PALM BEACH, Fla.--Chatham Lodging Trust (NYSE: CLDT), a hotel real estate investment trust (REIT) that owns wholly or through its joint ventures 77 premium-branded, upscale, extended-stay and select-service hotels, today announced results for the quarter ended June 30, 2014. In addition, the company increased its guidance for the remainder of 2014 to reflect recent acquisitions and strong business fundamentals.
Second Quarter 2014 Highlights
Portfolio RevPAR – Increased hotel RevPAR 9.6 percent to $133 for Chatham's 29 wholly owned hotels.
Comparable Hotel RevPAR – Grew hotel RevPAR 8.0 percent, excluding the Residence Inn Washington, D.C. hotel, which was without a brand for the entire 2013 first quarter.
Adjusted EBITDA – Rose 58 percent to $21.7 million.
Adjusted FFO – Advanced 71 percent to $15.0 million. Adjusted FFO per diluted share rose 17 percent to $0.56 from $0.48, exceeding consensus estimates.
Operating Margins – Expanded hotel EBITDA margins 350 basis points to an industry-leading 43.6 percent. Gross Operating Profit margins improved 280 basis points to 49.6 percent.
Monthly Dividend – Boosted the dividend by 14 percent in April to $0.08 per share, $0.96 per share on an annualized basis.
Consolidated Financial Results
The following is a summary of the consolidated financial results for the three and six months ended June 30, 2014. RevPAR, ADR and occupancy for 2014 and 2013 are based on hotels owned as of June 30, 2014 ($ in millions, except per share data, RevPAR, ADR, occupancy and margins):
Industry-Leading Top-Line Growth and Hotel EBITDA Margins Drive Results
"2014 is shaping up to be a terrific year for Chatham as we followed up a great first quarter with a phenomenal second quarter which produced industry-leading RevPAR growth of 9.6 percent, further driving expansion of our already industry leading margins by 350 basis points to 43.6 percent," emphasized Jeffrey H. Fisher, Chatham's president and chief executive officer. "Continuing a pattern from the first quarter, 13 of our 29 hotels, or 45 percent of our portfolio, produced double-digit RevPAR gains, reinforcing our acquisition strategy of focusing on specific markets where economic growth is strong. Anaheim, Boston, Dallas, Houston, Nashville, San Antonio and Silicon Valley were our strongest markets in the 2014 second quarter. Almost 90 percent of our portfolio is in higher growth west coast, northeast and Texas markets, allowing us to outperform our RevPAR guidance of 7-8 percent.
"Corporate demand continues to strengthen in our markets, whether it is the individual or group traveler, and since our hotel portfolio is predominantly reliant on corporate business, we continue to see strong occupancy growth in our hotels and in our markets. In fact, 40 percent of our RevPAR growth was attributable to occupancy gains as we saw occupancy rise to an exceptional 87 percent in the 2014 second quarter," Fisher commented. "This bodes well for our portfolio as the cycle matures and a greater proportion of RevPAR growth is expected to be attributable to rate increases, which Chatham has a long track record of aggressively driving to the bottom line given our industry leading margins. Our portfolio is in great physical shape, and we are well-positioned to benefit greatly as these metrics improve further. We continue to see on-going RevPAR growth above historical averages in our markets and remain very bullish with respect to the prospects for meaningful top-line growth in 2014 and 2015.
"Our best-in-class platform pairs a great ownership team at Chatham with Island Hospitality, the best operator in this class in generating unparalleled margins. Through both strategic acquisitions and aggressive management, this relationship continues to deliver the industry's best margins, with second quarter hotel EBITDA margins surging 350 basis points to 43.6 percent growth, up almost 1,300 basis points since our 2010 IPO," Fisher highlighted. "Our business strategy is intensely focused on driving hotel profits and ultimately distributable cash flow. We have achieved exceptional results on this front since our IPO. Adjusted EBITDA has grown at an average annual growth rate of 21 percent, and adjusted FFO per share has grown at an average annual rate of 30 percent, based on the midpoint of our 2014 guidance."
