Chatham Lodging Trust(CLDT) - 2024 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements The unaudited consolidated financial statements detail the company's financial position, performance, and cash flows Consolidated Balance Sheets Balance Sheet Highlights (in thousands): | Metric | June 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Total Assets | $1,302,478 | $1,343,930 | | Total Liabilities | $504,585 | $539,554 | | Total Equity | $797,893 | $804,376 | | Investment in hotel properties, net | $1,241,935 | $1,227,633 | | Cash and cash equivalents | $10,595 | $68,130 | | Mortgage debt, net | $190,373 | $394,544 | | Revolving credit facility | $120,000 | $— | | Unsecured term loan, net | $139,417 | $89,533 | Consolidated Statements of Operations Three Months Ended June 30 (in thousands): | Metric | 2024 | 2023 | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | $86,479 | $84,476 | 2.4% | | Total Operating Expenses | $72,401 | $69,077 | 4.8% | | Operating Income | $14,090 | $15,454 | (8.7)% | | Interest Expense | $(7,723) | $(6,442) | 19.9% | | Net Income Attributable to Common Shareholders | $4,861 | $7,157 | (32.1)% | | Basic EPS | $0.10 | $0.15 | (33.3)% | Six Months Ended June 30 (in thousands): | Metric | 2024 | 2023 | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | $154,920 | $152,091 | 1.9% | | Total Operating Expenses | $139,714 | $134,624 | 3.8% | | Operating Income | $15,066 | $17,522 | (14.1)% | | Interest Expense | $(15,030) | $(12,880) | 16.7% | | Net Income Attributable to Common Shareholders | $(2,354) | $321 | (832.1)% | | Basic EPS | $(0.05) | $0.01 | (600.0)% | Consolidated Statements of Equity Total Equity (in thousands): | Period | Balance, April 1, 2024 | Balance, June 30, 2024 | | :--- | :--- | :--- | | Total Shareholders' Equity | $765,029 | $766,472 | | Noncontrolling Interest in Operating Partnership | $29,949 | $31,421 | | Total Equity | $794,978 | $797,893 | - Key Equity Changes (Six Months Ended June 30, 2024, in thousands): - Net income: $1,548 - Dividends declared on common shares: $(6,847) - Dividends accrued on preferred shares: $(3,975) - Amortization of share-based compensation: $27[10] Consolidated Statements of Cash Flows Cash Flow Summary (Six Months Ended June 30, in thousands): | Metric | 2024 | 2023 | Change | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $32,069 | $32,741 | $(672) | | Net cash used in investing activities | $(46,008) | $(15,600) | $(30,408) | | Net cash used in financing activities | $(46,114) | $(14,595) | $(31,519) | | Net change in cash, cash equivalents and restricted cash | $(60,053) | $2,546 | $(62,599) | | Cash, cash equivalents and restricted cash, end of period | $25,696 | $47,699 | $(22,003) | - Key Investing Activities (Six Months Ended June 30, 2024, in thousands): - Improvements and additions to hotel properties: $(18,744) - Acquisition of hotel properties: $(43,730) - Proceeds from sale of hotel properties, net: $17,166[11] - Key Financing Activities (Six Months Ended June 30, 2024, in thousands): - Repayments of mortgage debt: $(263,961) - Borrowings on revolving credit facility: $121,000 - Borrowings on unsecured term loan: $50,000 - Proceeds from the issuance of mortgage debt: $60,300 - Distributions-common shares/units: $(7,200) - Distributions-preferred shares: $(3,975)[11] Notes to the Consolidated Financial Statements Note 1. Organization - The company operates as an internally-managed REIT, investing in upscale extended-stay and premium-branded select-service hotels[12] - As of June 30, 2024, the hotel portfolio consisted of 39 hotels with 5,883 rooms across 17 states and D.C[13] - All hotels are managed by Island Hospitality Management, LLC (IHM), which is wholly owned by the Company's Chairman, President, and CEO[14] Note 2. Summary of Significant Accounting Policies - The unaudited interim consolidated financial statements are prepared in accordance with U.S. GAAP and SEC rules, including normal, recurring adjustments[15] - The preparation of financial statements requires management estimates and assumptions, which may differ from actual results[17] - Recently Issued Accounting Standards: - ASU 2023-07 (Segment Reporting): Effective for fiscal years beginning after December 15, 2024, with impact currently under evaluation[18] - ASU 2020-04/2022-06 (Reference Rate Reform): Sunset provision deferred to December 31, 2024, with no material impact anticipated[19] Note 3. Acquisition of Hotel Properties - The company acquired the Home2 Suites Phoenix Downtown for $43.3 million on May 30, 2024[20] - The hotel property is classified as a finance lease, with