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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-34693
CHATHAM LODGING TRUST
(Exact Name of Registrant as Specified in Its Charter)
| Maryland (State or Other Jurisdiction of Incorporation or Organization) |
27-1200777 (I.R.S. Employer Identification No.) |
|
| 50 Cocoaut Row, Suite 200 | ||
| Palm Beach, FL (Address of Principal Executive Offices) |
33480 (Zip Code) |
(561) 802-4477
(Registrant’s Telephone Number, Including Area Code)
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. o Yes þ No
* The registrant became subject to the reporting requirements of the Securities Exchange Act
of 1934, as amended, on April 15, 2010.
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). o
Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definition of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ (do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). o Yes þ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as
of the latest practicable date.
| Class | Outstanding at May 20, 2010 | |
| Common Shares of Beneficial Interest ($0.01 par value per share) | 9,165,000 |
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PART I. FINANCIAL INFORMATION
| Item 1. | Financial Statements. |
Chatham Lodging Trust (the “Company”) completed its initial public offering of its common
shares of beneficial interest (the “IPO”) on April 21, 2010. The IPO resulted in the sale of
8,625,000 common shares at a price per share of $20.00 and generated gross proceeds of $172.5
million. The aggregate proceeds to the Company, net of underwriters’ discounts and commissions and
other offering costs, were approximately $158.4 million. Concurrently with the closing of the IPO,
in a separate private placement pursuant to Regulation D under the Securities Act of 1933, as
amended, the Company sold 500,000 of its common shares to Jeffrey H. Fisher, the Company’s
Chairman, President and Chief Executive Officer, at the public offering price of $20.00 per share,
for proceeds to the Company of $10 million.
The financial statement covered in this report represents the financial condition of the
Company prior to the consummation of the IPO. Due to the timing of the IPO and the formation
transactions, the results of operations discussion set forth in this document is not necessarily
indicative of future operating results of Chatham Lodging Trust as a publicly-held company. The
information provided only reflects the financial condition of the Company as of March 31, 2010 and
December 31, 2009.
On April 23, 2010, wholly owned subsidiaries of the Company completed the acquisition of six
hotel properties (the “Initial Acquisition Hotels”) from wholly owned subsidiaries of RLJ
Development, LLC for an aggregate purchase price of $73.5 million, plus customary pro-rated amounts
and closing costs. Each of the Initial Acquisition Hotels operates under the Homewood Suites by
Hilton® brand. The Initial Acquisition Hotels contain an aggregate of 813 suites and are located
in the major metropolitan statistical areas of Boston, Massachusetts; Minneapolis, Minnesota;
Nashville, Tennessee; Dallas, Texas; Hartford, Connecticut and Orlando, Florida. The Company
acquired the Initial Acquisition Hotels using a portion of the IPO proceeds.
On May 18, 2010, the Company signed an agreement to acquire four hotels, including a 133-room
Residence Inn by Marriott® in White Plains, New York, a 120-room Hampton Inn &
Suites® in Houston, Texas, a 105-room Courtyard by Marriott® in Altoona,
Pennsylvania and an 86-room SpringHill Suites by Marriott® in Washington, Pennsylvania.
The purchase and sale agreement for the hotels provides for an aggregate purchase price for the
four properties of $61.0 million, including the assumption of approximately $12.5 million of debt
collateralized by two of the properties.
The agreement to acquire the new hotels
is subject to completion of due diligence to occur within four weeks
of signing of the agreement and the following closing
conditions:
| • | the closing of the purchase of the Courtyard and the SpringHill Suites may be extended up to an additional 45 days, pending lender approval of the Company’s assumption of the debt on those two properties; and |
| • | the closing of the purchase of the Residence Inn may be extended up to an additional 60 days and is subject to the seller’s right to withdraw the property from the acquisition portfolio, in exchange for payment of a breakage fee to the Company, if the seller does not receive lender consent to the sale. In the event that the Residence Inn is removed from the acquisition portfolio, the Company will have the option to purchase the Residence Inn for up to an additional year. |
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Chatham Lodging Trust
(A Development Stage Company)
(A Development Stage Company)
Consolidated Balance Sheets
| March 31, 2010 | December 31, 2009 | |||||||
| (unaudited) | ||||||||
ASSETS |
||||||||
Cash |
$ | 23,666 | $ | 23,666 | ||||
Total assets |
$ | 23,666 | $ | 23,666 | ||||
LIABILITIES AND SHAREHOLDER’S EQUITY |
||||||||
Due to related party |
$ | 13,666 | $ | 13,666 | ||||
Total liabilities |
13,666 | 13,666 | ||||||
Commitment and contingencies (See Note 1 and 2) |
||||||||
Shareholder’s equity: |
||||||||
Preferred shares of beneficial interest, $0.01 par value, 100,000,000 shares authorized and unissued at March 31, 2010 |
— | — | ||||||
Common
shares of beneficial interest, $0.01 par value, 500,000,000 shares authorized at March 31, 2010;
1,000 issued and outstanding; 1,000 shares authorized at December 31, 2009; 1,000 issued and outstanding |
10 | 10 | ||||||
Additional paid-in capital |
9,990 | 9,990 | ||||||
Total shareholder’s equity |
10,000 | 10,000 | ||||||
Total liabilities and shareholder’s equity |
$ | 23,666 | $ | 23,666 | ||||
The accompanying notes are an integral part of these financial statements.