Innkeepers Joint Venture & Silicon Valley Acquisitions
The Innkeepers joint venture produced 2014 second quarter RevPAR growth of 8.5 percent to $115 on a 6.6 percent increase in average daily rate to $138 and a 1.8 percent increase in occupancy to 83 percent.
In June, a joint venture comprised of Cerberus Capital Management LP and Chatham completed the previously announced sale of a 51-hotel, 6,848-room portfolio in two separate transactions to Chatham and NorthStar Realty Finance Corp (NYSE: NRF), a publicly traded, diversified commercial real estate investment company that is organized as a REIT. The combined total price was $1.3 billion before capital expenditure reserves credited to the buyers of $39.7 million. Based on the net price, Chatham experienced a non-GAAP economic gain of over $80 million or more than $3 per share. Chatham's gain is expected to be primarily rolled over tax-free between the basis of Chatham's investments in the joint venture and the four Silicon Valley hotels Chatham acquired as part of the transactions.
"The Cerberus/Chatham joint venture was a great partnership and proved to be a highly successful investment, turning our initial $37 million investment into distributions of approximately $117 million and profits of approximately $80 million or almost $3 per share in less than three years," said Dennis Craven, Chatham's chief financial officer. "We generated an exceptional internal rate of return of over 80 percent and then re-invested most of the gain tax-free into new high growth, accretive investments."
Chatham acquired four Residence Inns by Marriott in Silicon Valley as part of the sale of the 51-hotel portfolio for a net cash purchase price of $272.7 million, or approximately $363k per room. The four Silicon Valley properties are Residence Inn by Marriott-branded hotels and comprise 751 rooms.
Chatham plans to partially redevelop and expand all four Silicon Valley Residence Inn hotels, increasing the room count by 36 percent to a total of 1,023 rooms. The 272-room expansion will include a new lobby and public spaces in each location with an estimated cost of approximately $59.0 million or $217k per room. On a pro-forma basis, the all-in cash cost for the four hotels is expected to be approximately $331.7 million or $324k per room. It is expected that the Mountain View expansion will begin in the 2014 fourth quarter, and the other three expansions will begin in the 2015 third or fourth quarter. The expansion/upgrade will take approximately 12 months in each location, but given the campus layout of the sites, disruption is expected to be minimal.
The remaining 47 hotels in the 51-hotel portfolio were purchased by a joint venture comprised of NorthStar and Chatham for a gross purchase price of $958.5 million, a net cash purchase price of $933.9 million, or $153k per room. NorthStar acquired Cerberus' 89.7 percent interest in the joint venture, while Chatham retained its 10.3 percent ownership stake.
"We look forward to a successful partnership with NorthStar in this joint venture," Fisher stated. "We share similar outlooks regarding the health of the hotel industry and performance expectations for the portfolio. Our long-term interests are aligned with a solid capital structure that we believe will provide strong, risk-adjusted returns for our shareholders, and Chatham and Island will continue to explore other joint venture opportunities with NorthStar. The hotels are in excellent physical condition with only minimal brand-mandated upgrades required. All the hotels will continue their current brand affiliations under long-term agreements."
As of June 30, 2014, the company had net debt of $530.6 million (total debt less cash). Total debt outstanding was $542.5 million at an average interest rate of 4.3 percent, including $98.0 million outstanding on its $175 million senior secured revolving credit facility. Chatham's leverage ratio was approximately 51 percent at June 30, 2014, based on the ratio of the company's net debt to hotel investments at cost.
During the first quarter, Chatham instituted a $25 million Dividend Reinvestment Plan and Direct Share Purchase Plan. The plan provides Chatham's shareholders with a simple and convenient method of reinvesting cash dividends and other distributions, as well as purchasing common shares outright. Also during the first quarter, Chatham implemented a $50 million "At the Market" Equity Offering Plan. During the second quarter, Chatham issued 486,969 shares through the two plans at a weighted average price of $22.53, generating proceeds of $11.0 million.
