Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2021. In this report, we use the terms “the Company," “we” or “our” to refer to Chatham Lodging Trust and its consolidated subsidiaries, unless the context indicates otherwise.
COVID-19 Pandemic
The lodging industry has been significantly impacted by the COVID-19 pandemic, which began in early 2020, but travel trends are improving and we expect strong growth in 2022 relative to 2021. The full impact of the COVID-19 pandemic on the lodging industry will depend on future developments including the continuing severity and duration of the pandemic, and the possibility of additional subsequent widespread outbreaks and variant strains and the impact of actions taken in response, people's willingness to travel and the strength of the U.S., regional and global economies. The Company took actions to mitigate the operating and financial impact of the COVID-19 pandemic, including suspending common share dividends, reducing capital expenditures, obtaining credit facility covenant waivers through June 30, 2022 and temporarily reducing executive compensation through December 31, 2020. The Company exited its credit facility covenant waiver period as of the end of the second quarter of 2022 and is in compliance with the covenants in the credit facility agreement. There remains significant uncertainty regarding the trends and outlook as a result of new variants and individual and government responses.
Statement Regarding Forward-Looking Information
The following information contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements include information about possible or assumed future results of the lodging industry and our business, financial condition, liquidity, results of operations, cash flow and plans and objectives. These statements generally are characterized by the use of the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” or similar expressions. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, our actual results could differ materially from those set forth in the forward-looking statements. Important factors that we think could cause our actual results to differ materially from expected results are summarized below. Some factors that might cause such a difference include the following: the continuing and future impact of the COVID-19 pandemic (including its effect on the ability or desire of people to travel), local, national and global economic conditions, increased direct competition, changes in government regulations or accounting rules, changes in local, national and global real estate conditions, declines in lodging industry fundamentals, increased operating costs, seasonality of the lodging industry, our ability to obtain debt and equity financing on satisfactory terms, changes in interest rates, our ability to identify suitable investments, our ability to close on identified investments, inaccuracies of our accounting estimates, the uncertainty and economic impact of pandemics, epidemics or other public health emergencies or fear of such events, such as the ongoing COVID-19 pandemic, the impact of and changes to various government programs, including in response to COVID-19, and our ability to dispose of selected hotel properties on the terms and timing we expect, if at all. Given these uncertainties, undue reliance should not be placed on such statements. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect future events or circumstances or to reflect the occurrence of unanticipated events. The forward-looking statements should also be read in light of the risk factors identified in the “Risk Factors” section in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 as updated by the Company's subsequent filings with the SEC under the Exchange Act.
Overview
We are a self-advised hotel investment company organized in October 2009 that commenced operations in April 2010. Our investment strategy is to invest in upscale extended-stay and premium-branded select-service hotels in geographically diverse markets with high barriers to entry near strong demand generators. We may acquire portfolios of hotels or single hotels. We expect that a significant portion of our portfolio will consist of hotels in the upscale extended-stay or select-service categories, including brands such as Homewood Suites by Hilton®, Residence Inn by Marriott®, Hyatt Place®, Courtyard by Marriott®, SpringHill Suites by Marriott®, Hilton Garden Inn by Hilton®, Embassy Suites®, Hampton Inn®, Hampton Inn and Suites®, Home2 Suites by Hilton® and TownePlace Suites by Marriott®.
The Company's future hotel acquisitions may be funded by issuances of both common and preferred shares or the issuance of partnership interests in our operating partnership, Chatham Lodging, L.P. (the "Operating Partnership"), draw-downs under our revolving credit facility, the incurrence or assumption of debt, available cash, or proceeds from dispositions of assets. We intend to acquire quality assets at attractive prices and improve their returns through knowledgeable asset management and seasoned, proven hotel management while remaining prudently leveraged.
At June 30, 2022, our leverage ratio was 28.4% measured as the ratio of our net debt (total debt outstanding before deferred financing costs less unrestricted cash and cash equivalents) to hotel investments at cost. Over the past several years, we have maintained a leverage ratio between the high 20s and the low 50s. As of June 30, 2022, we have total debt of $489.6 million at an average interest rate of approximately 4.9%.
We are a real estate investment trust (“REIT”) for federal income tax purposes. In order to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), we cannot operate our hotels. Therefore, the Operating Partnership and its subsidiaries lease our hotel properties to taxable REIT subsidiary lessees (“TRS Lessees”), who in turn engage eligible independent contractors to manage the hotels. Each of the TRS Lessees is treated as a taxable REIT subsidiary for federal income tax purposes and is consolidated within our financial statements for accounting purposes. However, since we control both the Operating Partnership and the TRS Lessees, our principal source of funds on a consolidated basis is from the operations of our hotels. The earnings of the TRS Lessees are subject to taxation as regular C corporations, as defined in the Code, potentially reducing the TRS Lessees’ cash available to pay dividends to us, and therefore our funds from operations and the cash available for distribution to our shareholders.
Key Indicators of Operating Performance and Financial Condition
We measure financial condition and hotel operating performance by evaluating non-financial and financial metrics and measures such as:
•Average Daily Rate (“ADR”), which is the quotient of room revenue divided by total rooms sold,
•Occupancy, which is the quotient of total rooms sold divided by total rooms available,
•Revenue Per Available Room (“RevPAR”), which is the product of occupancy and ADR, and does not include food and beverage revenue, or other operating revenue,
•Funds From Operations (“FFO”),
•Adjusted FFO,
•Earnings before interest, taxes, depreciation and amortization (“EBITDA”),
•EBITDAre,
•Adjusted EBITDA, and
•Adjusted Hotel EBITDA.
We evaluate the hotels in our portfolio and potential acquisitions using these metrics to determine each hotel’s contribution toward providing income to our shareholders through increases in distributable cash flow and increasing long-term total returns through appreciation in the value of our common shares. RevPAR, ADR and Occupancy are hotel industry measures commonly used to evaluate operating performance.
See “Non-GAAP Financial Measures” for further discussion of FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA.
Results of Operations
Industry Outlook
The lodging industry has been impacted by the COVID-19 pandemic and there has been a decline in travel relative to 2019, but trends are improving and we expect continued strong growth in 2022 relative to 2021. Smith Travel Research reported that U.S. lodging industry RevPAR increased 38.8% for the three months ended June 30, 2022, with RevPAR up 54.5% in April 2022, up 39.6% in May 2022 and up 26.8% in June 2022. We expect that over the remainder of 2022, RevPAR will continue to increase significantly versus 2021 and 2020, and that in some markets RevPAR may exceed levels achieved in 2019.