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CHATHAM LODGING TRUST
(A Development Stage Company)
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(unaudited)
1. Organization
Chatham Lodging Trust (the “Company”) was formed as a Maryland real estate investment trust
(“REIT”) on October 26, 2009 and intends to elect to qualify as a REIT for U.S. Federal Income Tax
purposes beginning with its short taxable year ending December 31, 2010. The Company is
internally-managed and was organized to invest primarily in premium-branded upscale extended-stay
and select-service hotels. The Company formed Chatham Lodging, L.P. (the “Operating Partnership”)
on November 18, 2009. The Company formed its taxable REIT subsidiary, Chatham TRS Holding, Inc.
(the “TRS”), and its initial lessee subsidiary, Chatham Leaseco I, LLC (the “TRS Lessee”), on
November 19, 2009. The TRS is wholly owned by the Operating Partnership and the TRS Lessee is
wholly owned by the TRS.
The Company completed its initial public offering (the “IPO”) on April 21, 2010. The IPO
resulted in the sale of 8,625,000 common shares of beneficial interest at a price per share of
$20.00, generating gross proceeds of $172.5 million. The aggregate proceeds to the Company, net of
underwriters’ discounts and commissions and other offering costs, were approximately $158.4
million. Concurrently with the closing of the IPO, in a separate private placement pursuant to
Regulation D under the Securities Act of 1933, as amended (the “Securities Act”), the Company sold
500,000 of its common shares to Jeffrey H. Fisher, the Company’s Chairman, President and Chief
Executive Officer, at the public offering price of $20.00 per share, for proceeds to the Company of
$10 million.
The Company had no operations prior to the consummation of the IPO. The Company is the sole
general partner of the Operating Partnership and plans to conduct substantially all of its business
through the Operating Partnership. Following the closing of the IPO, the Company contributed the
net proceeds from the IPO and the concurrent private placement to the Operating Partnership in
exchange for partnership interests in the Operating Partnership.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance with the
instructions to Form 10-Q and do not include all of the information and note disclosures required
by U.S. generally accepted accounting principles (“U.S. GAAP”). The balance sheets include all of
the accounts of the Company and its wholly owned subsidiary. All intercompany profits, balances
and transactions are eliminated in consolidation. Amounts as of December 31, 2009 included in the
unaudited consolidated financial statement have been derived from the audited consolidated
financial statement as of that date. The accompanying unaudited consolidated financial statement
should be read in conjunction with the consolidated financial statement and notes thereto as of
December 31, 2009 included in Amendment No. 7 to Form S-11 which was filed with the SEC on April 5,
2010.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial statements. Actual
results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months
or less to be cash equivalents.
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Income Taxes
The Company is currently subject to corporate federal and state income taxes. However, as of
March 31, 2010 and December 31, 2009, the Company had no operating results subject to taxation.
The Company intends to elect to be taxed as a REIT for federal income tax purposes. To qualify
as a REIT, the Company must meet certain organizational and operational requirements, including a
requirement to distribute at least 90% of the Company’s annual REIT taxable income to its
shareholders (which is computed without regard to the dividends paid deduction or net capital gain,
and which does not necessarily equal net income as calculated in accordance with U.S. GAAP). As a
REIT, the Company generally will not be subject to federal income tax to the extent it distributes
qualifying dividends to its shareholders. If the Company fails to qualify as a REIT in any taxable
year, it will be subject to federal income tax on its taxable income at regular corporate income
tax rates, and generally will not be permitted to qualify for treatment as a REIT for federal
income tax purposes for the four taxable years following the year during which qualification is
lost, unless the Internal Revenue Service grants the Company relief under certain statutory
provisions. Such an event could materially adversely affect the Company’s net income and net cash
available for distribution to shareholders. However, the Company intends to organize and operate in
such a manner as to qualify for treatment as a REIT.
