Chatham Lodging Trust(CLDT) - 2022 Q4 - Annual Report

PART I. Company Information This section outlines the company's business, operational structure, risk factors, and legal and property details Item 1. Business Overview Chatham Lodging Trust is a Maryland REIT investing in upscale extended-stay and premium-branded select-service hotels, owning 39 hotels managed by IHM - Chatham Lodging Trust is an internally-managed Maryland REIT, focusing on upscale extended-stay and premium-branded select-service hotels[22] - All hotels are managed by Island Hospitality Management Inc. (IHM), which is 100% owned by the Company's Chairman, President, and CEO, Jeffrey H. Fisher[25] Hotel Portfolio Summary (as of Dec 31, 2022) | Metric | Value | | :----- | :---- | | Hotels Owned | 39 | | Total Rooms | 5,914 | | States of Operation | 16 states and D.C. | Overview The company operates as a REIT, leasing hotels to TRS Lessees, and focuses on upscale extended-stay and premium-branded select-service hotels - The Company operates as a REIT, leasing its wholly-owned hotels to Taxable REIT Subsidiary (TRS) Lessees, which then contract third-party management companies for day-to-day operations[24] - The portfolio includes brands like Residence Inn by Marriott, Homewood Suites by Hilton, Courtyard by Marriott, and Hampton Inn, primarily focusing on upscale extended-stay and premium-branded select-service hotels[26] Financial Information About Industry Segments All hotels are evaluated as a single industry segment due to similar economic characteristics and customer services - The Company evaluates all its hotels as a single industry segment due to similar economic characteristics and customer services, thus not reporting segment-specific information[29] Business Strategy The primary objective is to generate attractive shareholder returns through disciplined acquisitions, aggressive asset management, and a prudent capital structure - Primary objective is to generate attractive shareholder returns through disciplined acquisition of hotel properties, opportunistic repositioning, aggressive asset management, selective hotel development, flexible management company selection, and selective investment in hotel debt[30] - The Company aims to maintain a prudent capital structure with a net debt to investment in hotels at cost ratio between the high 20s and low 50s, which was approximately 26.6% at December 31, 2022, down from 30.6% in 2021[31] Competition The company faces intense competition for hotel property investments and within the lodging industry from various entities and alternative marketplaces - The Company faces competition for hotel property investments from institutional funds, private equity, REITs, and hotel companies, some with greater financial resources[32][33] - The lodging industry is highly competitive, with hotels competing on factors like location, brand, rates, and services, including competition from alternative lodging marketplaces[33] Seasonality Hotel demand is seasonal, with lower revenue and cash flow in the first and fourth quarters, and higher in the second and third - Hotel demand is seasonal, with lower revenue, operating income, and cash flow expected in the first and fourth quarters, and higher in the second and third quarters[34] Regulation Properties are subject to various regulations, including fire, safety, ADA, and environmental compliance, with ongoing assessments for hazardous substances - Properties are subject to various covenants, laws, ordinances, and regulations, including fire, safety, and ADA requirements[35][36] - Compliance with environmental regulations, including potential liability for hazardous substances, is an ongoing concern, with Phase I environmental site assessments conducted for all investments[38][41] Tax Status The company maintains REIT taxation status, exempting it from federal income tax on distributed income, while its TRS is subject to corporate income tax - The Company elected REIT taxation status from 2010, which generally exempts it from federal income tax on distributed REIT taxable income, provided it meets specific requirements, including distributing at least 90% of its taxable income annually[42] - The Company's TRS is subject to federal, state, and local corporate income tax, and is currently under examination by the IRS for 2016 and by New Hampshire for 2018-2019[42][43] Hotel Management Agreements Management agreements with IHM have five-year terms with renewal options, including base fees of 3.0% of gross room revenue and incentive fees - Management agreements with IHM have an initial five-year term, automatically renewing for two successive five-year periods, with early termination options upon hotel sale without fee[45] - Base management fees are 3.0% of gross room revenue, with an incentive fee of 10% of net operating income (less fixed costs, base fees, and a return threshold), capped at 1% of gross hotel revenues[45][47] Management Fees (in thousands) | Year Ended Dec 31, | Management Fees | | :----------------- | :-------------- | | 2022 | $10,133 | | 2021 | $7,156 | | 2020 | $5,289 | Hotel Franchise Agreements Franchise fees are calculated as a percentage of gross room revenue, varying by brand, alongside marketing and program fees - Franchise fees are calculated as a specified percentage of gross room revenue, varying by brand (e.g., Hilton brands typically 4.0% franchise/royalty and 4.0% marketing/program fees; Marriott brands vary, e.g., Residence Inn 5.5% franchise and 2.5% marketing)[50][452] Franchise and Marketing/Program Fees (in thousands) | Year Ended Dec 31, | Fees | | :----------------- | :----- | | 2022 | $23,674 | | 2021 | $16,560 | | 2020 | $11,608 | Operating Leases The company is a lessee under various operating lease agreements for ground, air rights, garage, and office spaces, with significant future payments - The Company is a lessee under ground, air rights, garage, and office lease agreements, all qualifying as operating leases as of December 31, 2022[54][430] - Notable leases include the Residence Inn San Diego Gaslamp (ground lease expiring 2065) and Hilton Garden Inn Marina del Rey (ground lease expiring 2067), with monthly and percentage rent payments[52][53][445][404] Total Future Lease Payments (in thousands) | Year | Amount | | :--- | :----- | | 2023 | $2,093 | | 2024 | $2,115 | | 2025 | $2,186 | | 2026 | $1,894 | | 2027 | $1,272 | | Thereafter | $63,553 | | Total | $73,113 | Human Capital The company had 17 employees as of February 2023, focusing on attracting, developing, and retaining diverse talent through competitive pay and benefits - As of February 23, 2023, the Company had 17 employees, with day-to-day hotel operations managed by third-party companies[61] - Human capital objectives focus on attracting, developing, and retaining diverse talent through competitive pay, benefits, and a culture of diversity and inclusion[62] Corporate Responsibility The company is committed to ESG issues, publishing annual reports, implementing energy efficiency initiatives, and promoting diversity, equity, and inclusion - The Company is committed to ESG issues, publishing its annual Corporate Responsibility Report (latest in May 2022) aligned with GRI, SASB, and TCFD standards[63][65] - Initiatives include improving energy efficiency (e.g., LED lighting, smart thermostats, low-flow systems) and community engagement through charitable activities[66][67] - Diversity, Equity, and Inclusion efforts include increasing board diversity (25% female, 12.5% underrepresented group members) and participating in the CEO Action for Diversity and Inclusion™ pledge[68] Available Information Annual, quarterly, and current reports are available free of charge on the company's and SEC's websites - Annual, quarterly, and current reports (10-K, 10-Q, 8-K) are available free of charge on the Company's website (www.chathamlodgingtrust.com) and the SEC's website (www.sec.gov)[70](index=70&type=chunk) Item 1A. Risk Factors The company faces significant risks from pandemics, financing