Comparison of the three months ended June 30, 2022 to the three months ended June 30, 2021
Results of operations for the three months ended June 30, 2022 include the operating activities of our 39 wholly owned hotels that were owned for the entire period and operating activities for four hotels sold during the period during the periods of our ownership. We sold one hotel located in Burlington, MA on May 6, 2022, and sold three hotels located in Dallas, TX and Houston, TX on May 13, 2022. We acquired one hotel located in Miramar Beach, FL on March 8, 2022. We developed and opened on January 24, 2022 one hotel located in Los Angeles, CA. We acquired two hotels located in Austin, TX on August 3, 2021. The comparisons below are influenced by the COVID-19 pandemic, the sales of four hotels, the acquisition of three hotels, and the opening of one hotel.
Revenues
Revenue, which consists primarily of room, food and beverage and other operating revenues from our wholly owned hotels, was as follows for the periods indicated (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| For the three months ended | | |
| June 30, 2022 | | June 30, 2021 | | % Change |
| Room | $ | 75,761 | | | $ | 46,514 | | | 62.9 | % |
| Food and beverage | 1,968 | | | 756 | | | 160.3 | % |
| Other | 3,674 | | | 2,647 | | | 38.8 | % |
| Cost reimbursements from unconsolidated entities | 358 | | | 327 | | | 9.5 | % |
| Total revenue | $ | 81,761 | | | $ | 50,244 | | | 62.7 | % |
Total revenue was $81.8 million for the quarter ended June 30, 2022, up $31.6 million compared to total revenue of $50.2 million for the corresponding 2021 period. The increase in total revenue primarily was related to the recovery from the COVID-19 pandemic. Four hotels owned during the three months ended June 30, 2022 which were not owned during the three months ended June 30, 2021 contributed $7.8 million of revenue during the three months ended June 30, 2022. Four other hotels which were sold during the three months ended June 30, 2022 contributed $1.7 million of revenue during the three months ended June 30, 2022, down $1.5 million from the $3.2 million these hotels contributed during the three months ended June 30, 2021. Since all of our hotels are select-service or limited-service hotels, room revenue is the primary revenue source as these hotels do not have significant food and beverage revenue or large group conference facilities. Room revenue comprised 92.7% and 92.6% of total revenue for the three months ended June 30, 2022 and 2021, respectively. Room revenue was $75.8 million and $46.5 million for the three months ended June 30, 2022 and 2021, respectively, and the increase in room revenue primarily was related to the recovery from the COVID-19 pandemic.
Food and beverage revenue was $2.0 million for the quarter ended June 30, 2022, up $1.2 million compared to $0.8 million for the corresponding 2021 period. The increase in food and beverage revenue primarily was related to an increase in occupancies at our hotels due to the recovery from the COVID-19 pandemic.
Other operating revenue, comprised of parking, meeting room, gift shop, in-room movie and other ancillary amenities revenue, was up $1.1 million for the three months ended June 30, 2022. Other operating revenue was $3.7 million and $2.6 million for the quarters ended June 30, 2022 and 2021, respectively. The increase in other operating revenue primarily was related to an increase in occupancies at our hotels due to the recovery from the COVID-19 pandemic.
Reimbursable costs from unconsolidated entities were $0.4 million and $0.3 million for the three months ended June 30, 2022 and 2021, respectively. The cost reimbursements were offset by the reimbursed costs from unconsolidated entities included in operating expenses.
As reported by Smith Travel Research, U.S. lodging industry RevPAR for the three months ended June 30, 2022 and 2021 increased 38.8% and increased 160.4%, respectively, in the 2022 and 2021 periods as compared to the respective prior periods. Smith Travel Research reported that U.S. lodging industry RevPAR increased 54.5% in April 2022, increased 39.6% in May 2022 and increased 26.8% in June 2022. We expect that over the remainder of 2022, U.S. lodging industry RevPAR will continue to increase significantly versus 2021 and 2020.
In the table below, we present both actual and same property room revenue metrics. Actual Occupancy, ADR and RevPAR metrics reflect the performance of the hotels for the actual days such hotels were owned by the Company during the periods presented. Same property Occupancy, ADR, and RevPAR reflect results for the 37 hotels wholly owned by the Company as of June 30, 2022 that have been in operation for a full year regardless of our ownership during the period presented, which is a non-GAAP financial measure. Results for the hotels for periods prior to our ownership were provided to us by prior owners and have not been adjusted by us.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended June 30, | | | | |
| 2022 | | 2021 | | Percentage Change |
| Same Property (37 hotels) | | Actual (43 hotels) | | Same Property (37 hotels) | | Actual (39 hotels) | | Same Property (37 hotels) | | Actual (43 / 39 hotels) |
| Occupancy | 77.2 | % | | 76.8 | % | | 70.0 | % | | 68.2 | % | | 10.3 | % | | 12.6 | % |
| ADR | $ | 178.62 | | | $ | 176.33 | | | $ | 131.24 | | | $ | 127.06 | | | 36.1 | % | | 38.8 | % |
| RevPAR | $ | 137.93 | | | $ | 135.35 | | | $ | 91.86 | | | $ | 86.63 | | | 50.2 | % | | 56.2 | % |
For the three months ended June 30, 2022 same property RevPAR increased 50.2% due to an increase in ADR of 36.1% and an increase in occupancy of 10.3% primarily related to the recovery from the COVID-19 pandemic. Same property RevPAR increased 55.4% in April 2022, increased 43.2% in May 2022, and increased 52.6% in June 2022. Same property RevPAR was $123.42 in April 2022, $132.95 in May 2022, and $157.60 in June 2022.