The Company plans to lease its hotels to the TRS Lessee and other lessee subsidiaries of the
TRS that it may form in the future. The TRS is subject to federal and state income taxes and the
Company will account for taxes, where applicable, using the asset and liability method which
recognizes deferred tax assets and liabilities arising from differences between financial statement
carrying amounts and income tax bases.
Organizational and Offering Costs
The Company expenses organizational costs as incurred and offering costs, which include
selling commissions, will be deferred and charged to shareholder’s equity.
Recently Issued Accounting Standards
In June 2009, the Financial Accounting Standards Board (“FASB”) issued an accounting standard
that made the FASB Accounting Standards Codification (the “Codification”) the source of
authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. The Codification has
superseded all then-existing non-SEC accounting and reporting standards. All other
non-grandfathered non-SEC accounting literature not included in the Codification became
non-authoritative. This accounting standard is effective for financial statements issued for
interim and annual periods ending after September 15, 2009. Following the issuance of this
accounting standard, the FASB will not issue new standards in the form of Statements, FASB Staff
Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards
Updates (“Updates”). The FASB will not consider Updates as authoritative in their own right.
Updates will serve only to update the Codification, provide background information about the
guidance, and provide the bases for conclusions on the change(s) in the Codification. The adoption
of this standard did not have a material impact on our financial statement.
In June 2009, the FASB issued amended guidance related to the consolidation of
variable-interest entities, which requires enterprises to qualitatively assess the determination of
the primary beneficiary of a variable interest entity (“VIE”) based on whether the entity (1) has
the power to direct matters that most significantly impact the activities of the VIE, and (2) has
the obligation to absorb losses or the right to receive benefits of the VIE that could potentially
be significant to the VIE. The amendments change the consideration of kick-out rights in
determining if an entity is a VIE which may cause certain additional entities to now be considered
VIEs. Additionally, they require an ongoing reconsideration of the primary beneficiary and provide
a framework for the events that trigger a reassessment of whether an entity is a VIE. This guidance
is effective for financial statements issued for fiscal years beginning after November 15, 2009.
The Company had no VIEs as of March 31, 2010, but expects the new guidance to be applicable to
subsequent acquisitions.
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3. Shareholder’s Equity
Under the initial Declaration of Trust of the Company, the total number of shares initially
authorized for issuance was 1,000 common shares. The Board of Trustees may amend the Declaration of
Trust to increase or decrease the number of authorized shares. On October 30, 2009, the Company
issued the sole shareholder of the Company 1,000 common shares at $10.00 per share.
Effective March 31, 2010, the Company’s Declaration of Trust was amended and restated to
authorize the issuance of 500,000,000 common shares and 100,000,000 preferred shares. On April 21,
2010, the Company completed its IPO. The Company sold 8,625,000 of its common shares to the public
at a price of $20.00 per share. Concurrently with the closing of the IPO, in a separate private
placement pursuant to Regulation D under the Securities Act, the Company sold 500,000 of its common
shares to Mr. Fisher. Following the closing of the IPO, the Company repurchased the 1,000 common
shares issued to Mr. Fisher in October 2009 at his cost of $10.00 per share. No preferred shares
are outstanding.
4. Related Party Transactions
Mr. Fisher has advanced $13,666 to the Company which is accounted for as a due to related
party on the accompanying balance sheets.
Jeffrey H. Fisher owns 90% of Island Hospitality Management, Inc. (“IHM”), a hotel management
company. The Company may enter into hotel management agreements with IHM in the future to manage
certain acquired hotels.
5. Subsequent Events
On April 9, 2010, the sole shareholder of the Company approved the Company’s Equity Incentive
Plan (the “Equity Incentive Plan”) to attract and retain independent trustees, executive officers
and other key employees and service providers. The Equity Incentive Plan provides for the grant of
options to purchase common shares, share awards, share appreciation rights, performance units and
other equity-based awards, including grants of restricted common shares and long-term incentive
plan units (“LTIP Units”). The Equity Incentive Plan is administered by the Compensation Committee
of the Company’s board of trustees (the “Compensation Committee”), who has the ability to approve
all terms of awards under the Equity Incentive Plan. The Compensation Committee also may approve
who will receive grants under the Equity Incentive Plan and the number of common shares subject to
the grant.
