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, 2022. 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. The pandemic caused a sharp decline in travel and a significant reduction in hotel demand, which caused us to experience a significant decline in revenues, profitability and cash flows from operations during the years ended December 31, 2020 and December 31, 2021. During the year ended December 31, 2022, we experienced a significant improvement in our business which has continued into 2023, initially driven primarily by leisure travel, and more recently, improvement in other demand segments including corporate and group. There have also been material increases in inflation and interest rates. We anticipate that continued improvement in operating trends will be dependent on continued strength in leisure travel and a recovery of business travel. A return to normalized levels of operations is dependent on a continuation of the recovery in our business, further dissipation of concerns related to the COVID-19 pandemic, geopolitical stability, and moderating inflation.
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, such forward-looking statements relate to future events, our plans, strategies, prospects and future financial performance, and involve known and unknown risks that are difficult to predict, uncertainties and other factors that are, in some cases, beyond our control and which 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, uncertainty surrounding the financial stability of the United States, Europe and China, 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, a potential recessionary environment, 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, 2022 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 March 31, 2023, our leverage ratio was 26.7% 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 March 31, 2023, we have total debt of $469.7 million at a weighted 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
Smith Travel Research reported that U.S. lodging industry RevPAR increased 16.7% for the three months ended March 31, 2023, with RevPAR up 27.3% in January 2023, up 16.6% in February 2023 and up 10.4% in March 2023. We expect that over the remainder of 2023, RevPAR will continue to increase.
Comparison of the three months ended March 31, 2023 to the three months ended March 31, 2022
Results of operations for the three months ended March 31, 2023 include the operating activities of our 39 wholly owned hotels that were owned for the entire period. 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. The changes in results described below were driven primarily by the recovery from the COVID-19 pandemic, the sales of four hotels, the acquisition of one hotel, 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 | | |
| March 31, 2023 | | March 31, 2022 | | % Change |
| Room | $ | 61,671 | | | $ | 50,164 | | | 22.9 | % |
| Food and beverage | 2,087 | | | 1,415 | | | 47.5 | % |
| Other | 3,491 | | | 2,980 | | | 17.1 | % |
| Cost reimbursements from related parties | 365 | | | 326 | | | 12.0 | % |
| Total revenue | $ | 67,614 | | | $ | 54,885 | | | 23.2 | % |
Total revenue was $67.6 million for the three months ended March 31, 2023, up $12.7 million compared to total revenue of $54.9 million for the corresponding 2022 period. The increase in total revenue primarily was related to the recovery from the COVID-19 pandemic and the ramp-up of the Home2 Woodland Hills, which opened on January 24, 2022. The Home2 Woodland Hills contributed $2.6 million of revenue during the three months ended March 31, 2023, up $1.8 million from the $0.8 million contributed during the three months ended March 31, 2022. The increase was partially offset by the impact from selling four hotels during the second quarter of 2022 that contributed $0 of revenue during the three months ended March 31, 2023, down $3.1 million from the $3.1 million these hotels contributed during the three months ended March 31, 2022. 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 91.2% and 91.4% of total revenue for the three months ended March 31, 2023 and 2022, respectively. Room revenue was $61.7 million and $50.2 million for the three months ended March 31, 2023 and 2022, respectively, and the increase in room revenue primarily was related to the recovery from the COVID-19 pandemic and the ramp-up of the Home2 Woodland Hills, which opened on January 24, 2022.
Food and beverage revenue was $2.1 million for the three months ended March 31, 2023, up $0.7 million compared to $1.4 million for the corresponding 2022 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. Other operating revenue was $3.5 million and $3.0 million for the three months ended March 31, 2023 and 2022, 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 related parties were $0.4 million and $0.3 million for the three months ended March 31, 2023 and 2022, respectively. The cost reimbursements were offset by the reimbursed costs from related parties included in operating expenses.
