Chatham Lodging Trust(CLDT) - 2023 Q4 - Annual Report

Part I Business The company is an internally-managed REIT owning 39 upscale hotels managed by a related third-party, focusing on disciplined acquisitions and asset management - As of December 31, 2023, the Company's portfolio consists of 39 hotels with 5,915 rooms across 16 states and the District of Columbia[312] - The Company is an internally-managed REIT that primarily invests in upscale extended-stay hotels and premium-branded select-service hotels[314][315][340] - All 39 of the Company's hotels are managed by Island Hospitality Management, LLC (IHM), an entity wholly owned by the Company's Chairman and CEO, Jeffrey H. Fisher[313] - The Company's business strategy includes disciplined acquisitions, opportunistic hotel repositioning, aggressive asset management, selective development, and flexible selection of management companies[345] - As of February 27, 2024, the company had 17 direct employees, with day-to-day hotel operations staff employed by third-party management companies[9] Franchise and Management Fee Summary (2021-2023) | Fee Type | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Franchise and marketing/program fees | $24.9 million | $23.7 million | $16.6 million | | Management fees paid to IHM | $10.6 million | $10.1 million | $7.2 million | Risk Factors The company faces business, industry, real estate, and organizational risks, including reliance on a single manager and the cyclical nature of the lodging industry - A summary of key risks includes the potential adverse effects of pandemics like COVID-19, reliance on a single hotel management company (IHM), dependence on new financing for growth, and risks associated with the cyclical lodging industry[19][20] - All 39 hotels are managed by IHM, which is controlled by the Company's CEO, creating vulnerability to any adverse developments in IHM's business or operational effectiveness[33][35] - The company's growth strategy is dependent on accessing capital, as REIT qualification requires distributing at least 90% of taxable income, limiting retained earnings for funding acquisitions and capital improvements[31] - The company faces risks related to its TRS (Taxable REIT Subsidiary) structure, including a potential 100% penalty tax if transactions are not at arm's-length[23][471][473] - The lodging industry is cyclical and sensitive to economic conditions, discretionary spending, and competition, which can adversely affect occupancy, room rates, and profitability[375][438] Unresolved Staff Comments The company reports no unresolved staff comments - None[516] Cybersecurity Cybersecurity risk management relies on its hotel manager's program, with board oversight and no material incidents reported in the last three fiscal years - The Company relies on the cybersecurity program of its manager, IHM, which is aligned with the National Institute of Standards and Technology (NIST) Cybersecurity Framework[544] - The Audit Committee of the Board has primary oversight for cybersecurity risk, with the Executive Leadership Team responsible for assessment and management[522][548] - The company has not experienced a material information security breach in the last three fiscal years and is not aware of any cybersecurity risks reasonably likely to materially affect the business[522] Properties The company owns a geographically diverse portfolio of 39 hotels with a total purchase price of approximately $1.49 billion - The company leases its corporate headquarters in West Palm Beach, FL, and is subject to ground leases for several hotel properties, including in New Rochelle, NY; San Diego, CA; and Marina del Rey, CA[525][526] Portfolio Summary as of December 31, 2023 | Metric | Value | | :--- | :--- | | Total Hotels | 39 | | Total Rooms | 5,915 | | Total Purchase Price | $1,488.1 million | | Total Mortgage Debt Balance | $396.1 million | Legal Proceedings The company is subject to routine litigation not expected to have a material adverse impact - The Company is subject to routine litigation but believes these matters will not have a material adverse impact on its financial condition or operations[527][551] Mine Safety Disclosures This item is not applicable to the company - Not applicable[552] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on the NYSE, and it maintains its REIT status through required distributions, with no formal share repurchase plan - The Company's common shares trade on the New York Stock Exchange (NYSE) under the ticker symbol 'CLDT'[579] - As of December 31, 2023, there were 1,252,326 securities remaining for issuance under the company's equity compensation plans[533][582] - The company does not have a share repurchase plan, but employees can forfeit shares to satisfy tax withholding requirements upon vesting[585] 2023 Distribution Per Share & Tax Characterization | Security | Distribution per Share | Tax Characterization | | :--- | :--- | :--- | | Common Shares | $0.28 | 100% Ordinary Income | | Series A Preferred Shares | $1.65624 | 100% Ordinary Income | [Reserved] This item is reserved - Item 6 is reserved[557] Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue and RevPAR increased in 2023, but net income declined due to impairment charges, while liquidity remains strong Results of Operations Total revenue grew 5.5% in 2023 driven by RevPAR growth, but net income declined