corresponding ROU assets and lease liability recorded[20] Note 4. Disposition of Hotel Properties - The company sold the Hilton Garden Inn Denver Tech Center for $18.0 million on January 9, 2024[21] - The disposition resulted in a recognized loss on sale of $0.1 million[21] Note 5. Investment in Hotel Properties Investment in Hotel Properties, Net (in thousands): | Asset Category | June 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Land and improvements | $285,723 | $289,671 | | Building and improvements | $1,263,089 | $1,274,970 | | Furniture, fixtures and equipment | $109,683 | $108,222 | | Finance lease assets | $43,730 | $— | | Renovations in progress | $12,815 | $15,138 | | Less accumulated depreciation and amortization | $(473,105) | $(460,368) | | Investment in hotel properties, net | $1,241,935 | $1,227,633 | Note 6. Debt Total Debt Outstanding (in thousands): | Metric | June 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Total debt before unamortized debt issue costs | $452,448 | $486,109 | | Unamortized term loan and mortgage debt issue costs | $(2,658) | $(2,032) | | Total debt outstanding | $449,790 | $484,077 | - Debt Activity (Six Months Ended June 30, 2024): - Repaid $263.96 million in maturing mortgage loans[25] - Increased unsecured term loan from $90.0 million to $140.0 million[28] - Obtained new mortgage loans totaling $60.3 million[29][30] - The weighted average interest rate on total debt was approximately 6.8% at June 30, 2024[86] - One mortgage lender enforced cash trap provisions, resulting in $0.4 million of restricted cash with no expected impact on short-term liquidity[33] Future Principal Payments (in thousands): | Year | Amount | | :--- | :--- | | 2024 (remaining six months) | $33,248 | | 2025 | $155,975 | | 2026 | $120,000 | | 2027 | $— | | 2028 | $24,590 | | Thereafter | $118,635 | | Total debt before unamortized debt issue costs | $452,448 | Note 7. Income Taxes - Income tax expense was zero for both the three and six months ended June 30, 2024 and 2023[37] - A full valuation allowance is recognized on net deferred tax assets due to uncertainty regarding the utilization of taxable losses[37] Note 8. Dividends Declared and Paid Common Dividends and LTIP Distributions: | Period | Common Share Amount | LTIP Unit Amount | | :--- | :--- | :--- | | Six months ended June 30, 2024 | $0.14 | $0.14 | | Six months ended June 30, 2023 | $0.14 | $0.14 | Preferred Dividends: | Period | Dividend per Preferred Share | | :--- | :--- | | Six months ended June 30, 2024 | $0.82812 | | Six months ended June 30, 2023 | $0.82812 | Note 9. Shareholders' Equity - Common shares outstanding totaled 48,909,201 as of June 30, 2024[44] - The ATM Program has approximately $77.5 million in common shares available for issuance, with no shares issued in the first half of 2024[45] - The DRSPP has approximately $50.0 million in common shares available for issuance, with 2,752 shares issued for $27 thousand in the first half of 2024[46] - There are 4,800,000 Series A Preferred Shares outstanding with a 6.625% annual distribution rate[48] - 1,909,342 vested LTIP units were held by current and former employees as of June 30, 2024[50] Note 10. Earnings Per Share EPS Reconciliation (Six Months Ended June 30, in thousands, except per share data): | Metric | 2024 | 2023 | | :--- | :--- | :--- | | Net income (loss) attributable to common shareholders | $(2,354) | $321 | | Net income (loss) attributable to common shareholders excluding amounts attributable to unvested shares and units | $(2,418) | $349 | | Weighted average number of common shares - basic | 48,896,301 | 48,842,850 | | Weighted average number of common shares - diluted | 48,896,301 | 48,964,908 | | Basic income (loss) per common share | $(0.05) | $0.01 | | Diluted income (loss) per common share | $(0.05) | $0.01 | - For the six months ended June 30, 2024, 347,788 unvested shares and units were excluded from the diluted EPS calculation as they were anti-dilutive[51] Note 11. Equity Incentive Plan - The plan is designed to attract and retain independent trustees, executive officers, and other key employees[54] - There are 722,380 common shares available for issuance under the plan as of June 30, 2024[54] Restricted Share Awards (Six Months Ended June 30, 2024): | Metric | Number of Shares | Weighted-Average Grant Date Fair Value | | :--- | :--- | :--- | | Non-vested at beginning of period | 5,789 | $11.78 | | Granted | 2,943 | $10.20 | | Vested | (819) | $12.21 | | Non-vested at end of period | 7,913 | $11.15 | LTIP Unit Awards (Six Months Ended June 30, 2024): | Metric | Number of Units | Weighted-Average