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 39 hotels wholly owned by the Company as of March 31, 2023 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 March 31, | | | | |
| 2023 | | 2022 | | Percentage Change |
| Same Property (39 hotels) | | Actual (39 hotels) | | Same Property (39 hotels) | | Actual (43 hotels) | | Same Property (39 hotels) | | Actual (39 / 43 hotels) |
| Occupancy | 68.5 | % | | 68.5 | % | | 60.7 | % | | 59.9 | % | | 12.9 | % | | 14.4 | % |
| ADR | $ | 168.95 | | | $ | 169.08 | | | $ | 148.72 | | | $ | 146.29 | | | 13.6 | % | | 15.6 | % |
| RevPAR | $ | 115.78 | | | $ | 115.87 | | | $ | 90.21 | | | $ | 87.64 | | | 28.3 | % | | 32.2 | % |
For the three months ended March 31, 2023 same property RevPAR increased 28.3% due to an increase in ADR of 13.6% and an increase in occupancy of 12.9% primarily related to the recovery from the COVID-19 pandemic. Same property RevPAR increased 37.4% in January 2023, increased 30.1% in February 2023, and increased 21.7% in March 2023. Same property RevPAR was $92.52 in January 2023, $117.85 in February 2023, and $136.69 in March 2023.
Hotel Operating Expenses
Hotel operating expenses consist of the following for the periods indicated (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| For the three months ended | | |
| March 31, 2023 | | March 31, 2022 | | % Change |
| Hotel operating expenses: | | | | | |
| Room | $ | 14,117 | | | $ | 11,594 | | | 21.8 | % |
| Food and beverage | 1,557 | | | 1,047 | | | 48.7 | % |
| Telephone | 362 | | | 402 | | | (10.0) | % |
| Other hotel operating | 914 | | | 732 | | | 24.9 | % |
| General and administrative | 6,805 | | | 5,350 | | | 27.2 | % |
| Franchise and marketing fees | 5,341 | | | 4,408 | | | 21.2 | % |
| Advertising and promotions | 1,515 | | | 1,189 | | | 27.4 | % |
| Utilities | 3,151 | | | 2,888 | | | 9.1 | % |
| Repairs and maintenance | 3,730 | | | 3,445 | | | 8.3 | % |
| Management fees | 2,287 | | | 1,918 | | | 19.2 | % |
| Insurance | 699 | | | 710 | | | (1.5) | % |
| Total hotel operating expenses | $ | 40,478 | | | $ | 33,683 | | | 20.2 | % |
Hotel operating expenses increased $6.8 million, or 20.2%, to $40.5 million for the three months ended March 31, 2023 from $33.7 million for the three months ended March 31, 2022. The primary causes of the increase in hotel operating expenses were an increase in revenues and occupancy caused by the recovery from the COVID-19 pandemic and inflation. The increase was partially offset by four hotels that were sold during the second quarter of 2022 that contributed $0 of operating expenses during the three months ended March 31, 2023, down $2.2 million from the $2.2 million these hotels contributed during the three months ended March 31, 2022.
Room expenses, which are the most significant component of hotel operating expenses, increased $2.5 million from $11.6 million for the three months ended March 31, 2022 to $14.1 million for the three months ended March 31, 2023. 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 and inflation.
The remaining hotel operating expenses increased $4.3 million, from $22.1 million for the three months ended March 31, 2022 to $26.4 million for the three months ended March 31, 2023. 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 inflation.
Depreciation and Amortization
Depreciation and amortization expense decreased $0.7 million from $15.0 million for the three months ended March 31, 2022 to $14.3 million for the three months ended March 31, 2023. The decrease was primarily due to the depreciation expense from four hotels that were sold during the second quarter of 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 increased from $5.0 million for the three months ended March 31, 2022 to $6.1 million for the three months ended March 31, 2023. The increase was primarily related to increases in property tax assessments as a result of the recovery from 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 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 $1.3 million for the three months ended March 31, 2023 and 2022, respectively) was $2.9 million for the three months ended March 31, 2023 versus $2.6 million for the three months ended March 31, 2022.
Other Charges
Other charges decreased from $0.3 million for the three months ended March 31, 2022 to $0 for the three months ended March 31, 2023.
Reimbursable Costs from Related Parties
Reimbursable costs from related parties, comprised of corporate payroll and rent costs were $0.4 million and $0.3 million for the three months ended March 31, 2023 and 2022, respectively. The cost reimbursements were offset by the cost reimbursements from related parties included in revenues.
Interest Expense, Including Amortization of Deferred Fees
Interest expense increased $49 thousand from $6.4 million for the three months ended March 31, 2022 to $6.4 million for the three months ended March 31, 2023 and is comprised of the following (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| For the three months ended | | |
| March 31, 2023 | | March 31, 2022 | | % Change |
| Mortgage debt interest | $ | 4,746 | | | $ | 5,077 | | | (6.5) | % |
| Credit facility and term loan interest and unused fees | 978 | | | 1,013 | | | (3.5) | % |
| Interest rate cap | (16) | | | (244) | | | (93.4) | % |
| Construction loan interest | 415 | | | 539 | | | (23.0) | % |
| Capitalized interest | — | | | (330) | | | (100.0) | % |
| Amortization of deferred financing costs | 315 | | | 334 | | | (5.7) | % |
| Total | $ | 6,438 | | | $ | 6,389 | | | 0.8 | % |
Loss on Early Extinguishment of Debt
Loss on early extinguishment of debt increased $0.7 million from $0 for the three months ended March 31, 2022. The loss in 2023 is related to the Company's repayment of the construction loan on the Home2 Woodland Hills hotel property.
