Chatham Lodging Trust(CLDT) - 2018 Q4 - Annual Report

PART I Business Chatham Lodging Trust is a REIT specializing in upscale hotels, owning 42 properties and interests in 95 JV hotels, managed by an affiliate - As of December 31, 2018, the Company owned 42 hotels with 6,283 rooms and held noncontrolling interests in two joint ventures (NewINK JV and Inland JV) which own a total of 95 hotels with 12,500 rooms[22] - The Company's primary business strategy includes disciplined acquisition of properties below replacement cost, opportunistic repositioning, aggressive asset management, and maintaining a prudent capital structure with a leverage ratio of approximately 34.7% as of year-end 2018[31][32] - All 42 of the Company's wholly-owned hotels are managed by Island Hospitality Management Inc. (IHM), which is 51% owned by the Company's CEO, Mr. Fisher. IHM also manages a significant portion of the JV hotels[25] Management Fee Structure with IHM | Fee Type | Rate/Terms | | :--- | :--- | | Base Management Fee | A percentage of the hotel's gross room revenue (typically 3.0%) | | Incentive Management Fee | 10% of the hotel's net operating income above a specified return threshold, capped at 1% of gross hotel revenues | - To maintain its REIT status, the Company cannot operate its hotels directly. It leases them to Taxable REIT Subsidiaries (TRS Lessees), which then engage third-party management companies like IHM[24] Risk Factors The Company faces diverse business, industry, real estate, and REIT-specific risks, including reliance on IHM and maintaining REIT status - A significant concentration of operational risk exists as one management company, IHM (affiliated with the CEO), managed all 42 wholly-owned hotels and most JV hotels as of December 31, 2018[81][114] - The Company's growth and operations are dependent on its ability to obtain financing, as REIT rules require distributing at least 90% of taxable income, limiting the use of retained earnings for funding[73][88] - Risks related to joint venture investments include a lack of full decision-making authority, reliance on partners' financial condition, and potential disputes or impasses with co-venturers[102][103][104] - The lodging industry is cyclical and highly competitive. Performance is linked to the general economy, and risks include over-supply of rooms, competition from alternative lodging (e.g., Airbnb), and the need for ongoing capital expenditures[117][123][126][133] - Failure to maintain qualification as a REIT would subject the Company to federal corporate income tax, significantly reducing cash available for shareholder distributions and adversely impacting share value[173][174] Properties As of December 31, 2018, the Company owned 42 hotels (6,283 rooms) for $1.48 billion, with $503.6 million in mortgage debt Wholly-Owned Hotel Portfolio Summary (as of Dec 31, 2018) | Metric | Value | | :--- | :--- | | Number of Hotels | 42 | | Number of Rooms | 6,283 | | Total Purchase Price | $1,483.9 million | | Total Mortgage Debt Balance | $503.6 million | Legal Proceedings IHM, the Company's hotel manager, faces two California class-action lawsuits for wage violations, with the Company accruing $0.1 million in estimated liability - IHM is defending two class-action lawsuits in California related to alleged wage and hour law violations at hotels it operates, including some owned by the Company[218] - The Company has accrued an estimated liability of $0.1 million related to these lawsuits as of year-end 2018[218] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The Company's common shares trade on the NYSE under "CLDT", with 2018 distributions characterized as 86.7% ordinary income and 13.3% return of capital - The Company's common shares are listed on the NYSE under the ticker symbol "CLDT"[222] Tax Characterization of Common Share Distributions | Year | Ordinary Income | Return of Capital | Unrecap. Sec. 1250 Gain | | :--- | :--- | :--- | :--- | | 2018 | 86.7% | 13.3% | 0.0% | | 2017 | 85.5% | 9.1% | 5.5% | - As of December 31, 2018, there were 1,400,529 securities remaining available for future issuance under the company's equity compensation plans[232] Selected Financial Data This section summarizes five-year financial data, showing 2018 total revenue of $324.2 million, net income of $30.6 million, and total assets of $1.44 billion Selected Financial Highlights (in thousands, except per share data) | Metric | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Total Revenue | $324,230 | $301,844 | $295,871 | | Net Income to Common Shareholders | $30,641 | $29,478 | $31,483 | | Diluted EPS | $0.66 | $0.73 | $0.81 | | Total Assets | $1,439,709 | $1,392,216 | $1,302,954 | | Total Liabilities | $632,291 | $582,436 | $621,364 | | Cash Dividends per Share | $1.32 | $1.32 | $1.30 