Hotel Operating Expenses
Hotel operating expenses consist of the following for the periods indicated (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| For the three months ended | | |
| June 30, 2022 | | June 30, 2021 | | % Change |
| Hotel operating expenses: | | | | | |
| Room | $ | 14,480 | | | $ | 9,486 | | | 52.6 | % |
| Food and beverage | 1,429 | | | 491 | | | 191.0 | % |
| Telephone | 359 | | | 348 | | | 3.2 | % |
| Other hotel operating | 879 | | | 544 | | | 61.6 | % |
| General and administrative | 6,804 | | | 5,056 | | | 34.6 | % |
| Franchise and marketing fees | 6,559 | | | 4,091 | | | 60.3 | % |
| Advertising and promotions | 1,230 | | | 835 | | | 47.3 | % |
| Utilities | 2,784 | | | 2,352 | | | 18.4 | % |
| Repairs and maintenance | 3,347 | | | 2,720 | | | 23.1 | % |
| Management fees | 2,727 | | | 1,760 | | | 54.9 | % |
| Insurance | 747 | | | 707 | | | 5.7 | % |
| Total hotel operating expenses | $ | 41,345 | | | $ | 28,390 | | | 45.6 | % |
Hotel operating expenses increased $12.9 million, or 45.6%, to $41.3 million for the three months ended June 30, 2022 from $28.4 million for the three months ended June 30, 2021. The primary cause of the increase in hotel operating expenses was related to the increase in revenues and occupancy caused by the recovery from the COVID-19 pandemic. Four hotels owned during the three months ended June 30, 2022 that were not owned during the three months ended June 30, 2021 contributed $4.0 million of operating expenses during the three months ended June 30, 2022. Four other hotels that were sold during the three months ended June 30, 2022 contributed $1.3 million of operating expenses during the three months ended June 30, 2022, down $0.7 million from the $2.0 million these hotels contributed during the three months ended June 30, 2021.
Room expenses, which are the most significant component of hotel operating expenses, increased $5.0 million from $9.5 million for the three months ended June 30, 2021 to $14.5 million for the three months ended June 30, 2022. The increase in room expenses primarily was related to an increase in occupancies and revenues at our hotels due to the recovery from the COVID-19 pandemic.
The remaining hotel operating expenses increased $8.0 million, from $18.9 million for the three months ended June 30, 2021 to $26.9 million for the three months ended June 30, 2022. The increase in other remaining expenses primarily was related to an increase in occupancies and revenues at our hotels due to the recovery from the COVID-19 pandemic.
Depreciation and Amortization
Depreciation and amortization expense increased $1.9 million from $13.4 million for the three months ended June 30, 2021 to $15.3 million for the three months ended June 30, 2022. The increase was primarily due to higher depreciation expense from the four hotels owned during three months ended June 30, 2022 that were not owned during than the three months ended June 30, 2021 than the depreciation expense from four other hotels which were sold during the three months ended June 30, 2022. Depreciation is generally recorded on our assets over 40 years for buildings, 20 years for land improvements, 15 years for building improvements and one to ten years for furniture, fixtures and equipment from the date of acquisition on a straight-line basis. Depreciable lives of hotel furniture, fixtures and equipment are generally assumed to be the difference between the date of acquisition and the date that the furniture, fixtures and equipment will be replaced. Amortization of franchise fees is recorded on a straight-line basis over the term of the respective franchise agreement.
Property Taxes, Ground Rent and Insurance
Total property taxes, ground rent and insurance expenses decreased from $6.0 million for the three months ended June 30, 2021 to $5.9 million for the three months ended June 30, 2022.
General and Administrative
General and administrative expenses principally consist of employee-related costs, including base payroll, bonuses and amortization of restricted stock and awards of long-term incentive plan units. These expenses also include corporate operating costs, professional fees and trustees’ fees. Total general and administrative expenses (excluding amortization of stock based compensation of $1.4 million and $1.2 million for the three months ended June 30, 2022 and 2021, respectively) was $3.0 million for the three months ended June 30, 2022 versus $3.1 million for the three months ended June 30, 2021.
Other Charges
Other charges decreased from $0.3 million for the three months ended June 30, 2021 to $0.2 million for the three months ended June 30, 2022. Other charges for both periods primarily relate to the payment of insurance deductibles.
Reimbursable Costs from Unconsolidated Entities
Reimbursable costs from unconsolidated entities, comprised of corporate payroll and rent costs were $0.4 million and $0.3 million for the three months ended June 30, 2022 and 2021, respectively. The cost reimbursements were offset by the cost reimbursements from unconsolidated entities included in revenues.
Gain on Sale of Hotel Properties
Gain on sale of hotel properties increased $2.0 million for the three months ended June 30, 2022 compared to the three months ended June 30, 2021 due to the sale of the HGI Burlington hotel property on May 6, 2022, and the sale of the HWS Dallas hotel property, CY Houston West U hotel property, and RI Houston West U hotel property on May 13, 2022.
Interest Expense, Including Amortization of Deferred Fees
Interest expense increased $0.5 million from $6.4 million for the three months ended June 30, 2021 to $6.9 million for the three months ended June 30, 2022 and is comprised of the following (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| For the three months ended | | |
| June 30, 2022 | | June 30, 2021 | | % Change |
| Mortgage debt interest | $ | 5,107 | | | $ | 5,268 | | | (3.1) | % |
| Credit facility interest and unused fees | 689 | | | 1,065 | | | (35.3) | % |
| Interest rate cap | (45) | | | (4) | | | 1025.0 | % |
| Construction loan interest | 817 | | | 495 | | | 65.1 | % |
| Capitalized interest | — | | | (842) | | | (100.0) | % |
| Amortization of deferred financing costs | 368 | | | 374 | | | (1.6) | % |
| Total | $ | 6,936 | | | $ | 6,356 | | | 9.1 | % |
The increase in interest expense for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 is primarily due to an increase in construction loan interest and decrease in capitalized interest due to the opening of the Home2 Woodland Hills on January 24, 2022. This was partially offset by a decrease in revolving credit facility interest due to the decreased outstanding principal amount compared to the prior period.
Income Tax Expense
Income tax expense for the three months ended June 30, 2022 and 2021 was $0 and $0, respectively. We are subject to income taxes based on the taxable income of our TRS Lessees at a combined federal and state tax rate of approximately 25%. The Company’s TRS is expecting taxable losses in 2022 and recognizes a full valuation allowance equal to 100% of the gross deferred tax assets due to the uncertainty of the TRS's ability to utilize these deferred tax assets.
Net Income (Loss)
Net income was $9.3 million for the three months ended June 30, 2022, compared to a net loss of $8.7 million for the three months ended June 30, 2021. The change in net income (loss) was primarily due to an improvement in performance at our hotels due to the continued recovery from the COVID-19 pandemic, and the sale of four hotels which resulted in a gain on sale of hotel properties of $2.0 million during the three months ended June 30, 2022, combined with the other factors discussed above.
Comparison of the six months ended June 30, 2022 to the six months ended June 30, 2021
Results of operations for the six months ended June 30, 2022 include the operating activities of our 37 wholly owned hotels that were owned for the entire period and operating activities for one hotel that was opened during the period, one hotel that was acquired during the period and four hotels sold during the period during the periods of our ownership of these hotels. We sold one hotel located in Burlington, MA on May 6, 2022, and sold three hotels located in Dallas, TX and Houston, TX on May 13, 2022. We acquired one hotel located in Miramar Beach, FL on March 8, 2022. We developed and opened on January 24, 2022 one hotel located in Los Angeles, CA. We acquired two hotels located in Austin, TX on August 3, 2021. We sold our investment in the NewINK JV on March 18, 2021 and sold our investment in the Inland JV on September 23, 2021. The comparisons below are influenced by the COVID-19 pandemic, the sale of four hotels, the acquisition of three hotels, the opening of one hotel, and the sale of our investments in the NewINK JV and the Inland JV.