Grant Date Fair Value | | :--- | :--- | :--- | | Non-vested at beginning of period | 999,955 | $15.37 | | Granted | 512,264 | $11.18 | | Vested | (322,025) | $14.03 | | Forfeited | (28,391) | $15.91 | | Non-vested at end of period | 1,161,803 | $13.88 | - 2024 LTIP Grants (March 1, 2024): - Time-Based LTIP Unit Awards: 204,909 units, vesting ratably based on employment[58][59] - Performance-Based LTIP Unit Awards: 307,355 units, vesting based on relative TSR performance over a three-year period[61][62] - Unrecognized compensation cost for LTIP units was $9.9 million as of June 30, 2024, expected to be recognized over approximately 2.1 years[63] Note 12. Leases - Leases are classified as operating or finance leases, with corresponding ROU assets and lease liabilities recognized on the balance sheet[65] - A new 10-year corporate office lease was signed in May 2024, with annual base rent ranging from $0.6 million to $0.7 million[70] - The Home2 Phoenix hotel property is under an 8-year GPLET agreement, classified as a finance lease[71] ROU Assets and Lease Liabilities (in thousands): | Metric | June 30, 2024 | | :--- | :--- | | Finance lease assets, net | $43,580 | | Operating lease assets, net | $17,849 | | Total ROU asset, net | $61,429 | | Finance lease liability | $273 | | Operating lease liability | $20,586 | | Total lease liability | $20,859 | - The weighted-average remaining lease term is 41.6 years[73] - The weighted-average discount rate is 6.90%[73] Total Future Lease Payments (in thousands): | Year | Amount | | :--- | :--- | | 2024 (remaining six months) | $940 | | 2025 | $1,966 | | 2026 | $1,768 | | 2027 | $1,313 | | 2028 | $1,338 | | Thereafter | $62,510 | | Total lease payments | $69,835 | Note 13. Commitments and Contingencies - The company is subject to various claims and lawsuits, but aggregate liabilities are not expected to have a material adverse impact[75] - All 39 hotels are managed by IHM, with base management fees being a percentage of gross room revenue and incentive fees capped at 1% of gross hotel revenues[76][79] - Management fees totaled $2.9 million for Q2 2024 and $5.2 million year-to-date[77] - Franchise agreements have a weighted average expiration of May 2034, with fees based on a percentage of gross room revenue[78] - Franchise and marketing fees totaled $6.9 million for Q2 2024 and $12.4 million year-to-date[78] Note 14. Related Party Transactions - IHM, owned by the CEO, manages all 39 of the company's hotels[79] - Management Fees Paid to IHM: - Three months ended June 30: $2.9 million (2024) vs $2.8 million (2023)[79] - Six months ended June 30: $5.2 million (2024) vs $5.1 million (2023)[79] - The company receives reimbursements for shared office expenses from related parties, which have no impact on operating or net income[80] Note 15. Subsequent Events - Debt Activity (July 2024): - Borrowed $15.0 million on the unsecured revolving credit facility[81] - Repaid an $18.8 million mortgage loan on the Hilton Garden Inn Marina del Rey[81] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition, operational results, performance indicators, liquidity, and capital resources Statement Regarding Forward-Looking Information - The report includes forward-looking statements about future results, financial condition, liquidity, and plans[84] - These statements are subject to known and unknown risks, including economic conditions, competition, and lodging fundamentals[84] Overview - The company's strategy is to invest in upscale extended-stay and premium-branded select-service hotels in diverse markets with high barriers to entry[85] - The leverage ratio was 25.8% as of June 30, 2024 (net debt to hotel investments at cost)[86] - Total debt was $452.4 million at a weighted average interest rate of approximately 6.8% as of June 30, 2024[86] - The company operates as a REIT, leasing hotels to taxable REIT subsidiary lessees managed by independent contractors[88] Key Indicators of Operating Performance and Financial Condition - Non-financial metrics include Average Daily Rate (ADR), Occupancy, and Revenue Per Available Room (RevPAR)[89] - Financial metrics include Funds From Operations (FFO), Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA, and Adjusted Hotel EBITDA[89] Results of Operations Industry Outlook - U.S. Lodging RevPAR increased 2.5% for the three months ended June 30, 2024[92] - A modest RevPAR increase is expected for the remainder of 2024[92] Comparison of the three months ended June 30, 2024 to the three months ended June 30, 2023 Revenues (in thousands): | Revenue Category | Q2 2024 | Q2 2023 | % Change | | :--- | :--- | :--- | :--- | | Room | $79,044 | $77,486 | 2.0% | | Food and beverage | $2,127 | $2,094 | 1.6% | | Other | $5,033 | $4,531 | 11.1% | | Reimbursable costs from related parties | $275 | $365 | (24.7)% | | Total revenue | $86,479 | $84,476 | 2.4% | Same Property Metrics (38 hotels): | Metric | Q2 2024 | Q2 2023 | % Change | | :--- | :--- | :--- | :--- | | Occupancy | 82.3% | 79.2% | 3.9% | | ADR | $183.16 | $183.52 | (0.2)% | | RevPAR | $150.69 | $145.40 | 3.6% | Hotel Operating Expenses (in thousands): | Expense Category | Q2 2024 | Q2 2023 | % Change | | :--- | :--- | :--- | :--- | | Room | $16,966 | $14,578 | 16.4% | | Total hotel operating expenses | $46,571 | $43,323 | 7.5% | - Depreciation and Amortization was $14.9 million in Q2 2024 compared to $14.7 million in Q2 2023[102] - Property Taxes, Ground Rent and Insurance decreased by $0.1 million due to successful property tax appeals[102] - Interest Expense increased by $1.3 million to $7.7 million, primarily due to higher credit facility and term loan interest[105][106] - Net Income was $7.0 million in Q2 2024 versus $9.4 million in Q2 2023, a decrease driven by higher operating costs and interest expense[107] Comparison of the six months ended June 30, 2024 to the six months ended June 30, 2023 Revenues (in thousands): | Revenue Category | YTD Q2 2024 | YTD Q2 2023 | % Change | | :--- | :--- | :--- | :--- | | Room | $141,526 | $139,157 | 1.7% | | Food and beverage | $3,973 | $4,182 | (5.0)% | | Other | $8,868 | $8,022 | 10.5% | | Reimbursable costs from related parties | $553 | $730 | (24.2)% | | Total revenue | $154,920 | $152,091 | 1.9% | Same Property Metrics (38 hotels): | Metric | YTD Q2 2024 | YTD Q2 2023 | % Change | | :--- | :--- | :--- | :--- | | Occupancy | 76.2% | 74.3% | 2.6% | | ADR | $177.44 | $177.24 | 0.1% | | RevPAR | $135.16 | $131.70 | 2.6% | Hotel Operating Expenses (in thousands): | Expense Category | YTD Q2 2024 | YTD Q2 2023 | % Change | | :--- | :--- | :--- | :--- | | Room | $32,099 | $28,694 | 11.9% | | Total hotel operating expenses | $88,413 | $83,800 | 5.5% | - Depreciation and Amortization increased by $1.3 million to $30.2 million[118] - Property Taxes, Ground Rent and Insurance decreased by $0.9 million due to successful property tax appeals[119] - The company recognized a $0.1 million loss on sale of hotel property in 2024 versus a $0.1 million gain in 2023[121] - Interest and Other Income increased by $1.3 million to $1.5 million[122] - Interest Expense increased by $2.1 million to $15.0 million, primarily due to higher credit facility and term loan interest[122] - Net Income decreased by $2.8 million to $1.5 million in the first half of 2024 from $4.3 million in the prior year period[126] Non-GAAP Financial Measures - FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA, and Adjusted Hotel EBITDA are used as supplemental performance measures[128] - Nareit's definition of FFO is net income excluding gains/losses from real estate sales and impairment, plus depreciation and amortization[130] - Adjusted FFO further adjusts FFO for items not related to hotel operations, such as losses on early extinguishment of debt[131] FFO and Adjusted FFO (Six Months Ended June 30, in thousands): | Metric | 2024 | 2023 | | :--- | :--- | :--- | | Net income | $1,548 | $4,324 | | FFO attributable to common share and unit holders | $27,621 | $29,115 | | Adjusted FFO attributable to common share and unit holders | $27,865 | $29,680 | - EBITDAre is net income excluding interest, taxes, depreciation, amortization, gains/losses from real estate sales, and impairment[135] - Adjusted EBITDA further adjusts EBITDAre for items like share-based compensation and other non-recurring expenses[136] EBITDA, EBITDAre, and Adjusted EBITDA (Six Months Ended June 30, in thousands): | Metric | 2024 | 2023 | | :--- | :--- | :--- | | Net income | $1,548 | $4,324 | | EBITDA | $46,747 | $46,132 | | EBITDAre | $46,887 | $46,077 | | Adjusted EBITDA | $50,241 | $49,649 | - Adjusted Hotel EBITDA is net income before interest, taxes, depreciation, amortization, corporate G&A, and other specified non-hotel operating items[137] Adjusted Hotel EBITDA (Six Months Ended June 30, in thousands): | Metric | 2024 | 2023 | | :--- | :--- | :--- | | Net income | $1,548 | $4,324 | | Adjusted Hotel EBITDA | $54,679 | $54,969 | - These non-GAAP measures have limitations as they do not reflect cash expenditures, working capital needs, or asset replacement costs and may not be comparable across companies[140] Sources and Uses of Cash - Cash, cash equivalents, and restricted cash decreased by $60.1 million to $25.7 million as of June 30, 