The number of common shares authorized for issuance under the Equity Incentive Plan is
565,359. In connection with share splits, dividends, recapitalizations and certain other events,
the Company’s board of trustees will make adjustments that it deems appropriate in the aggregate
number of common shares that may be issued under the Equity Incentive Plan and the terms of
outstanding awards. On April 26, 2010, the Company issued 40,000 restricted common shares to its
independent trustees pursuant to its Equity Incentive Plan.
Subsequent to the IPO, on April 23, 2010, the Company granted 246,960 LTIP Units to the
Company’s executive officers pursuant to the Equity Incentive Plan, all of which will be accounted
for in accordance with Codification Topic (“ASC”) 718, “Stock Compensation”. Once the LTIP Units
have achieved parity and are vested, they may be converted into units of limited partnership
interest in the Operating Partnership (“OP Units”) which may, in the Company’s sole and absolute
discretion, be redeemed by the Company for cash or exchanged for an equivalent number of the
Company’s common shares. The LTIP Units granted to the Company’s executive officers will vest and
be recognized as expense ratably over a five-year period, beginning on the date of grant.
On April 23, 2010, wholly owned subsidiaries of the Company completed the acquisition of six
hotel properties (the “Initial Acquisition Hotels”) from wholly owned subsidiaries of RLJ
Development, LLC for an aggregate purchase price of $73.5 million, plus customary pro-rated amounts
and closing costs. Each of the Initial Acquisition Hotels operates under the Homewood Suites by
Hilton® brand. The Initial Acquisition Hotels contain an aggregate of 813 suites and are located
in the major metropolitan statistical areas of Boston, Massachusetts; Minneapolis, Minnesota;
Nashville, Tennessee; Dallas, Texas;
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Hartford, Connecticut and Orlando, Florida. The Company funded the acquisition of the Initial
Acquisition Hotels from proceeds of the IPO.
The Company used approximately $3.2 million of the net proceeds of the IPO and the concurrent
private placement to reimburse Mr. Fisher for out-of-pocket expenses Mr. Fisher incurred in
connection with the Company’s formation and the IPO, including $2.5 million Mr. Fisher funded as
earnest money deposits for the Company’s purchase of the Initial Acquisition Hotels.
Initial Acquisition Hotels Management Agreements
The Initial Acquisition Hotels will be managed by Promus Hotels, Inc. (the “Manager”), a
subsidiary of Hilton Worldwide (“Hilton”). The TRS Lessee assumed each of the existing hotel
management agreements (collectively, the “Hotel Management Agreements”) for the Initial Acquisition
Hotels. Each of the Hotel Management Agreements became effective on December 20, 2000, has an
initial term of 15 years and may be renewed for an additional five-year period at the manager’s
option by written notice to the Company no later than 120 days prior to the expiration of the
initial term.
Under the Hotel Management Agreements, the Manager receives a base management fee equal to 2%
of the hotel’s gross room revenue and, if certain financial thresholds are met or exceeded, an
incentive management fee equal to 10% of the hotel’s net operating income, less fixed costs, base
management fees, agreed-upon return on the owner’s original investment and debt service payments.
Subject to certain limitations, the Hotel Management Agreements may be terminated as follows:
(1) upon casualty or condemnation of the hotel or the occurrence of certain events of default that
occur and continue beyond any applicable grace period, upon notice to the defaulting party; (2) by
the Company, without payment of any termination fee to the Manager, as a result of the failure of
the hotel to meet certain market and financial performance thresholds over a period of two
consecutive years; (3) by the Manager, upon a change of control, if the new owner does not receive
a Homewood Suites by Hilton® license agreement for the operation of the hotel; or (4) by
the Company, upon a change of control, with payment of a termination fee to the Manager, or without
payment of a termination fee where the new owner assumes the existing management agreement and
obtains a Homewood Suites franchise agreement for the operation of the hotel.
Following the assumption of the Hotel Management Agreements by the TRS Lessee, the Hotel
Management Agreements were amended to provide that beginning on the third anniversary of the
closing of the purchase of the Initial Acquisition Hotels, the Company may terminate the Hotel
Management Agreements upon six months’ notice to the Manager without payment of any termination fee
to the Manager.