Revenues
Revenue, which consists primarily of room, food and beverage and other operating revenues from our wholly owned hotels, was as follows for the periods indicated (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| For the six months ended | | |
| June 30, 2022 | | June 30, 2021 | | % Change |
| Room | $ | 125,926 | | | $ | 75,905 | | | 65.9 | % |
| Food and beverage | 3,382 | | | 1,120 | | | 202.0 | % |
| Other | 6,654 | | | 4,218 | | | 57.8 | % |
| Cost reimbursements from unconsolidated entities | 684 | | | 1,114 | | | (38.6) | % |
| Total revenue | $ | 136,646 | | | $ | 82,357 | | | 65.9 | % |
Total revenue was $136.6 million for the six months ended June 30, 2022, up $54.2 million compared to total revenue of $82.4 million for the corresponding 2021 period. The increase in total revenue primarily was related to the recovery from the COVID-19 pandemic. Four hotels owned during the six months ended June 30, 2022 that were not owned during the six months ended June 30, 2021 contributed $11.7 million of revenue during the six months ended June 30, 2022. Four other hotels that were sold during the six months ended June 30, 2022 contributed $4.9 million of revenue during the six months ended June 30, 2022, down $0.4 million from the $5.3 million these hotels contributed during the six months ended June 30, 2021. Since all of our hotels are select-service or limited-service hotels, room revenue is the primary revenue source as these hotels do not have significant food and beverage revenue or large group conference facilities. Room revenue comprised 92.2% and 92.2% of total revenue for the six months ended June 30, 2022 and 2021, respectively. Room revenue was $125.9 million and $75.9 million for the six months ended June 30, 2022 and 2021, respectively, and the increase in room revenue primarily was related to the recovery from the COVID-19 pandemic.
Food and beverage revenue was $3.4 million for the six months ended June 30, 2022, up $2.3 million compared to food and beverage revenue of $1.1 million for the corresponding 2021 period. The increase in food and beverage revenue primarily was related to an increase in occupancies at our hotels due to the recovery from the COVID-19 pandemic.
Other operating revenue, comprised of parking, meeting room, gift shop, in-room movie and other ancillary amenities revenue was up $2.5 million for the six months ended June 30, 2022. Other operating revenue was $6.7 million and $4.2 million for the six months ended June 30, 2022 and June 30, 2021, respectively. The increase in other operating revenue primarily was related to an increase in occupancies at our hotels due to the recovery from the COVID-19 pandemic.
Reimbursable costs from unconsolidated real estate entities were $0.7 million and $1.1 million for the six months ended June 30, 2022 and 2021, respectively. The cost reimbursements were offset by the reimbursed costs from unconsolidated real estate entities included in operating expenses. The decrease in cost reimbursements primarily was related to the sale of the NewINK JV.
As reported by Smith Travel Research, U.S. lodging industry RevPAR for the six months ended June 30, 2022 and 2021 increased 49.4% and increased 27.4%, respectively, in the 2022 and 2021 periods as compared to the respective prior year periods. We expect that over the remainder of 2022, U.S. lodging industry RevPAR will continue to increase significantly versus 2021 and 2020.
In the table below, we present both actual and same property room revenue metrics. Actual Occupancy, ADR and RevPAR metrics reflect the performance of the hotels for the actual days such hotels were owned by the Company during the periods presented. Same property Occupancy, ADR, and RevPAR reflect results for the 37 hotels wholly owned by the Company as of June 30, 2022 that have been in operation for a full year regardless of our ownership during the period presented, which is a non-GAAP financial measure. Results for the hotels for periods prior to our ownership were provided to us by prior owners and have not been adjusted by us.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the six months ended June 30, | | | | |
| 2022 | | 2021 | | Percentage Change |
| Same Property (37 hotels) | | Actual (43 hotels) | | Same Property (37 hotels) | | Actual (39 hotels) | | Same Property (37 hotels) | | Actual (43 / 39 hotels) |
| Occupancy | 69.2 | % | | 68.2 | % | | 61.7 | % | | 60.0 | % | | 12.2 | % | | 13.7 | % |
| ADR | $ | 165.57 | | | $ | 162.94 | | | $ | 121.53 | | | $ | 118.38 | | | 36.2 | % | | 37.6 | % |
| RevPAR | $ | 114.54 | | | $ | 111.19 | | | $ | 74.96 | | | $ | 71.08 | | | 52.8 | % | | 56.4 | % |
For the six months ended June 30, 2022 same property RevPAR increased 52.8% due to an increase in ADR of 36.2% and an increase in occupancy of 12.2% primarily related to the recovery from the COVID-19 pandemic.
Hotel Operating Expenses
Hotel operating expenses consist of the following for the periods indicated (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| For the six months ended | | |
| June 30, 2022 | | June 30, 2021 | | % Change |
| Hotel operating expenses: | | | | | |
| Room | $ | 26,074 | | | $ | 16,653 | | | 56.6 | % |
| Food and beverage | 2,476 | | | 775 | | | 219.5 | % |
| Telephone | 760 | | | 748 | | | 1.6 | % |
| Other hotel operating | 1,611 | | | 909 | | | 77.2 | % |
| General and administrative | 12,153 | | | 8,870 | | | 37.0 | % |
| Franchise and marketing fees | 10,966 | | | 6,688 | | | 64.0 | % |
| Advertising and promotions | 2,419 | | | 1,592 | | | 51.9 | % |
| Utilities | 5,673 | | | 4,638 | | | 22.3 | % |
| Repairs and maintenance | 6,792 | | | 5,180 | | | 31.1 | % |
| Management fees | 4,645 | | | 2,956 | | | 57.1 | % |
| Insurance | 1,457 | | | 1,356 | | | 7.4 | % |
| Total hotel operating expenses | $ | 75,026 | | | $ | 50,365 | | | 49.0 | % |
Hotel operating expenses increased $24.6 million to $75.0 million for the six months ended June 30, 2022 from $50.4 million for the six months ended June 30, 2021. The primary cause of the increase in hotel operating expenses was related to the increase in revenues and occupancy caused by the recovery from the COVID-19 pandemic.
