WEST PALM BEACH, FL—Chatham Lodging Trust saw ADR and net income decline slightly, according to second quarter earnings results. President/CEO Jeffrey H. Fisher attributed the decrease to a softening in demand over the last half of the quarter, and waning of business travel.
“June’s decline was exacerbated by the shift in demand related to July 4th,” said Fisher. “As a result, our RevPAR ended the quarter slightly down compared to our expectation that RevPAR would rise 0.5 to 1.5%. Within the quarter at our 38 comparable hotels, RevPAR was down 0.2% in April, up 2.3% in May and down 2.8% in June.”
Chatham’s six largest markets comprise approximately 60% of its hotel EBITDA. Second quarter 2019 RevPAR performance for these key markets include the following:
- Silicon Valley RevPAR improved 1.9% to $194 at its four hotels.
- RevPAR at its two San Diego properties increased 4% percent to $169.
- Washington, DC RevPAR rose 2.3% to $185 at its three hotels.
- RevPAR at its three coastal hotels in Maine and New Hampshire advanced 5.3%, driven by strong leisure demand.
- At its four hotels in Houston, TX, RevPAR dropped 11.1% as two hotels were under renovation for part of the quarter, as well as weak demand and new supply at the Medical Center.
- The two Los Angeles-area hotels experienced a 2.7% RevPAR decline.
“Given the uncertain operating environment, as evidenced by the number of hotels where RevPAR declined in the quarter, we cautiously have reduced our RevPAR guidance, and combined with the sale of two hotels, reduced our FFO guidance for the second half of 2019,” Fisher concluded.
Second quarter gross operating profit margins at its 38 comparable hotels, which excludes two hotels opened in 2018, declined 20 basis points to 49.3%.
“Collaborating with Island Hospitality, we are rolling out initiatives to increase revenue and further reduce operating expenses, or at least minimize any increase as best possible,” said Dennis Craven, Chatham’s chief operating officer. “At our 38 comparable hotels, compared to the 2018 second quarter, other revenue was up $243,000 or approximately 7%. On the operating expense side, we implemented additional programs focused on reducing repairs and maintenance, and those costs were down $260,000 in the quarter.
“With RevPAR declining in the quarter, the fact that we were able to minimize gross operating profit margin erosion to only 20 basis points at our 38 comparable hotels is noteworthy and reinforces the belief that we have a ‘best-in-class platform.’ Our margins remain the highest of all lodging REITs,” Craven noted.
On a per occupied room basis at its 38 comparable Island-managed hotels, payroll and benefits costs increased 3.6% in the 2019 second quarter.
“With unemployment at historical low levels and new supply poaching our trained employees, staffing remains the biggest headwind in our cost structure. On a per occupied room basis, the rate of increase in payroll and benefits rose above 3% this quarter. We must continue to find ways to reduce hours, with or without the help of our brands,” Craven stated.
Strategic Capital Recycling Program and Hotel Investments
During the second quarter, continuing its selective recycling strategy, the company sold the 105-room Courtyard by Marriott Altoona, PA, as well as the 86-suite SpringHill Suites by Marriott Washington, PA, for approximately $10 million. Inclusive of brand required improvements of more than $4 million, Chatham sold the hotels at an approximate 6% net operating income capitalization rate (after an assumed annual capital reserve of 4% of total hotel revenues).
Also in the quarter, the company substantially completed the renovation of the Residence Inn Dedham, MA, and commenced the renovations of the Residence Inn San Mateo, CA, Courtyard by Marriott Houston, TX (West University) and the Hampton Inn and Suites Houston, TX (Medical Center).
Hotel Under Development
Chatham is developing and has begun construction on a hotel in the Warner Center submarket of Los Angeles, on a parcel of land owned by the company. The company expects the total development costs to be approximately $65 million, inclusive of land of $6.6 million. Including land, the company has incurred costs to date of $10.8 million. The hotel will be well located within Warner Center, an urban community consisting of more than 10 million sq. ft. of office space, approximately eight million sq. ft. of retail space and 20,000 residents. The surrounding area employs more than 50,000 people. Under the Warner Center 2035 plan, it is expected to more than double these metrics.
“This is our first ground-up development since our inception, and we believe this development will provide incremental long-term returns for our shareholders,” Fisher emphasized. “For a couple of years, we have espoused development as part of our overall growth strategy. With that in mind, we reduced leverage since 2017 from 40% to our current level of 34%. Over that period, we have raised $225 million through asset sales and equity issuance, invested those proceeds into acquisitions of $201 million and provided ourselves the financial flexibility to execute on this component of our strategy.”