Initial Acquisition Hotels Franchise Agreements
Following the Company’s acquisition of the Initial Acquisition Hotels, the TRS Lessee entered
into new hotel franchise agreements with the Manager. Each of the new hotel franchise agreements
has an initial term of 15 years. The hotel franchise agreements for each of the Initial Acquisition
Hotels provide for a franchise royalty fee equal to 4% of the hotel’s gross room revenue and a
program fee equal to 4% of the hotel’s gross room revenue. The franchise agreements generally have
no termination rights unless the franchisee fails to cure an event of default in accordance with
the franchise agreements.
Agreement to Purchase New Hotel Properties
On May 18, 2010, the Company signed an agreement to acquire four hotels, including a 133-room
Residence Inn by Marriott® in White Plains, New York, a 120-room Hampton Inn &
Suites® in Houston, Texas, a 105-room Courtyard by Marriott® in Altoona,
Pennsylvania and an 86-room SpringHill Suites by Marriott® in Washington, Pennsylvania.
The purchase and sale agreement for the hotels provides for an aggregate purchase price for the
four properties of $61.0 million, including the assumption of approximately $12.5 million of debt
collateralized by two of the properties.
The
agreement to acquire the new hotels is subject to completion of due
diligence to occur within four weeks of signing of the agreement and the following closing
conditions:
| • | the closing of the purchase of the Courtyard and the SpringHill Suites may be extended up to an additional 45 days, pending lender approval of the Company’s assumption of the debt on those two properties; and |
| • | the closing of the purchase of the Residence Inn may be extended up to an additional 60 days and is subject to the seller’s right to withdraw the property from the acquisition portfolio, in exchange for payment of a breakage fee to the Company, if the seller does not receive lender consent to the sale. In the event that the Residence Inn is removed from the acquisition portfolio, the Company will have the option to purchase the Residence Inn for up to an additional year. |
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| Item 2. | Management’s Discussion and Analysis of Results of Operations and Financial Condition. |
The following discussion and analysis should be read in conjunction with our consolidated
financial statement and related notes included elsewhere in this report.
Statement Regarding Forward-Looking Information
The following information contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements
include information about possible or assumed future results of our business, financial condition,
liquidity, results of operations, cash flow and plans and objectives. These statements generally
are characterized by the use of the words “believe,” “expect,” “anticipate,” “estimate,” “plan,”
“continue,” “intend,” “should,” “may” or similar expressions. Although we believe that the
expectations reflected in such forward-looking statements are based upon reasonable assumptions,
our actual results could differ materially from those set forth in the forward-looking statements.
Some factors that might cause such a difference include the following: the current global economic
downturn, increased direct competition, changes in government regulations or accounting rules,
changes in local, national and global real estate conditions, declines in the lodging industry,
seasonality of the lodging industry, our ability to obtain lines of credit or permanent financing
on satisfactory terms, changes in interest rates, availability of proceeds from offerings of our
common shares, our ability to identify suitable investments, our ability to close on identified
investments and inaccuracies of our accounting estimates. Given these uncertainties, undue
reliance should not be placed on such statements. We undertake no obligation to publicly release
the results of any revisions to these forward-looking statements that may be made to reflect future
events or circumstances or to reflect the occurrence of unanticipated events. The forward-looking
statements should be read in light of the risk factors identified in the “Risk Factors” section of
our Registration Statement on Form S-11, as filed with the Securities and Exchange Commission
(“SEC”).
Overview
We are a self-advised hotel investment company organized in October 2009 to invest in
premium-branded upscale extended-stay and select-service hotels. We expect that a significant
portion of our portfolio will consist of hotels in the upscale extended-stay category, including
brands such as Homewood Suites by Hilton®, Residence Inn by Marriott® and
Summerfield Suites by Hyatt®. Upscale extended-stay hotels typically have the following
characteristics:
| • | their principal customer base includes business travelers who are on extended assignments and corporate relocations; |
| • | their services and amenities include complimentary breakfast and evening hospitality hour, high-speed internet access, in-room movie channels, limited meeting space, daily linen and room cleaning service, 24-hour front desk, guest grocery services and an on-site maintenance staff; and |
| • | their physical facilities include large suites, quality construction, full separate kitchens in each guest suite, quality room furnishings, pool, and exercise facilities. |
We also intend to invest in premium-branded select-service hotels such as Courtyard by
Marriott®, Hampton Inn® and Hampton Inn and Suites®. The service
and amenity offerings of these hotels typically include complimentary breakfast, high-speed
internet access, local calls, in-room movie channels and daily linen and room cleaning service. We
intend to invest primarily in hotels in the 25 largest metropolitan markets in the United States.