Room expenses, which are the most significant component of hotel operating expenses, increased $9.4 million from $16.7 million for the six months ended June 30, 2021 to $26.1 million for the six months ended June 30, 2022. The increase in room expenses primarily was related to an increase in occupancies and revenues at our hotels due to the recovery from the COVID-19 pandemic.
The remaining hotel operating expenses increased $15.3 million, from $33.7 million for the six months ended June 30, 2021 to $49.0 million for the six months ended June 30, 2022. The increase in other remaining expenses primarily was related to an increase in occupancies and revenues at our hotels due to the recovery from the COVID-19 pandemic and the contribution from four additional hotels owned during the six months ended June 30, 2022.
Depreciation and Amortization
Depreciation and amortization expense increased $3.6 million from $26.7 million for the six months ended June 30, 2021 to $30.3 million for the six months ended June 30, 2022. The increase was primarily due to higher depreciation expense from the four hotels owned during six months ended June 30, 2022 that were not owned during than the six months ended June 30, 2021 than the depreciation expense from four other hotels which were sold during the six months ended June 30, 2022. Depreciation is generally recorded on our assets over 40 years for buildings, 20 years for land improvements, 15 years for building improvements and one to ten years for furniture, fixtures and equipment from the date of acquisition on a straight-line basis. Depreciable lives of hotel furniture, fixtures and equipment are generally assumed to be the difference between the date of acquisition and the date that the furniture, fixtures and equipment will be replaced. Amortization of franchise fees is recorded on a straight-line basis over the term of the respective franchise agreement.
Property Taxes, Ground Rent and Insurance
Total property taxes, ground rent and insurance expenses decreased $0.9 million from $11.8 million for the six months ended June 30, 2021 to $10.9 million for the six months ended June 30, 2022. The decrease was primarily related to reductions in property tax assessments as a result of the COVID-19 pandemic.
General and Administrative
General and administrative expenses principally consist of employee-related costs, including base payroll, bonuses and amortization of restricted stock and awards of LTIP units. These expenses also include corporate operating costs, professional fees and trustees’ fees. Total general and administrative expenses (excluding amortization of stock based compensation of $2.7 million and $2.4 million for the six months ended June 30, 2022 and 2021, respectively) increased $0.2 million to $5.7 million for the six months ended June 30, 2022 from $5.5 million for the six months ended June 30, 2021.
Other Charges
Other charges were $0.4 million and $0.4 million for the six months ended June 30, 2022 and 2021, respectively. Other charges for both periods primarily relate to the payment of insurance deductibles.
Reimbursable Costs from Unconsolidated Entities
Reimbursable costs from unconsolidated entities, comprised of corporate payroll and rent costs were $0.7 million and $1.1 million for the six months ended June 30, 2022 and 2021, respectively. The cost reimbursements were offset by the cost reimbursements from unconsolidated entities included in revenues. The decrease in cost reimbursements primarily was related to the sale of the NewINK JV.
Gain (Loss) on Sale of Hotel Properties
Gain on sale of hotel properties increased $2.0 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 due to the sale of the HGI Burlington hotel property on May 6, 2022, and the sale of the HWS
Dallas hotel property, CY Houston West U hotel property, and RI Houston West U hotel property on May 13, 2022.
Interest Expense, Including Amortization of Deferred Fees
Interest expense increased $0.5 million from $12.8 million for the six months ended June 30, 2021 to $13.3 million for the six months ended June 30, 2022 and is comprised of the following (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| For the six months ended | | |
| June 30, 2022 | | June 30, 2021 | | % Change |
| Mortgage debt interest | $ | 10,184 | | | $ | 10,624 | | | (4.1) | % |
| Credit facility interest and unused fees | 1,703 | | | 2,168 | | | (21.4) | % |
| Interest rate cap | (289) | | | (44) | | | 556.8 | % |
| Construction loan interest | 1,355 | | | 845 | | | 60.4 | % |
| Capitalized interest | (330) | | | (1,532) | | | (78.5) | % |
| Amortization of deferred financing costs | 702 | | | 765 | | | (8.2) | % |
| Total | $ | 13,325 | | | $ | 12,826 | | | 3.9 | % |
The increase in interest expense for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 is primarily due to an increase in construction loan interest and decrease in capitalized interest due to the opening of the Home2 Woodland Hills on January 24, 2022. This was partially offset by a decrease in revolving credit
facility interest due to the decreased outstanding principal amount compared to the prior period.
Loss from Unconsolidated Real Estate Entities
Loss from unconsolidated real estate entities decreased $1.2 million from a loss of $1.2 million for the six months ended June 30, 2021 to $0 for the six months ended June 30, 2022. The loss in 2021 is primarily due to losses within the NewINK JV prior to sale.
Gain on Sale of Investment in Unconsolidated Real Estate Entities
Gain on sale of investment in unconsolidated real estate entities decreased $23.8 million from a gain of $23.8 million for the six months ended June 30, 2021 to $0 for the six months ended June 30, 2022. The gain in 2021 is due to the sale of the NewINK JV.
Income Tax Expense
Income tax expense for the six months ended June 30, 2022 and 2021 was $0 and $0, respectively. We are subject to income taxes based on the taxable income of our TRS Lessees at a combined federal and state tax rate of approximately 25%. The Company’s TRS is expecting taxable losses in 2022 and recognizes a full valuation allowance equal to 100% of the gross deferred tax assets due to the uncertainty of the TRS's ability to utilize these deferred tax assets.
Net Loss
Net loss was $0.4 million for the six months ended June 30, 2022, compared to a net loss of $6.0 million for the six months ended June 30, 2021. The change in net loss was primarily due to an increase in occupancies and revenues at our hotels due to the recovery from the COVID-19 pandemic, the sale of four hotels which resulted in a gain on sale of hotel properties of $2.0 million during the six months ended June 30, 2022, and the sale of the NewINK JV in 2021 which resulted in a large gain on sale of investment in unconsolidated real estate entities, combined with the factors discussed above.
Non-GAAP Financial Measures
We consider the following non-GAAP financial measures useful to investors as key supplemental measures of our operating performance: (1) FFO, (2) Adjusted FFO, (3) EBITDA, (4) EBITDAre, (5) Adjusted EBITDA and (6) 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 our operating performance.
FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA do not represent cash generated from operating activities under 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 our liquidity, nor are FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA indicative of funds available to fund our cash needs, including our ability to make cash distributions. These measurements do not reflect cash expenditures for long-term assets and other items that have been and will be incurred. FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA may include funds that may not be available for management’s discretionary use due to functional requirements to conserve funds for capital expenditures, property acquisitions, and other commitments and uncertainties.
