8-K: Chatham Lodging Trust Exceeds Expectations with Strong Q2 Results, RevPAR Surpasses Pre-Pandemic Levels

Chatham Lodging Trust announced strong second-quarter 2024 results, with adjusted FFO per share beating estimates and portfolio RevPAR exceeding 2019 levels for the first time since the pandemic.

Summary

• Chatham Lodging Trust reported its second-quarter 2024 results, showing a 4 percent increase in portfolio RevPAR to $151 compared to the same period last year.
• The company's average daily rate (ADR) remained unchanged at $183, while occupancy increased by 4 percent to 82 percent.
• Notably, portfolio RevPAR surpassed 2019 levels for the first time since the pandemic, reaching $151 compared to $147.
• Net income for the quarter was $7.0 million, down from $9.4 million in the second quarter of 2023, with diluted earnings per share at $0.10 compared to $0.15.
• Hotel EBITDA margins were 39 percent, a decrease from 41 percent in the prior year's second quarter.
• Adjusted EBITDA was $31.4 million, slightly lower than the $31.9 million reported in the second quarter of 2023.
• Adjusted FFO was $19.9 million, down from $21.8 million in the same quarter of the previous year, with adjusted FFO per diluted share at $0.39 compared to $0.43.
• The company acquired the Home2 Suites by Hilton Phoenix Downtown for $43.3 million, marking its first hotel acquisition since 2022.
• Chatham also repaid $261 million of maturing debt during the quarter through various financing activities.
• The company's leverage ratio, based on net debt to hotel investments at cost, was approximately 26 percent.

Sentiment

Score: 8

Explanation: The document presents a positive outlook with strong operational performance, exceeding expectations in key metrics like RevPAR and FFO. The company's strategic balance sheet repositioning and acquisition activity further contribute to a favorable sentiment. However, some negative aspects such as decreased net income and EBITDA margins temper the overall optimism.

Positives

• The company's RevPAR growth of 4 percent significantly outperformed industry-wide RevPAR growth by approximately 60 percent.
• Business travel demand is gaining momentum across the portfolio.
• The company has a high concentration of extended-stay hotels, which make up 64 percent of its trailing twelve-month hotel EBITDA.
• The acquisition of the Home2 Suites in Phoenix is expected to generate a NOI yield over 9 percent upon stabilization.
• The company has 29 unencumbered properties to support additional growth opportunities.
• The company has completed a multi-year transformation of its balance sheet.

Negatives

• Net income decreased to $7.0 million from $9.4 million in the second quarter of 2023.
• Hotel EBITDA margins decreased to 39 percent from 41 percent in the same quarter last year.
• Adjusted EBITDA was slightly lower at $31.4 million compared to $31.9 million in the second quarter of 2023.
• Adjusted FFO decreased to $19.9 million from $21.8 million in the second quarter of 2023.
• The company's tech hotel RevPAR is still 19 percent below pre-pandemic levels.

Risks

• The company's performance is subject to national and local economic conditions, which can affect occupancy rates and demand for hotel services.
• Operating risks associated with the hotel business, including competition and the ability to maintain properties, could impact results.
• The company's debt level and ability to meet debt covenants pose a risk.
• Changes in travel patterns, taxes, and government regulations could affect the company's performance.
• The company's ability to complete acquisitions and dispositions is subject to market conditions.
• The company must continue to satisfy complex rules to remain a REIT for federal income tax purposes.
• The company's accounting estimates could be inaccurate, and pandemics or other public health emergencies could have an economic impact.

Future Outlook

Chatham expects third-quarter 2024 RevPAR to be between $148 and $152, with RevPAR growth between 0 percent and 2.5 percent. The company anticipates net income between $3 and $5 million, adjusted EBITDA between $28 and $31 million, and adjusted FFO between $16 and $18 million. The company also plans to continue to opportunistically sell assets in 2024 with the intent to redeploy those proceeds into additional hotel investments.

Management Comments

• Jeffrey H. Fisher, Chatham's president and chief executive officer, emphasized that the second quarter was a great quarter for Chatham and its shareholders, with all key metrics finishing at the top of their guidance range.
• Fisher also highlighted the completion of a multi-year transformation of the balance sheet, positioning the company strongly for future opportunities.
• Fisher stated that the company has the financial capacity and flexibility to prudently make hotel investments and grow earnings and cash flow.
• Dennis Craven, Chatham's chief operating officer, noted that the company's tech-driven hotels in Silicon Valley and Bellevue led the way with combined RevPAR growth of 10 percent in the quarter.
• Jeremy Wegner, Chatham's chief financial officer, emphasized that the company has patiently and prudently repositioned its balance sheet since the end of 2022.
• Wegner also stated that the company is well-situated to benefit from an expected declining interest rate environment as almost 60 percent of its debt is based on floating rates.

Industry Context

Chatham's performance is notable in the context of the broader lodging industry, as its RevPAR growth significantly outperformed the industry average. The company's focus on extended-stay hotels and its strategic positioning in key markets, particularly those with strong technology-related travel demand, appear to be contributing to its success. The acquisition of the Home2 Suites in Phoenix also aligns with the trend of hotel companies expanding into high-growth urban markets.

Comparison to Industry Standards

• Chatham's RevPAR growth of 4% significantly outperformed the industry average, which was approximately 60% lower, indicating a strong competitive position.
• The company's focus on extended-stay hotels, which comprise 64% of its EBITDA, is a strategic differentiator compared to other lodging REITs with a more diversified portfolio.
• The 10% RevPAR growth in Silicon Valley and Bellevue hotels highlights the company's ability to capitalize on technology-related travel demand, a trend that is not universally seen across all hotel portfolios.
• The acquisition of the Home2 Suites in Phoenix for $293,000 per room is within the range of recent transactions for similar properties in urban markets, but the expected 9% NOI yield is a strong indicator of the acquisition's potential.
• Chatham's leverage ratio of 26% is relatively conservative compared to some of its peers, which may have higher debt levels, positioning the company well for future growth opportunities.
• The company's ability to repay $261 million of maturing debt and issue new debt at favorable terms demonstrates strong financial management and access to capital markets, which is a key advantage in the current economic environment.
• The company's statement that for every 100 basis point decline in SOFR, its AFFO per share will increase by $0.05, highlights the sensitivity of its earnings to interest rate changes, which is a common factor for companies with floating-rate debt.

Related Party Transactions

• The document mentions management fees paid to related parties of $2.850 million for the three months ended June 30, 2024, and $5.159 million for the six months ended June 30, 2024.
• The document mentions reimbursable costs from related parties of $275,000 for the three months ended June 30, 2024, and $553,000 for the six months ended June 30, 2024.

Stakeholder Impact

• Shareholders will benefit from the strong operating results and the company's strategic balance sheet repositioning.
• Employees may see increased job security and potential for growth as the company expands its portfolio.
• Customers will benefit from the company's focus on upscale, extended-stay hotels and premium-branded, select-service hotels.
• Suppliers and creditors will benefit from the company's strong financial position and ability to meet its obligations.

Next Steps

• The company will continue to opportunistically sell assets in 2024 with the intent to redeploy those proceeds into additional hotel investments.
• The company will commence a renovation of the SpringHill Suites Savannah in September.
• The company will hold its second quarter 2024 conference call later today at 10:00 a.m. Eastern Time.

Key Dates

Keywords

RevPAR, Hotel, REIT, EBITDA, FFO, Occupancy, Debt, Acquisition, Lodging, Extended-Stay