"In 2011, we leveraged our balance sheet to make the initial Innkeepers investments which consisted of the $37 million Innkeepers joint venture investment with Cerberus and the acquisition of five hotels for almost $200 million," Craven summarized. "In 2013, we opportunistically accessed the equity markets in smaller sized offerings to match fund six acquisitions and create the capacity that allowed us to make the transformative acquisition of the four Silicon Valley Residence Inn hotels and the new joint venture investment in the Innkeepers portfolio with NorthStar. We are willing to use borrowings under our line of credit or property specific debt to fund growth when the opportunity arises. With financing rates at historically low levels, we are comfortable at these leverage levels."
Two hotels completed their planned, major renovations during the second quarter: the Denver Hilton Garden Inn and the Residence Inn White Plains, N.Y. The renovations cost approximately $6.3 million and completely refreshed the two hotels, bringing them to "like-new" condition. There are no other major renovations planned for the remainder of the year.
In April, Chatham's board of trustees approved a 14 percent dividend increase to an annualized rate of $0.96 per share. Chatham currently pays a monthly dividend of $0.08 per common share, the only public lodging REIT to pay monthly dividends. The annualized dividend of $0.96 per common share represents a dividend yield of 4.6 percent, one of the highest in the hotel industry, based on the company's common share closing price of $21.09 on August 4, 2014.
"We have increased our dividend every year since our IPO, and we will continue to grow our dividend in tandem with growth in adjusted FFO per share. Our 2014 dividend is well covered at approximately 48 percent of adjusted FFO per share. The increase reflects management's and the Board of Trustees' confidence in Chatham and our positive outlook, and we look forward to future dividend growth," Craven stated.
Outlook and 2014 Guidance
"We expect solid operating fundamentals for the balance of 2014 which is reflected in our higher guidance. We believe there is still plenty of running room in this cycle," Fisher said. "We expect 2015 to bring further earnings improvement as the significant, external growth attributable to the acquisition of the four, great hotels in the heart of Silicon Valley is included for the full year, further bolstered by the expected completion of the first expansion in Mountain View by the end of 2015."
The company provides guidance, but does not undertake to update it for any developments in its business. Achievement of the results is subject to the risks disclosed in the company's filings with the Securities and Exchange Commission. The company's 2014 guidance updates the 2014 guidance provided on June 17, 2014 for the impact of the Silicon Valley Residence Inn portfolio acquisition and Innkeepers joint venture recapitalization that closed on June 10, 2014, but does not take into account any additional acquisitions, dispositions, debt or equity issuances.
Funds from operations (FFO), Adjusted FFO (AFFO), EBITDA and Adjusted EBITDA are non-GAAP financial measures within the meaning of the rules of the Securities and Exchange Commission. See the discussion included in this press release for information regarding these non-GAAP financial measures. Earnings Call
The company will hold its second quarter 2014 conference later today, August 5, 2014, at 10:00 a.m. Eastern Time. Shareholders and other interested parties may listen to a simultaneous webcast of the conference call on the Internet by logging onto Chatham's Web site, www.chathamlodgingtrust.com, or www.streetevents.com, or may participate in the conference call by dialing 1-888-299-7209, reference number 8711670. A recording of the call will be available by telephone until 1 p.m. ET on Tuesday, August 12, 2014, by dialing 1-888-203-1112, reference number 8711670. A replay of the conference call will be posted on Chatham's website.
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Chatham Lodging Trust is a self-advised REIT that invests in upscale extended-stay hotels and premium-branded, select-service hotels. The company owns interests in 77 hotels totaling 10,685 rooms/suites, comprised of 29 hotels it wholly owns with an aggregate of 4,343 rooms/suites in 15 states and the District of Columbia and a minority investment in two joint ventures that own 48 hotels with an aggregate of 6,342 rooms/suites. Additional information about Chatham may be found at www.chathamlodgingtrust.com.