We calculate FFO in accordance with standards established by 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. We believe that the presentation of FFO provides useful information to investors regarding our operating performance because it measures our 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 we believe are not indicative of the property level performance of our hotel properties. We believe that these items reflect historical cost of our asset base and our acquisition and disposition activities and are less reflective of our ongoing operations, and that by adjusting to exclude the effects of these items, FFO is useful to investors in comparing our operating performance between periods and between REITs that also report FFO using the Nareit definition.
We calculate Adjusted FFO by further adjusting FFO for certain additional items that are not addressed in Nareit’s definition of FFO, including other charges, losses on the early extinguishment of debt and similar items related to our unconsolidated real estate entities that we believe do not represent costs related to hotel operations. We believe 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.
The following is a reconciliation of net income to FFO and Adjusted FFO for the three and six months ended June 30, 2022 and 2021 (in thousands, except share data):
| | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended | | For the six months ended |
| June 30, | | June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Funds From Operations (“FFO”): | | | | | | | |
| Net income (loss) | $ | 9,322 | | | $ | (8,718) | | | $ | (376) | | | $ | (6,016) | |
| Preferred dividends | (1,987) | | | — | | | (3,975) | | | — | |
| Net income (loss) attributable to common shares and common units | 7,335 | | | (8,718) | | | (4,351) | | | (6,016) | |
| | | | | | | |
| | | | | | | |
| (Gain) loss on sale of hotel properties | (2,020) | | | (28) | | | (2,020) | | | 15 | |
| | | | | | | |
| Gain on sale of investment in unconsolidated real estate entities | — | | | — | | | — | | | (23,817) | |
| Depreciation | 15,223 | | | 13,292 | | | 30,193 | | | 26,566 | |
| | | | | | | |
| | | | | | | |
| Adjustments for unconsolidated real estate entity items | — | | | — | | | — | | | 568 | |
| FFO attributable to common share and unit holders | 20,538 | | | 4,546 | | | 23,822 | | | (2,684) | |
| Other charges | 150 | | | 322 | | | 400 | | | 377 | |
| | | | | | | |
| Adjustments for unconsolidated real estate entity items | — | | | — | | | — | | | 46 | |
| Adjusted FFO attributable to common share and unit holders | $ | 20,688 | | | $ | 4,868 | | | $ | 24,222 | | | $ | (2,261) | |
| Weighted average number of common shares and units | | | | | | | |
| Basic | 50,010,107 | | | 49,613,586 | | | 49,928,420 | | | 48,823,781 | |
| Diluted | 50,231,943 | | | 49,794,765 | | | 50,139,358 | | | 48,823,781 | |
Diluted weighted average common share and unit count used for calculation of adjusted FFO per share may differ from diluted weighted average common share count used for calculation of GAAP Net Income per share due to the inclusion of LTIP units, which may be converted to common shares of beneficial interest if Net Income per share is negative and Adjusted FFO is positive. Unvested restricted shares and unvested LTIP units that could potentially dilute basic earnings per share in the future would not be included in the computation of diluted loss per share for the periods where a loss has been recorded because they would have been anti-dilutive for the periods presented.
Earnings before interest, taxes, depreciation and amortization ("EBITDA") is defined as net income or loss excluding: (1) interest expense; (2) provision for income taxes, including income taxes applicable to sales 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. We consider EBITDA useful to an investor in evaluating and facilitating comparisons of our operating performance between periods and between REITs by removing the impact of our capital structure (primarily interest expense) and asset base (primarily depreciation and amortization) from our operating results. In addition, EBITDA is used as one measure in determining the value of hotel acquisitions and dispositions.
In addition to EBITDA, we present 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.
We also present Adjusted EBITDA, which includes additional adjustments for items such as other charges, gains or losses on extinguishment of indebtedness, the amortization of share-based compensation, and certain other expenses that we consider outside the normal course of operations. We believe that Adjusted EBITDA provides useful supplemental information to investors regarding our ongoing operating performance that, when considered with net income, EBITDA and EBITDAre, is beneficial to an investor's understanding of our performance.
The following is a reconciliation of net income to EBITDA, EBITDAre and Adjusted EBITDA for the three and six months ended June 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended | | For the six months ended |
| June 30, | | June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”): | | | | | | | |
| Net income (loss) | $ | 9,322 | | | $ | (8,718) | | | $ | (376) | | | $ | (6,016) | |
| Interest expense | 6,936 | | | 6,356 | | | 13,325 | | | 12,826 | |
| | | | | | | |
| Depreciation and amortization | 15,277 | | | 13,353 | | | 30,313 | | | 26,687 | |
| Adjustments for unconsolidated real estate entity items | — | | | — | | | — | | | 1,184 | |
| EBITDA | 31,535 | | | 10,991 | | | 43,262 | | | 34,681 | |
| | | | | | | |
| | | | | | | |
| (Gain) loss on sale of hotel properties | (2,020) | | | (28) | | | (2,020) | | | 15 | |
| | | | | | | |
| Gain on sale of investment in unconsolidated real estate entities | — | | | — | | | — | | | (23,817) | |
EBITDAre | 29,515 | | | 10,963 | | | 41,242 | | | 10,879 | |
| Other charges | 150 | | | 322 | | | 400 | | | 377 | |
| | | | | | | |
| Adjustments for unconsolidated real estate entity items | — | | | — | | | — | | | 46 | |
| | | | | | | |
| | | | | | | |
| Share based compensation | 1,419 | | | 1,194 | | | 2,713 | | | 2,351 | |
| Adjusted EBITDA | $ | 31,084 | | | $ | 12,479 | | | $ | 44,355 | | | $ | 13,653 | |
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, other charges, interest and other income, losses on sales of hotel properties and income or loss from unconsolidated real estate entities. We present Adjusted Hotel EBITDA because we believe it is useful to investors in comparing our hotel operating performance between periods and comparing our Adjusted Hotel EBITDA margins to those of our peer companies. Adjusted Hotel EBITDA represents the results of operations for our wholly owned hotels only.
