains in the quarter, but those gains were offset by weakness in Houston and Los Angeles,” said Jeffrey H. Fisher, Chatham’s president and chief executive officer. “Additionally, our three Boston hotels experienced a RevPAR decline of 6.3 percent as two of those hotels benefitted from demand related to the Boston area gas explosions during the latter half of September 2018. Excluding the four hotels under renovation during the 2019 third quarter, 24 of our 36 hotels experienced RevPAR growth in the quarter.”

Chatham’s six largest markets comprise approximately 60 percent of its hotel EBITDA. Third quarter 2019 RevPAR performance for these key markets include:

• Silicon Valley RevPAR advanced 4.6 percent excluding the San Mateo hotel which was under renovation.
• RevPAR at its two San Diego properties increased 0.9 percent to $180.
• Washington, D.C. RevPAR improved 5.4 percent to $152 at its three hotels.
• RevPAR at its three coastal hotels in Maine and New Hampshire advanced 3.8 percent, driven by strong leisure demand.
• At its four Houston hotels, RevPAR decreased 16.8 percent to $84.
• The two Los Angeles-area hotels experienced a 4.9 percent RevPAR decline to $174.

“We were very pleased with our hotel operating performance in the quarter as we continue to collaborate with Island Hospitality on a daily basis to increase revenue and reduce operating expenses or minimize increases, and this supports our thesis that we operate a best-in-class platform,” said Dennis Craven, Chatham’s chief operating officer. “It really is remarkable to increase margins despite a RevPAR decline. That outperformance enabled us to beat the upper end of our EBITDA and FFO guidance. Other revenue was up 22 percent in the quarter, driven primarily by incremental parking revenue. On the operating expense side, previously implemented programs focused on reducing repairs and maintenance expenses helped us reduce those costs $0.1 million in the quarter and improved margins by approximately 20 basis points.”

On a per occupied room basis at its 40 comparable Island-managed hotels, payroll and benefits costs increased 1.5 percent in the 2019 third quarter. Payroll costs per occupied room rose 4.3 percent in the quarter, yet benefits costs were down 7.6 percent.

Strategic Capital Recycling Program and Hotel Investments

During the 2019 third quarter, the company substantially completed the renovations of the Courtyard by Marriott Houston, Texas (West University) and the Hampton Inn and Suites Houston, Texas (Medical Center) and commenced the renovations of the Residence Inn Fort Lauderdale, Fla. The company will commence renovations of the Residence Inn Sunnyvale, Calif., #2, during the 2019 fourth quarter with expected completion in the 2020 first quarter.

Looking ahead to 2020, Chatham plans to renovate only four hotels comprising 554 rooms, compared to six hotels encompassing 814 rooms that underwent renovation in 2019 which includes two hotels with approximately 408 rooms located in Silicon Valley.

Hotel under Development

Development on a very select basis is part of Chatham’s long-term growth strategy. Chatham is developing and has begun construction on a hotel in the Warner Center submarket of Los Angeles, Calif., on a parcel of land owned by the company. The company expects the total development costs to be approximately $65 million, inclusive of land of $6.6 million. Including land, the company has incurred costs to date of $15.2 million. The hotel site is well located within Warner Center, an urban community consisting of more than 10 million square feet of office space, approximately eight million square feet of retail space and 20,000 residents. The surrounding area employs more than 50,000 people. Under the Warner Center 2035 plan, it is expected to more than double these metrics.

Capital Markets & Capital Structure

As of September 30, 2019, the company had net debt of $574.9 million (total consolidated debt less unrestricted cash). Total debt outstanding was $585.1 million at an average interest rate of 4.5 percent, comprised of $499.1 million of fixed-rate mortgage debt at an average interest rate of 4.7 percent and $86.0 million outstanding on the company’s $250 million senior unsecured revolving credit facility, which currently carries a 3.7 percent interest rate.

Chatham’s leverage ratio was approximately 34.0 percent on September 30, 2019, 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, 2019, Chatham’s proportionate share of joint venture debt and unrestricted cash was $165.4 million and $5.3 million, respectively. At Chatham’s current leverage level, the borrowing cost under its credit facility is LIBOR plus 1.65 percent.

On September 30, 2019, as defined in the company’s credit agreement, Chatham’s fixed charge coverage ratio, including its interest in the two joint venture portfolios with Colony Capital, was 3.2 times, and total net debt to trailing 12-month corporate EBITDA was 5.5 times. Excluding its interest in the two joint ventures, Chatham’s fixed charge coverage ratio was 3.5 times, and net debt to trailing 12-month corporate EBITDA was 4.9 times.

Joint Venture Investments

During the 2019 third quarter, the Innkeepers and Inland joint ventures contributed Adjusted EBITDA and Adjusted FFO of approximately $5.0 million and $2.6 million, respectively, compared to the 2018 third quarter Adjusted EBITDA and FFO of approximately $4.9 million and $2.5 million, respectively. Adjusted EBITDA and Adjusted FFO were within the company’s previous guidance for the quarter.