due to impairment losses and other one-time charges - Hotel operating expenses increased 9.1% to $175.4 million in 2023, driven by higher revenues, increased staffing levels, and inflation[571] - An impairment loss of $4.3 million was recorded in 2023 on the HGI Denver Tech hotel property, which is under contract to be sold[573] - Other charges increased to $2.3 million in 2023 from $0.7 million in 2022, primarily due to a $2.2 million write-off of development costs for a hotel project in California[328][625] Revenue Comparison (2023 vs. 2022) | Revenue Category | 2023 (in thousands) | 2022 (in thousands) | % Change | | :--- | :--- | :--- | :--- | | Room | $284,999 | $272,265 | 4.7% | | Food and beverage | $8,124 | $7,303 | 11.2% | | Other | $16,703 | $13,958 | 19.7% | | Total revenue | $311,109 | $294,851 | 5.5% | Same Property Operating Metrics (39 hotels, 2023 vs. 2022) | Metric | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Occupancy | 74.3% | 71.9% | 3.3% | | ADR | $177.60 | $173.01 | 2.7% | | RevPAR | $132.01 | $124.43 | 6.1% | Non-GAAP Performance Reconciliation (in thousands) | Measure | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net income (loss) | $2,488 | $9,871 | $(18,845) | | FFO | $56,826 | $58,776 | $13,559 | | Adjusted FFO | $59,658 | $59,597 | $14,316 | | EBITDAre | $92,118 | $93,407 | $42,858 | | Adjusted EBITDA | $101,067 | $99,779 | $48,438 | Liquidity and Capital Resources The company maintains strong liquidity with $85.7 million in cash and full credit facility availability, with a leverage ratio of 24.8% - As of Dec 31, 2023, the company had $68.1 million in cash and cash equivalents and $260.0 million of borrowing capacity under its revolving credit facility[86][639] - The company's leverage ratio (net debt to hotel investments at cost) was 24.8% at year-end 2023, down from 26.6% at year-end 2022[662] - The company plans to invest approximately $36.8 million on renovations and capital expenditures for its existing hotels in 2024[644] - In October 2022, the company entered into a new $260.0 million unsecured revolving credit facility and a $90.0 million unsecured delayed-draw term loan[44] Cash Flow Summary (in millions) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $76.4 | $71.5 | | Net cash (used in) provided by investing activities | $(28.1) | $30.0 | | Net cash (used in) provided by financing activities | $(7.7) | $(86.2) | Critical Accounting Estimates Key estimates involve hotel property valuation for impairment, share-based compensation, and income tax accounting for the TRS structure - The company periodically reviews hotel properties for impairment, leading to a $4.3 million impairment loss recorded in 2023[151][673] - Share-based compensation for LTIP units is measured using a Monte Carlo approach, considering factors like volatility, dividend yield, and risk-free interest rates[189][675] - The company must distribute at least 90% of its REIT taxable income annually and believes it operates in a manner to maintain its REIT qualification[676] - The company allocates the purchase price of acquired hotels based on fair value estimates for real estate, FF&E, and other assets, using third-party valuations and due diligence[150][646] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate exposure from its $90.0 million in floating-rate debt - The company is exposed to interest rate risk from its floating-rate debt; a hypothetical 100 basis point increase in SOFR would result in an additional annual interest expense of approximately $0.9 million on its $90.0 million of floating-rate debt[652] Debt Maturities and Fair Value as of December 31, 2023 (in thousands) | Debt Type | 2024 | 2025 | Thereafter | Total | Fair Value | | :--- | :--- | :--- | :--- | :--- | :--- | | Floating Rate | $— | $90,000 | $— | $90,000 | $90,000 | | Fixed Rate | $297,210 | $15,974 | $82,925 | $396,109 | $396,001 | Consolidated Financial Statements and Supplementary Data This section incorporates the company's audited financial statements and notes by reference - The Consolidated Financial Statements and Notes are included starting on page F-1 of the report[653] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no disagreements with its accountants on accounting and financial disclosure - None[63][679] Controls and Procedures Management concluded that disclosure controls and internal controls over financial reporting were effective as of year-end 2023 - Management concluded that as of December 31, 2023, the company's disclosure controls and procedures were effective[680] - Based on the COSO 2013 framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2023[62] - There were no changes in internal control over financial reporting during the last fiscal quarter of 2023 that materially affected, or are reasonably likely to materially affect, internal controls[61] Other Information This item is not applicable - Not applicable[655] Part III Trustees, Executive Officers and Corporate Governance Information required for this item is incorporated by reference from the Company's Proxy Statement for the 2024 Annual Meeting of Shareholders - Information is incorporated by reference to the Company's 2024 Proxy Statement[656] Executive Compensation Information required for this item is incorporated by reference from the Company's Proxy Statement for the 2024 Annual Meeting of Shareholders - Information