The following is a presentation of Adjusted Hotel EBITDA for the three and six months ended June 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended | | For the six months ended |
| | June 30, | | June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | |
| Net income (loss) | $ | 9,322 | | | $ | (8,718) | | | $ | (376) | | | $ | (6,016) | |
| Add: | Interest expense | 6,936 | | | 6,356 | | | 13,325 | | | 12,826 | |
| | | | | | | | |
| Depreciation and amortization | 15,277 | | | 13,353 | | | 30,313 | | | 26,687 | |
| Corporate general and administrative | 4,462 | | | 4,316 | | | 8,405 | | | 7,844 | |
| Other charges | 150 | | | 322 | | | 400 | | | 377 | |
| Loss from unconsolidated real estate entities | — | | | — | | | — | | | 1,231 | |
| | | | | | | | |
| | | | | | | | |
| Loss on sale of hotel property | — | | | — | | | — | | | 15 | |
| | | | | | | | |
| Less: | Interest and other income | (1) | | | (28) | | | (1) | | | (102) | |
| | | | | | | | |
| | | | | | | | |
| Gain on sale of hotel properties | (2,020) | | | (28) | | | (2,020) | | | — | |
| Gain on sale of investment in unconsolidated real estate entities | — | | | — | | | — | | | (23,817) | |
| Adjusted Hotel EBITDA | $ | 34,126 | | | $ | 15,573 | | | $ | 50,046 | | | $ | 19,045 | |
Although we present FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA because we believe they are useful to investors in comparing our 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 our 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, our 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 our 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 our overall long-term incentive compensation package, although we exclude it as an expense when evaluating our 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 we consider not to be indicative of the underlying performance of our hotel properties; and
•Other companies in our industry may calculate FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA differently than we do, 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 our 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. We compensate for these limitations by relying primarily on our GAAP results and using FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA only supplementally. Our consolidated financial statements and the notes to those statements included elsewhere are prepared in accordance with GAAP.
Sources and Uses of Cash
Our principal sources of cash include net cash from operations, availability under our revolving credit facility, proceeds from debt and equity issuances, and proceeds from the sale of hotel properties. Our principal uses of cash include acquisitions, capital expenditures, operating costs, corporate expenditures, interest costs, debt repayments and distributions to equity holders.
Cash, cash equivalents, and restricted cash totaled $27.8 million as of June 30, 2022, a decrease of $2.1 million from December 31, 2021, primarily due to net cash provided by operating activities of $21.7 million, net cash provided by investing activities of $35.9 million, and net cash used in financing activities of $59.7 million.
Cash from Operations
Net cash flows provided by operating activities increased $23.9 million to $21.7 million during the six months ended June 30, 2022 compared to ($2.2) million during the six months ended June 30, 2021. The increase in cash from operating activities was primarily due to improving operating results from our hotels which generated RevPAR growth of 52.5% during the six months ended June 30, 2022 compared to the six months ended June 30, 2021.
Investing Activities Cash Flows
Net cash flows provided by investing activities increased $52.5 million to $35.9 million during the six months ended June 30, 2022 compared to ($16.6) million during the six months ended June 30, 2021. For the six months ended June 30, 2022, net cash flows provided by investing activities of $35.9 million consisted of $79.6 million in net proceeds related to the sale of four hotel properties, $0.4 million of deferred key money received for the development of the Home2 Woodland Hills, partially offset by $31.0 million related to the acquisitions of the HGI Destin hotel, $9.4 million related to capital improvements on our 39 wholly owned hotels, and $3.6 million related to the development of the Home2 Woodland Hills. For the six months ended June 30, 2021, net cash flows used in investing activities of $16.6 million consisted of $4.2 million related to capital improvements on our 39 wholly owned hotels, $15.2 million related to the development of the Home2 Woodland Hills, partially offset by $2.8 million of proceeds from the sale of an unconsolidated real estate entity (the NewINK JV).
We expect to invest approximately $10.2 million on renovations, discretionary and emergency expenditures on our existing hotels during the remainder of 2022, including improvements required under any brand PIP.
Financing Activities Cash Flows
Net cash flows used in financing activities increased $189.3 million to ($59.7) million during the six months ended June 30, 2022 compared to $129.6 million during the six months ended June 30, 2021. For the six months ended June 30, 2022, net cash flows used in financing activities of ($59.7) million were comprised of net repayments of our senior unsecured revolving credit facility of $55.0 million, principal payments on mortgage debt of $4.5 million, payments of deferred financing and offering costs of $0.3 million, distributions to unit holders of $0.1 million, and distributions on preferred shares of $4.0 million, partially offset by net borrowings on our construction loan of $4.1 million. For the six months ended June 30, 2021, net cash flows provided by financing activities of $129.6 million were comprised $116.2 million of net proceeds from our Series A Preferred Shares offering, $24.6 million of common equity proceeds raised through sales under our DRSPP and ATM Plan, and net borrowings on our construction loan of $14.2 million, partially offset by net repayments of our senior unsecured revolving credit facility of $7.3 million, principal payments on mortgage debt of $16.9 million which included the repayment of the $12.5 million mortgage loan on the Residence Inn New Rochelle, payments of financing and offering costs of $1.0 million, and distributions to unit holders of $0.3 million.
We declared total dividends of $0 and $0 per common share and LTIP unit, respectively, for the six months ended June 30, 2022, and $0 and $0 per common share and LTIP unit, respectively, for the six months ended June 30, 2021. We declared total dividends of $0.82812 and $0 per Series A preferred share for the six months ended June 30, 2022 and 2021, respectively.
Material Cash Requirements
Our material cash requirements include the following contractual obligations:
•At June 30, 2022, we had total debt principal and interest obligations of $532.0 million with $97.2 million of principal and interest payable within the next 12 months from June 30, 2022. $64.9 million of debt principal obligations payable during the next 12 months relate to the Company's credit facility which has an initial maturity date of March 8, 2023 and the Company's mortgage loans secured by the Homewood Suites San Antonio, Residence Inn Tysons, and Courtyard Houston Medical Center hotel properties. The Company has options to extend the maturity of the credit facility to March 8, 2024. See Note 8, “Debt” to our consolidated financial statements for additional information relating to our property loans and revolving credit facility.
•Lease payments due within the next 12 months from June 30, 2022 total $2.1 million. See Note 14, “Leases” to our consolidated financial statements for additional information relating to our corporate office and ground leases.
Liquidity and Capital Resources
At June 30, 2022, our leverage ratio was approximately 28.4% measured as the ratio of our net debt (total debt outstanding before deferred financing costs less unrestricted cash and cash equivalents) to hotel investments at cost. Over the past several years, we have maintained a leverage ratio between the high 20s and the low 50s. At June 30, 2022, we have total debt of $489.6 million at an average interest rate of approximately 4.9%.