Dividend

Chatham currently pays a monthly dividend of $0.11 per common share. Chatham’s estimated 2019 dividend per share of $1.32 represents approximately 73 percent of adjusted FFO per share based upon the midpoint of its 2019 guidance.

2019 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.

“As expected and consistent with our initial guidance for 2019, the fourth quarter presents very tough RevPAR comparisons due to a few one-time events that benefitted us in 2018 when our RevPAR rose 4.1 percent. We have outlined those one-time occurrences in our guidance assumptions. Our fourth quarter projected RevPAR decline of 5.0 to 6.5 percent does not reflect a stabilized operating trend of our portfolio. Since last quarter, we have increased the midpoint of our full-year adjusted EBITDA, FFO and FFO per share and our current forecast is actually higher than our initial 2019 guidance provided in February when you factor in the impact of selling two hotels in 2019,” Fisher concluded.

The company’s fourth quarter 2019 guidance reflects the following assumptions:

• Fourth quarter RevPAR is expected to be adversely impacted by significant one-time events that occurred in certain of its markets during the 2018 fourth quarter:
  • Approximately 330 basis points due to non-recurring demand at four of its hotels related to the Boston area gas explosions in the 2018 fourth quarter resulting in RevPAR growth of 36 percent at those hotels.
  • 70 basis points related to renovation delays at its San Mateo, Calif. Residence Inn that was expected to be completed by the end of the 2019 third quarter.
  • 70 basis points due to a very tough comp at its two San Diego hotels that benefitted from one-time border patrol business. RevPAR at those two hotels was up 34 percent in the 2018 fourth quarter.
• The loss in hotel operating income from the sale of the Courtyard by Marriott Altoona, Pa., and the SpringHill Suites by Marriott Washington, Pa. during the second quarter.
• Renovations commencing or ongoing at the following hotels during the 2019 fourth quarter:
  • Residence Inn San Mateo, Calif. and the Residence Inn Sunnyvale, Calif., #2, in the fourth quarter
• No additional acquisitions, dispositions, debt or equity issuance

Earnings Call

The company will hold its third quarter 2019 conference later today at 10:00 a.m. Eastern Time. Shareholders and other interested parties may listen to a simultaneous webcast of the conference call on the Internet by logging onto either www.chathamlodgingtrust.com or www.streetevents.com or may participate in the conference call by dialing 1-877-407-0789 and referencing Chatham Lodging Trust. A recording of the call will be available by telephone until 11:59 p.m. ET on Thursday, November 7, 2019, by dialing 1-844-512-2921, reference number 13694986. A replay of the conference call will be posted on Chatham’s website.

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 135 hotels totaling 18,592 rooms/suites, comprised of 40 wholly-owned properties with an aggregate of 6,092 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 12,500 rooms/suites. Additional information about Chatham may be found at chathamlodgingtrust.com.

Non-GAAP Financial Measures

Included in this press release are certain “non-GAAP financial measures,” within the meaning of Securities and Exchange Commission (SEC) rules and regulations, that are different from measures calculated and presented in accordance with GAAP (generally accepted accounting principles). The company considers the following non-GAAP financial measures useful to investors as key supplemental measures of its operating performance: (1) FFO, (2) Adjusted FFO, (3) EBITDA, (5) EBITDAre (6) Adjusted EBITDA and (7) Adjusted Hotel EBITDA. These non-GAAP financial measures should be considered along with, but not as alternatives to, net income or loss as prescribed by GAAP as a measure of its operating performance.

FFO As Defined by NAREIT and Adjusted FFO

The company calculates FFO in accordance with standards established by the National Association of Real Estate Investment Trusts (NAREIT), which defines FFO as net income or loss (calculated in accordance with GAAP), excluding gains or losses from sales of real estate, impairment write-downs, the cumulative effect of changes in accounting principles, plus depreciation and amortization (excluding amortization of deferred financing costs), and after adjustments for unconsolidated partnerships and joint ventures following the same approach. The company believes that the presentation of FFO provides useful information to investors regarding its operating performance because it measures its performance without regard to specified non-cash items such as real estate depreciation and amortization, gain or loss on sale of real estate assets and certain other items that the company believes are not indicative of the property level performance of its hotel properties. The company believes that these items reflect historical cost of its asset base and its acquisition and disposition activities and are less reflective of its ongoing operations, and that by adjusting to exclude the effects of these items, FFO is useful to investors in comparing its operating performance between periods and between REITs that also report using the NAREIT definition.

The company calculates Adjusted FFO by further adjusting FFO for certain additional items that are not addressed in NAREIT’s definition of FFO, including other charges (2018 includes expenses related to the previously planned Silicon Valley expansions that the Company is no longer actively pursuing), losses on the early extinguishment of debt and similar items related to its unconsolidated real estate entities that it believes do not represent costs related to hotel operations. The company believes that Adjusted FFO provides investors with another financial measure that may facilitate comparisons of operating performance between periods and between REITs that make similar adjustments to FFO.

EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA

The company calculates EBITDA for purposes of the credit facility debt as net income or loss excluding: (1) interest expense; (2) provision for income taxes, including income taxes applicable to sale of assets; (3) depreciation and amortization; and (4) unconsolidated real estate entity items including interest, depreciation and amortization excluding gains and losses from sales of real estate. The company believes EBITDA is useful to investors in evaluating and facilitating comparisons of its operating performance because it helps investors compare the company’s operating performance between periods and between REITs by removing the impact of its capital structure (primarily interest expense) and asset base (primarily depreciation and amortization) from its operating results. In addition, the company uses EBITDA as one measure in determining the value of hotel acquisitions and dispositions.

The company calculates EBITDAre in accordance with NAREIT guidelines, which defines EBITDAre as net income or loss excluding interest expense, income tax expense, depreciation and amortization expense, gains or losses from sales of real estate, impairment, and adjustments for unconsolidated joint ventures. We believe that the presentation of EBITDAre provides useful information to investors regarding the Company's operating performance and can facilitate comparisons of operating performance between periods and between REITs.

The company calculates Adjusted EBITDA by further adjusting EBITDA for certain additional items, including other charges (2018 includes expenses related to the previously planned Silicon Valley expansions that the Company is no longer actively pursuing), losses on the early extinguishment of debt, amortization of non-cash share-based compensation and similar items related to its unconsolidated real estate entities, which it believes are not indicative of the performance of its underlying hotel properties entities. The company believes that Adjusted EBITDA provides investors with another financial measure that may facilitate comparisons of operating performance between periods and between REITs that report similar measures.

Adjusted Hotel EBITDA is defined as net income before interest, income taxes, depreciation and amortization, corporate general and administrative, impairment loss, loss on early extinguishment of debt, interest and other income and income or loss from unconsolidated real estate entities. The Company presents Adjusted Hotel EBITDA because the Company believes it is useful to investors in comparing its hotel operating performance between periods and comparing its Adjusted Hotel EBITDA margins to those of our peer companies. Adjusted Hotel EBITDA represents the results of operations for its wholly owned hotels only.

Although the company presents FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA because it believes they are useful to investors in comparing the company’s operating performance between periods and between REITs that report similar measures, these measures have limitations as analytical tools. Some of these limitations are:

• FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA do not reflect the company’s cash expenditures, or future requirements, for capital expenditures or contractual commitments;
• FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA do not reflect changes in, or cash requirements for, the company’s working capital needs;
• FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA do not reflect funds available to make cash distributions;
• EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on the company’s debts;
• Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may need to be replaced in the future, and FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA do not reflect any cash requirements for such replacements;
• Non-cash compensation is and will remain a key element of the company’s overall long-term incentive compensation package, although the company excludes it as an expense when evaluating its ongoing operating performance for a particular period using adjusted EBITDA;
• Adjusted FFO, Adjusted EBITDA and Adjusted Hotel EBITDA do not reflect the impact of certain cash charges (including acquisition transaction costs) that result from matters the company considers not to be indicative of the underlying performance of its hotel properties; and
• Other companies in the company’s industry may calculate FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA differently than the company does, limiting their usefulness as a comparative measure.

In addition, FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA do not represent cash generated from operating activities as determined by GAAP and should not be considered as alternatives to net income or loss, cash flows from operations or any other operating performance measure prescribed by GAAP. FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA are not measures of the Company’s liquidity. Because of these limitations, FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. The Company compensates for these limitations by relying primarily on its GAAP results and using FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA only supplementally. The Company’s consolidated financial statements and the notes to those statements included elsewhere are prepared in accordance with GAAP.

The company’s reconciliation of FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA to net income attributable to common shareholders, as determined under GAAP, is set forth below.

Forward-Looking Statement Safe Harbor

Note: This press release contains forward-looking statements within the meaning of federal securities regulations. These forward-looking statements are identified by their use of terms and phrases such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "should," "plan," "predict," "project," "will," "continue" and other similar terms and phrases, including references to assumption and forecasts of future results. Forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially from those anticipated at the time the forward-looking statements are made. These risks include, but are not limited to: national and local economic and business conditions, including the effect on travel of potential terrorist attacks, that will affect occupancy rates at the company’s hotels and the demand for hotel products and services; operating risks associated with the hotel business; risks associated with the level of the company’s indebtedness and its ability to meet covenants in its debt agreements; relationships with property managers; the company’s ability to maintain its properties in a Fourth-class manner, including meeting capital expenditure requirements; the company’s ability to compete effectively in areas such as access, location, quality of accommodations and room rate structures; changes in travel patterns, taxes and government regulations which influence or determine wages, prices, construction procedures and costs; the company’s ability to complete acquisitions and dispositions; and the company’s ability to continue to satisfy complex rules in order for the company to remain a REIT for federal income tax purposes and other risks and uncertainties associated with the company’s business described in the company's filings with the SEC. Although the company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that the expectations will be attained or that any deviation will not be material. All information in this release is as of the date hereof, and the company undertakes no obligation to update any forward-looking statement to conform the statement to actual results or changes in the company’s expectations.

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