Analyst: Chatham Growth Demands Fund Raising or Capital Recycling

PALM BEACH, FL-Chatham Lodging Trust saw RevPAR growth in the third quarter, but it wasn’t enough to satisfy the markets. Despite wading through the troubled waters with Cerberus Capital Management on the Innkeepers acquisition deal, the hotel REIT failed to impress the investment community with its $1 million net loss.

Chatham reported a year-over-year 5.4% increase in RevPAR on its 18 owned hotels in the third quarter. Occupancy increased 4.9% to 84.4% and average daily rate rose 0.4% to $127.64. RevPAR for the six recently renovated Homewood Suites hotels jumped 10.5% in the quarter. Chatham generated $8.1 million, compared to $2.3 million in the year-ago quarter, but still reported a loss attributable to $2.1 million of costs associated with the Innkeepers acquisitions.

Jeffrey Fisher, Chatham’s president and CEO, said the third quarter was about producing strong operating results, enhancing the investment portfolio with the acquisition of five high quality hotels in attractive markets and achieving a critical mass. Chatham did make progress toward those goals with the acquisitions and the $37 million Cerberus joint venture. The firm also reported gross operating profit margins of 46.7%.

“Our hotels generated strong profit margins during the quarter,” Fisher said in a statement. “We are beginning to see much improved results in those hotels where we have invested significantly in major renovations and realized incremental operating profits through some unique value-enhancing strategies we have implemented across our portfolio.”

One of the sore spots for investors was a bail out on the acquisition of the Residence Inn Pittsburgh University Medical Center. In connection with the termination, Chatham forfeited a $600,000 deposit. Another factor that is dinging the stock prices is a slow recovery from six property renovations.

“The outlook for the back half of the year was that renovated properties would drive RevPAR growth somewhere around the 5% to 7% range,” C. Patrick Scholes, a senior equity research analyst at FBR Capital Markets, tells GlobeSt.com. “RevPAR growth was below expectations and was largely hampered by one property in San Diego. That property will continue to impact Chatham for the next several quarters unless they spin it off.”

Chatham CFO Dennis Craven didn’t indicate any spin offs. As he sees it, the firm needs to maintain its portfolio in top condition in order to remain highly competitive. In the earnings statement, he said Chatham is just starting to deliver exceptional performance on the $13.2 million it has spent on its portfolio.

“It’s evident that to grow the company Chatham needs to do either an equity offering or sell some assets and recycle capital into some higher growth assets,” Scholes says. “Better equity markets could certainly help the REIT right now, but it’s a challenging time to try to go out and raise capital.”