Chatham Lodging Trust (CLDT) delivered a strong performance in the first quarter of 2024, beating consensus estimates and generating robust free cash flow growth. The company's laser-focus on driving free cash flow through revenue growth, cost management, and enhancing ancillary profits has positioned it well to outperform its peers in the current environment.

In the first quarter of 2024, Chatham reported net income of $2.6 million, revenue of $81.1 million, operating cash flow of $76.4 million, and free cash flow of $48.3 million. The company's performance was driven by a 2% increase in same-property RevPAR, with occupancy and ADR contributing equally to the growth. Notably, Chatham's tech-driven hotels in Silicon Valley and Bellevue saw a 17% RevPAR increase, with occupancy gaining 1,200 basis points to 67%.

Chatham's management team has been proactive in addressing the company's capital structure, taking steps to enhance its financial flexibility. In the first quarter, the company sold the Hilton Garden Inn Denver Tech for $18 million, representing an approximate 4% capitalization rate on 2023 NOI. Chatham plans to continue opportunistically selling hotels with lower RevPAR and margins, targeting $40 million to $100 million in sales proceeds to reinvest into higher-growth, higher-RevPAR properties.

The company's balance sheet remains in excellent condition, with a leverage ratio of 24.8% at the end of the first quarter. Chatham has made significant progress in addressing its upcoming debt maturities, including a $50 million increase to its unsecured term loan subsequent to the quarter-end. With $122.3 million in pro forma cash and $260 million in undrawn revolver capacity, the company is well-positioned to repay the $281 million in debt maturing in the second and third quarters of 2024.

Outlook

Looking ahead, Chatham provided guidance for the second quarter of 2024, expecting RevPAR growth of 2.5% to 4%, adjusted EBITDA of $28.7 million to $30.4 million, and adjusted FFO per share of $0.33 to $0.36. The company's outlook reflects its confidence in the continued strength of its tech-driven markets, as well as the stabilization of cost pressures.

Business Overview

Chatham's business overview highlights its focus on upscale extended-stay and premium-branded select-service hotels, with a particular emphasis on markets with high barriers to entry and strong demand generators. The company's portfolio consists of 38 hotels with 5,735 rooms across 16 states and the District of Columbia. Chatham's hotels are leased to taxable REIT subsidiary lessees, which engage independent management companies to operate the properties.

Financials

The company's financial ratios demonstrate its strong liquidity and solvency. As of March 31, 2024, Chatham had a current ratio of 2.74, a quick ratio of 2.74, and a cash ratio of 2.64, indicating ample short-term liquidity. The company's debt ratio of 0.36 and debt-to-equity ratio of 0.63 suggest a prudent capital structure.

Chatham's geographic diversification and focus on tech-driven markets have been key drivers of its outperformance. The company's Silicon Valley and Bellevue hotels, which account for a significant portion of its portfolio, have been the standout performers, benefiting from surging corporate demand and limited new supply. Meanwhile, Chatham's leisure-oriented hotels in markets like Destin and Savannah have faced some softness, reflecting the broader industry trends.

The company's revenue breakdown shows that room revenue, which accounted for 91.3% of total revenue in the first quarter of 2024, increased by 1.3% year-over-year. Food and beverage revenue declined by 11.5%, while other revenue, including parking and ancillary services, grew by 9.9%. Chatham's focus on enhancing its ancillary revenue streams has been a key contributor to its performance.

Liquidity

Chatham's liquidity position remains strong, with $91.5 million in cash, cash equivalents, and restricted cash as of March 31, 2024. The company's net debt-to-EBITDA ratio stood at 4.0x, significantly below its pre-pandemic levels, providing ample financial flexibility for future investments and capital allocation decisions.

Risks and Challenges

The company's risks include exposure to macroeconomic conditions, competition in the hotel industry, and the potential for disruptions in the travel and hospitality sectors. However, Chatham's focus on high-quality assets in markets with strong demand drivers, coupled with its prudent financial management, positions it well to navigate these challenges.

Conclusion

In conclusion, Chatham Lodging Trust has delivered a robust performance in the first quarter of 2024, driven by its strategic focus on tech-driven markets and its proactive approach to capital management. The company's strong liquidity, diversified portfolio, and ability to outperform the industry make it an attractive investment opportunity in the current environment.