is incorporated by reference to the Company's 2024 Proxy Statement[684] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information required for this item is incorporated by reference from the Company's Proxy Statement for the 2024 Annual Meeting of Shareholders - Information is incorporated by reference to the Company's 2024 Proxy Statement[66] Certain Relationships and Related Transactions, and Trustee Independence Information required for this item is incorporated by reference from the Company's Proxy Statement for the 2024 Annual Meeting of Shareholders - Information is incorporated by reference to the Company's 2024 Proxy Statement[92][657] Principal Accountant Fees and Services Information required for this item is incorporated by reference from the Company's Proxy Statement for the 2024 Annual Meeting of Shareholders - Information is incorporated by reference to the Company's 2024 Proxy Statement[66] Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K - This section includes the list of financial statements, Schedule III - Real Estate and Accumulated Depreciation, and all exhibits filed with the report[67][686] - Key exhibits filed include governance documents, employment agreements for executive officers, debt agreements for credit facilities, and certifications from the CEO and CFO[72][660] Consolidated Financial Statements Report of Independent Registered Public Accounting Firm The auditor issued an unqualified opinion on the financial statements and internal controls, identifying property impairment as a critical audit matter - The auditor, PricewaterhouseCoopers LLP, expressed an opinion that the financial statements are fairly presented in conformity with GAAP and that the Company maintained effective internal control over financial reporting as of December 31, 2023[78][695] - The audit identified the 'Impairment Evaluation of Investments in Hotel Properties' as a Critical Audit Matter due to significant management judgment required to assess recoverability[84][109][134] Consolidated Balance Sheets Total assets were stable at $1.344 billion in 2023, with a shift in debt composition and a slight decrease in total equity Consolidated Balance Sheet Summary (in thousands) | Account | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $1,343,930 | $1,343,738 | | Investment in hotel properties, net | $1,227,633 | $1,264,252 | | Cash and cash equivalents | $68,130 | $26,274 | | Total Liabilities | $539,554 | $525,741 | | Mortgage debt, net | $394,544 | $430,553 | | Unsecured term loan, net | $89,533 | $— | | Total Equity | $804,376 | $817,997 | Consolidated Statements of Operations Total revenue increased to $311.1 million in 2023, but an impairment charge led to a net loss attributable to common shareholders of $5.3 million Consolidated Statement of Operations Summary (in thousands, except per share data) | Account | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Total Revenue | $311,109 | $294,851 | $203,975 | | Total Operating Expenses | $282,513 | $260,666 | $221,168 | | Operating Income (Loss) | $28,614 | $36,453 | $(17,214) | | Net Income (Loss) | $2,488 | $9,871 | $(18,845) | | Net (Loss) Income Attributable to Common Shareholders | $(5,306) | $1,855 | $(22,385) | | (Loss) Income Per Common Share - Diluted | $(0.11) | $0.04 | $(0.46) | Consolidated Statements of Equity Total equity decreased by $13.6 million in 2023, primarily due to dividend distributions exceeding net income - Total equity decreased by $13.6 million during 2023, from $818.0 million to $804.4 million[114] - Key changes in equity for 2023 included net income of $2.5 million, offset by common dividends of $13.7 million and preferred dividends of $8.0 million[114] Consolidated Statements of Cash Flows The company generated $76.4 million in operating cash flow, funding capital improvements and debt service, resulting in a $40.6 million cash increase Consolidated Cash Flow Summary (in thousands) | Activity | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $76,442 | $71,535 | $28,777 | | Net cash (used in) provided by investing activities | $(28,113) | $29,960 | $(101,943) | | Net cash (used in) provided by financing activities | $(7,733) | $(86,211) | $71,582 | | Net change in cash | $40,596 | $15,284 | $(1,584) | Notes to Consolidated Financial Statements The notes detail the REIT/TRS structure, accounting policies, and significant 2023 events including impairment, debt refinancing, and related-party transactions - The Company operates as a REIT and leases its hotels to Taxable REIT Subsidiary (TRS) Lessees to comply with REIT operational requirements[118][120][145] - In 2023, the company recorded a $4.3 million impairment loss on the HGI Denver Tech hotel property to write it down to its estimated fair value/selling price[151][200] - During 2023, the company repaid several loans, including a $39.3 million construction loan, and entered into five new mortgage loans totaling $82.9 million[178][205] - As of Dec 31, 2023, the present value of lease liabilities was $20.8 million, with total future lease payments amounting to $70.4 million[231][275] - The company paid related-party management fees of $10.6 million to IHM in 2023, compared to $10.1 million in 2022 and $7.2 million in 2021[261][283] - On January 9, 2024, the Company sold the Hilton Garden Inn Denver Tech hotel property for approximately $18.0 million[265]