Income Tax Expense
Income tax expense for the three months ended March 31, 2023 and 2022 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 2023 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 $5.0 million for the three months ended March 31, 2023, compared to a net loss of $9.7 million for the three months ended March 31, 2022. The change in net loss was primarily due to an improvement in performance at our hotels due to the continued recovery from the COVID-19 pandemic, combined with the other 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 months ended March 31, 2023 and 2022 (in thousands, except share data):
| | | | | | | | | | | | | | | |
| For the three months ended | | |
| March 31, | | |
| 2023 | | 2022 | | | | |
| Funds From Operations (“FFO”): | | | | | | | |
| Net loss | $ | (5,042) | | | $ | (9,699) | | | | | |
| Preferred dividends | (1,987) | | | (1,987) | | | | | |
| Net loss attributable to common shares and common units | (7,029) | | | (11,686) | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Depreciation | 14,204 | | | 14,970 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| FFO attributable to common share and unit holders | 7,175 | | | 3,284 | | | | | |
| Other charges | — | | | 250 | | | | | |
| Loss on early extinguishment of debt | 691 | | | — | | | | | |
| | | | | | | |
| Adjusted FFO attributable to common share and unit holders | $ | 7,866 | | | $ | 3,534 | | | | | |
| Weighted average number of common shares and units | | | | | | | |
| Basic | 50,181,826 | | | 49,845,825 | | | | | |
| Diluted | 50,310,638 | | | 50,042,723 | | | | | |
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 months ended March 31, 2023 and 2022 (in thousands):
| | | | | | | | | | | | | | | |
| For the three months ended | | |
| March 31, | | |
| 2023 | | 2022 | | | | |
| Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”): | | | | | | | |
| Net loss | $ | (5,042) | | | $ | (9,699) | | | | | |
| Interest expense | 6,438 | | | 6,389 | | | | | |
| | | | | | | |
| Depreciation and amortization | 14,258 | | | 15,036 | | | | | |
| | | | | | | |
| EBITDA | 15,654 | | | 11,726 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
EBITDAre | 15,654 | | | 11,726 | | | | | |
| Other charges | — | | | 250 | | | | | |
| Loss on early extinguishment of debt | 691 | | | — | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Share based compensation | 1,452 | | | 1,294 | | | | | |
| Adjusted EBITDA | $ | 17,797 | | | $ | 13,270 | | | | | |
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 months ended March 31, 2023 and 2022 (in thousands):
| | | | | | | | | | | | | | | | | | |
| | For the three months ended | | |
| | March 31, | | |
| | 2023 | | 2022 | | | | |
| | | | | | | | |
| Net loss | $ | (5,042) | | | $ | (9,699) | | | | | |
| Add: | Interest expense | 6,438 | | | 6,389 | | | | | |
| | | | | | | | |
| Depreciation and amortization | 14,258 | | | 15,036 | | | | | |
| Corporate general and administrative | 4,341 | | | 3,942 | | | | | |
| Other charges | — | | | 250 | | | | | |
| | | | | | | | |
| | | | | | | | |
| Loss on early extinguishment of debt | 691 | | | — | | | | | |
| | | | | | | | |
| | | | | | | | |
| Less: | Interest and other income | (20) | | | — | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Adjusted Hotel EBITDA | $ | 20,666 | | | $ | 15,918 | | | | | |
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 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 $35.8 million as of March 31, 2023, a decrease of $9.4 million from December 31, 2022, primarily due to net cash provided by operating activities of $4.8 million, net cash used in investing activities of $8.1 million, and net cash used in financing activities of $6.1 million.
Cash from Operations
Net cash flows provided by operating activities increased $9.0 million to $4.8 million during the three months ended March 31, 2023 compared to $(4.2) million during the three months ended March 31, 2022. The increase in cash from operating activities was primarily due to improving operating results from our hotels which generated RevPAR growth of 28.4% during the three months ended March 31, 2023 compared to the three months ended March 31, 2022.