At June 30, 2022 and December 31, 2021, we had $15.0 million and $70.0 million, respectively, in outstanding borrowings under our $250.0 million revolving credit facility. We had $39.1 million and $35.0 million, respectively, in outstanding borrowings under our $40 million construction loan for the Home2 Woodland Hills hotel development at June 30, 2022 and December 31, 2021. We also had mortgage debt on individual hotels aggregating $435.5 million and $439.9 million at June 30, 2022 and December 31, 2021, respectively.
Our revolving credit facility contains representations, warranties, covenants, terms and conditions customary for credit facilities of this type, including a maximum leverage ratio, a minimum fixed charge coverage ratio and minimum net worth financial covenants, limitations on (i) liens, (ii) incurrence of debt, (iii) investments, (iv) distributions, and (v) mergers and asset dispositions, covenants to preserve corporate existence and comply with laws, covenants on the use of proceeds of the revolving credit facility and default provisions, including defaults for non-payment, breach of representations and warranties, insolvency, non-performance of covenants, cross-defaults and guarantor defaults. We were in compliance with all financial covenants at June 30, 2022.
Our mortgage debt agreements contain “cash trap” provisions that are triggered when the hotel’s operating results fall below a certain debt service coverage ratio or debt yield. When these provisions are triggered, all of the excess cash flow generated by the hotel is deposited directly into cash management accounts for the benefit of our lenders until a specified debt service coverage ratio or debt yield is reached. Such provisions do not allow the lender the right to accelerate repayment of the underlying debt. As of June 30, 2022, the debt service coverage ratios or debt yields for seven of our mortgage loans were below the minimum thresholds such that the cash trap provision of each respective loan could be enforced. As of June 30, 2022, one of our mortgage debt lenders has enforced cash trap provisions. We do not expect that such cash traps will affect our ability to satisfy our short-term liquidity requirements.
In December 2017, we established a $50 million dividend reinvestment and stock purchase plan. We filed a new $50 million shelf registration statement for the dividend reinvestment and stock purchase plan (the "DRSPP") on December 22, 2020 to replace the prior plan. Under the DRSPP, shareholders may purchase additional common shares by reinvesting some or all of the cash dividends received on common shares. Shareholders may also make optional cash purchases of common shares subject to certain limitations detailed in the prospectuses for the DRSPP. During the three months ended June 30, 2022, the Company issued 1,522 common shares under the DRSPP at a weighted average price of $12.47, which generated $19 thousand of proceeds. As of June 30, 2022, there was approximately $47.9 million in common shares available for issuance under the DRSPP.
In January 2021, we established an "at-the-market" offering program (the "ATM Program") whereby, from time to time, we may publicly offer and sell our common shares having an aggregate maximum offering price up to $100 million by means of ordinary brokers transactions on the New York Stock Exchange (the "NYSE"), in negotiated transactions or in transactions that are deemed to be "at-the-market" offerings as defined in Rule 415 under the Securities Act of 1933, as amended. Cantor Fitzgerald & Co., Barclays Capital Inc., BMO Capital Markets Corp., BofA Securities, Inc., BTIG, LLC, Citigroup Global Markets Inc., Regions Securities LLC, Stifel, Nicolaus & Company, Incorporated and Wells Fargo Securities act as sales agents under the ATM Program. The Company did not issue any shares under the ATM Program during the three months ended June 30, 2022. As of June 30, 2022, there was approximately $77.5 million in common shares available for issuance under the ATM Program.
We expect to meet our short-term liquidity requirements generally through existing cash balances and availability under our credit facility. We believe that our existing cash balances and availability under our credit facility will be adequate to fund operating obligations, pay interest on any borrowings and fund dividends in accordance with the requirements for qualification as a REIT under the Code. We expect to meet our long-term liquidity requirements, such as hotel property acquisitions and debt maturities or repayments through additional long-term secured and unsecured borrowings, the issuance of additional equity or debt securities or the possible sale of existing assets.
The COVID-19 pandemic has caused, and is continuing to cause, significant disruption in the financial markets both globally and in the United States, and will continue to impact, possibly materially, our business, financial condition and results of operations. We cannot predict the degree, or duration, to which our operations will continue to be affected by the COVID-19 outbreak, and the effects could be material. While we believe the liquidity provided by our unrestricted cash and credit facility availability, and aggressive cost reduction initiatives, will enable us to fund our current obligations for the foreseeable future, COVID-19 has resulted in significant disruption of global financial markets, which could have a negative impact on our ability to access capital in the future.
We intend to continue to invest in hotel properties as suitable opportunities arise. We intend to finance our future investments with free cash flow, the net proceeds from additional issuances of common and preferred shares, issuances of
common units in our Operating Partnership or other securities, borrowings or asset sales. The success of our acquisition strategy depends, in part, on our ability to access additional capital through other sources. There can be no assurance that we will continue to make investments in properties that meet our investment criteria. Additionally, we may choose to dispose of certain hotels as a means to provide liquidity.
We had no material off-balance sheet arrangements at June 30, 2022.
Dividend Policy
Our common share dividend policy has been to distribute, annually, approximately 100% of our annual taxable income. We suspended common share dividends after the March 2020 payment due to the decline in operating performance caused by the COVID-19 pandemic. We plan to pay dividends required to maintain REIT status. There were no dividends and distributions declared for the six months ended June 30, 2022 per common share and LTIP unit. The amount of any dividends is determined by our Board of Trustees.
Chatham declared total dividends of $0.82812 per share of 6.625% Series A Cumulative Redeemable Preferred Shares during the six months ended June 30, 2022.
Inflation
Operators of hotels, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. However, competitive pressures may limit the ability of our management companies to raise room rates. Inflation may also affect our expenses and costs of capital investments by increasing, among other things, the costs of construction, labor, employee-related benefits, food, commodities and other materials, taxes, property and casualty insurance and utilities.
Seasonality
Demand for our hotels is affected by recurring seasonal patterns. Generally, we expect that we will have lower revenue, operating income and cash flow in the first and fourth quarters and higher revenue, operating income and cash flow in the second and third quarters. These general trends are, however, influenced by overall economic cycles and the geographic locations of our hotels. To the extent that cash flow from operations is insufficient during any quarter, due to temporary or seasonal fluctuations in revenue, we expect to utilize cash on hand or borrowings under our credit facility to pay expenses, debt service or to make distributions to our equity holders.
Critical Accounting Estimates
Our consolidated financial statements have been prepared in conformity with GAAP, which requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. While we do not believe the reported amounts would be materially different, application of these policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on experience and on various other assumptions that are believed to be reasonable under the circumstances. All of our significant accounting policies, including certain critical accounting estimates, are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.