2024[142] - Net cash provided by operating activities decreased by $0.6 million to $32.1 million for the six months ended June 30, 2024[143] - Net cash used in investing activities increased by $30.4 million to $(46.0) million, including $43.7 million for a hotel acquisition[144] - Net cash used in financing activities increased by $31.5 million to $(46.1) million, driven by $264.0 million in mortgage debt repayments[146] - Material cash requirements within the next 12 months include $78.4 million for debt obligations and $1.9 million for lease payments[147] - The company expects to meet short-term liquidity needs through existing cash and credit facility availability[154] Dividend Policy - The company's policy is to annually distribute approximately 100% of taxable income to maintain its REIT status[156] - Dividends declared for the first six months of 2024 were $0.14 per common share/LTIP unit and $0.82812 per Series A preferred share[156] Inflation - Operators can adjust room rates daily, but competitive pressures may limit increases[158] - Inflation may increase costs for construction, labor, benefits, food, materials, and utilities[158] Seasonality - Hotel performance is typically lower in Q1 and Q4 and higher in Q2 and Q3[159] - The company uses cash on hand or credit facility borrowings to manage seasonal fluctuations in liquidity[159] Critical Accounting Estimates - Financial statements require management to make estimates and assumptions involving judgment and future uncertainties[160] - Significant accounting policies and critical estimates are disclosed in the Annual Report on Form 10-K[160] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company manages interest rate risk by primarily using fixed-rate debt or variable-rate debt with conversion options - The company is primarily exposed to interest rate risk from its long-term debt[162] - Risk management aims to limit the impact on earnings and cash flows by using fixed rates or variable rates with conversion options[162] Debt Maturities and Interest Rates (in thousands): | Category | 2024 (remaining) | 2025 | 2026 | 2027 | 2028 | Thereafter | Total/Weighted Average | Fair Value | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Floating rate debt | — | $140,000 | $120,000 | — | — | — | $260,000 | $260,000 | | Average interest rate | — | 6.91% | 6.96% | — | — | — | 6.93% | | | Fixed rate debt | $33,248 | $15,975 | — | — | $24,590 | $118,635 | $192,448 | $198,652 | | Average interest rate | 4.52% | 4.25% | — | — | 7.61% | 7.16% | 6.52% | | - A hypothetical 100 basis point increase in SOFR would result in approximately $2.6 million in additional annual interest[163] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes in internal control - Disclosure controls and procedures were evaluated and concluded to be effective as of June 30, 2024[165] - There were no material changes in internal control over financial reporting during the last fiscal quarter[166] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company does not expect routine legal proceedings to have a material adverse impact on its financial condition - The company is subject to routine claims, lawsuits, and legal proceedings in the ordinary course of business[168] - Aggregate identifiable liabilities are not expected to have a material adverse impact on financial condition or results of operations[168] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's 2023 Annual Report - There have been no material changes to risk factors since the Annual Report on Form 10-K for December 31, 2023[169] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reports no unregistered sales of equity securities or use of proceeds for the period - There were no unregistered sales of equity securities or use of proceeds to report[169] Item 3. Defaults Upon Senior Securities The company reports no defaults upon senior securities for the period - There were no defaults upon senior securities to report[169] Item 4. Mine Safety Disclosures Mine safety disclosures are not applicable to the company's operations - Mine safety disclosures are not applicable to the company[169] Item 5. Other Information No trustees or officers adopted or terminated any Rule 10b5-1 trading arrangements during the quarter - No Rule 10b5-1 or non-Rule 10b5-1 trading arrangements were adopted or terminated by trustees or officers during Q2 2024[170] Item 6. Exhibits This section lists the exhibits filed as part of the report, including certifications and XBRL documents - The exhibits list includes corporate governance documents, CEO/CFO certifications, and XBRL related documents[172]