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) The MD&A analyzes 2018 financial performance, with revenue up 7.4% to $324.2 million, net income at $30.9 million, and a 34.7% leverage ratio Results of Operations In 2018, total revenue increased 7.4% to $324.2 million, driven by acquisitions and RevPAR growth, while net income rose to $30.9 million, impacted by a 2017 impairment loss Year-over-Year Performance Comparison (2018 vs. 2017) | Metric | 2018 | 2017 | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | $324.2M | $301.8M | 7.4% | | Hotel Operating Expenses | $170.6M | $155.7M | 9.6% | | Net Income | $30.9M | $29.7M | 4.0% | | Same Property RevPAR | $134.19 | $133.04 | 0.9% | - The increase in 2018 revenue was primarily driven by contributions from hotels acquired in 2017 ($23.5 million) and 2018 ($1.1 million), along with a $4.7 million increase from the 37 comparable hotels[251] - The Company recorded a $6.7 million impairment loss on its Washington SHS, PA hotel during 2017, which negatively impacted year-over-year net income comparisons[267][294] Non-GAAP Financial Measures The company uses non-GAAP measures like FFO and EBITDA; in 2018, FFO was $85.8 million and Adjusted EBITDA was $131.5 million Reconciliation of Net Income to FFO and Adjusted FFO (in thousands) | Metric | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net Income | $30,870 | $29,680 | $31,695 | | Depreciation & Amortization | $47,932 | $46,060 | $48,562 | | Impairment Loss | $0 | $6,663 | $0 | | FFO | $85,812 | $85,676 | $88,453 | | Adjusted FFO | $90,696 | $86,295 | $88,992 | Reconciliation of Net Income to EBITDA and Adjusted EBITDA (in thousands) | Metric | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net Income | $30,870 | $29,680 | $31,695 | | EBITDA | $122,384 | $118,919 | $124,374 | | EBITDAre | $122,402 | $122,255 | $124,384 | | Adjusted EBITDA | $131,499 | $126,698 | $127,973 | Liquidity and Capital Resources The Company's liquidity relies on cash and its credit facility, with $7.2 million cash, $168.5 million available, $585.1 million total debt, and a 34.7% leverage ratio - As of December 31, 2018, the Company had $7.2 million in cash and cash equivalents and $168.5 million available for borrowing under its $250 million senior unsecured revolving credit facility[327] - The company's leverage ratio (net debt to investment in hotels at cost) was 34.7% at year-end 2018, with total debt of $585.1 million at an average interest rate of approximately 4.6%[333] - In March 2018, the senior unsecured credit facility was refinanced, extending the maturity to March 2023 and reducing borrowing costs by up to 15 basis points[336] - During 2018, the Company raised $16.9 million through its Dividend Reinvestment and Stock Purchase Plan (DRSPP) and $7.6 million through its At the Market (ATM) equity offering program[338][339] Quantitative and Qualitative Disclosures about Market Risk The Company's primary market risk is interest rate changes on its $81.5 million variable-rate debt, with a 100 basis point increase raising annual interest expense by $0.8 million - The company's main market risk is interest rate fluctuations on its variable-rate debt, which totaled $81.5 million at year-end 2018[375][377] - A hypothetical 100 basis point increase in the variable interest rate would result in an estimated additional annual interest expense of approximately $0.8 million[378] Controls and Procedures Management and auditors concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2018 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the fiscal year 2018[383] - Management's assessment, based on the COSO framework, concluded that internal control over financial reporting was effective as of December 31, 2018, a conclusion audited and confirmed by PricewaterhouseCoopers LLP[386][387] PART III Trustees, Executive Officers, Corporate Governance, Compensation, and Principal Accountant Fees Information for Items 10-14, including corporate governance, executive compensation, and related party transactions, is incorporated by reference from the 2019 Proxy Statement - Information regarding corporate governance, executive compensation, security ownership, and related transactions is not detailed in this 10-K but is incorporated by reference from the forthcoming 2019 Proxy Statement[391][392][393][394][395] PART IV Exhibits and Financial Statement Schedules This section includes consolidated financial statements, the independent auditor's report, Schedule III, and an index of all exhibits filed with the report - This part contains the full audited consolidated financial statements for the fiscal years 2018, 2017, and 2016[398] - Financial Statement Schedule III, detailing Real Estate and Accumulated Depreciation as of December 31, 2018, is included[398]