Investing Activities Cash Flows
Net cash flows used in investing activities decreased $30.0 million to $(8.1) million during the three months ended March 31, 2023 compared to $(38.1) million during the three months ended March 31, 2022. For the three months ended March 31, 2023, net cash flows used in investing activities of $(8.1) million consisted of $8.1 million related to capital improvements on our 39 wholly owned hotels. For the three months ended March 31, 2022, net cash flows used in investing activities of $(38.1) million consisted of $31.0 million related to the acquisition of the HGI Destin hotel property, $4.1 million related to capital improvements on our 43 wholly owned hotels during the period, and $2.9 million related to the development of the Home2 Woodland Hills hotel property.
We expect to invest approximately $22.5 million on renovations, discretionary and emergency expenditures on our existing hotels during the remainder of 2023, including improvements required under any brand PIP.
Financing Activities Cash Flows
Net cash flows used in financing activities increased $44.9 million to $(6.1) million during the three months ended March 31, 2023 compared to $38.8 million during the three months ended March 31, 2022. For the three months ended March 31, 2023, net cash flows used in financing activities of $(6.1) million were comprised of the repayment of our construction loan of $39.3 million, principal payments on mortgage debt of $36.2 million, distributions to common share and unit holders of $3.5 million, and distributions on preferred shares of $2.0 million, partially offset by borrowings on our unsecured term loan of $75.0 million. For the three months ended March 31, 2022, net cash flows provided by financing activities of $38.8 million were comprised of borrowings on our credit facility of $40.0 million, net borrowing on our construction loan of $3.4 million, offset by principal payments on mortgage debt of $2.3 million, payments of deferred financing and offering costs of $0.2 million, and distributions on preferred shares of $2.0 million.
We declared total dividends of $0.07 and $0.07 per common share and LTIP unit, respectively, for the three months ended March 31, 2023, and $0 and $0 per common share and LTIP unit, respectively, for the three months ended March 31, 2022. We declared total dividends of $0.41406 and $0.41406 per Series A preferred share for the three months ended March 31, 2023 and 2022, respectively.
Material Cash Requirements
Our material cash requirements include the following contractual obligations:
•At March 31, 2023, we had total debt principal and interest obligations of $498.9 million with $103.4 million of principal and interest payable within the next 12 months from March 31, 2023. $75.8 million of debt principal obligations payable during the next 12 months relate to maturities of the Company's mortgage loans secured by the Courtyard Houston Medical Center, Hyatt Place Pittsburgh, and Residence Inn Bellevue hotel properties. See Note 7, “Debt” to our consolidated financial statements for additional information relating to our property loans, revolving credit facility, and unsecured term loan.
•Lease payments due within the next 12 months from March 31, 2023 total $2.1 million. See Note 13, “Leases” to our consolidated financial statements for additional information relating to our corporate office and ground leases.
Liquidity and Capital Resources
At March 31, 2023, our leverage ratio was approximately 26.7% 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 March 31, 2023, we have total debt of $469.7 million at an average interest rate of approximately 4.9%.
At March 31, 2023 and December 31, 2022, we had $0 and $0, respectively, in outstanding borrowings under our $260.0 million revolving credit facility. We had $75.0 million and $0, respectively, in outstanding borrowings under our unsecured term loan at March 31, 2023 and December 31, 2022.
Our revolving credit facility and term loan contain 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 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 March 31, 2023.
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 March 31, 2023, four of our mortgage debt lenders have enforced cash trap provisions resulting in $5.1 million of restricted cash. 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 March 31, 2023, the Company issued 1,215 common shares under the DRSPP at a weighted average price of $12.10, which generated $15 thousand of proceeds. As of March 31, 2023, 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 March 31, 2023. As of March 31, 2023, 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 and unsecured term loan. We believe that our existing cash balances and availability under our credit facility and unsecured term loan 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.
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 March 31, 2023.
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. The Company reinstated common share dividends during the fourth quarter of 2022. During the three months ended March 31, 2023, the Company declared total common share dividends of $0.07 per share and distributions on LTIP units of $0.07 per unit. There were no common share dividends declared during the three months ended March 31, 2022. We plan to pay dividends required to maintain REIT status. The amount of any dividend is determined by our Board of Trustees.
Chatham declared dividends of $0.41406 per share of 6.625% Series A Cumulative Redeemable Preferred Shares during the three months ended March 31, 2023.
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, 2022.