As a newly formed company with no business activity to date, we have no operating history and only
nominal assets, consisting of cash contributed in connection with our formation.
We intend to elect to qualify for treatment as a real estate investment trust (“REIT”) for
federal income tax purposes.
In order to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the
“Code”), we cannot operate the hotels that we acquire. Therefore, our operating partnership,
Chatham Lodging, L.P. (the “Operating Partnership”), and its subsidiaries will lease our hotel
properties to lessee subsidiaries (“TRS Lessees”) of our taxable REIT subsidiary, who will in turn
engage eligible independent contractors to manage the hotels. Each of these lessees will be
treated as a taxable REIT
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subsidiary for federal income tax purposes and will be evaluated for consolidation within our
financial statements for accounting purposes. However, since we will control both the Operating
Partnership and the TRS Lessees, our principal source of funds on a consolidated basis will be from
the operations of our hotels. The earnings of the TRS Lessees will be subject to taxation as
regular C corporations, as defined in the Code, reducing the TRS Lessees’ ability to pay dividends,
and therefore our funds from operations and the cash available for distribution to our
shareholders.
As of March 31, 2010, we were in the development stage and had not begun operations.
Liquidity and Capital Resources
We intend to limit the outstanding principal amount of our consolidated indebtedness to not
more than 35% of the investment in our hotel properties at cost (defined as our initial acquisition
price plus the gross amount of any subsequent capital investment and excluding any impairment
charges), measured at the time the debt is incurred, and a subsequent decrease in hotel property
values will not necessarily cause us to repay debt to comply with this limitation. Our board of
trustees may modify or eliminate this policy at any time without the approval of our shareholders.
Following completion of our initial public offering (the “IPO”) and concurrent private placement,
and following our purchase of the hotel properties described in Note 5 to our financial statements,
we expect to have approximately $42 million of cash available to fund additional investments in
hotel properties.
We expect to meet our short-term liquidity requirements generally through net cash provided by
operations, existing cash balances and, if necessary, short-term borrowings under an anticipated
revolving credit facility. We believe that our net cash provided by operations will be adequate to
fund operating requirements, pay interest on any borrowings and fund dividends in accordance with
the requirements for qualification as a REIT under the Code. We expect to meet our long-term
liquidity requirements through the cash we will have available from our IPO and subsequent
borrowings, and we expect to fund other investments in hotel properties and scheduled debt
maturities through long-term secured and unsecured borrowings and the issuance of additional equity
or debt securities.
We plan to arrange and utilize a revolving credit facility that we anticipate will be in place
following the full investment of the net proceeds of the IPO. This facility, which we expect will
be secured by hotel properties we acquire and other assets, will be used for general corporate
purposes. We intend to repay indebtedness incurred under our credit facility from time to time out
of cash flow and from the net proceeds of issuances of additional equity and debt securities. No
assurances can be given that we will obtain such a credit facility or, if we do, what the amount
and terms will be. Our failure to obtain such a facility on favorable terms could adversely impact
our ability to execute our business strategy. In the future, we may seek to increase the amount of
our credit facility, negotiate additional credit facilities or issue corporate debt instruments.
Any debt incurred or issued by us may be secured or unsecured, long-term or short-term, fixed or
variable interest rate and may be subject to such other terms as we deem prudent.
We intend to invest in hotel properties only as suitable opportunities arise. In the near
term, we intend to fund future investments in properties with the net proceeds of our IPO and the
concurrent private placement. In the longer term, we intend to finance our investments with the
net proceeds from additional issuances of common and preferred shares, issuances of units of
limited partnership interest in the Operating Partnership or other securities or borrowings. The
success of our acquisition strategy may depend, in part, on our ability to access additional
capital through issuances of equity securities.
Results of Operations
As of March 31, 2010, operations had not commenced because we were in our developmental stage.
We are not aware of any material trends or uncertainties, favorable or unfavorable, that may be
reasonably anticipated to have a material impact on either the capital resources or the revenues or
income to be derived from the acquisition and operation of properties, loans and other permitted
investments, other than those referred to in the risk factors identified in the “Risk Factors”
section of our Registration Statement on Form S-11, as filed with the SEC.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of March 31, 2010.
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Contractual Obligations
On May 18, 2010, we signed an agreement to acquire four hotels, including a 133-room Residence
Inn by Marriott® in White Plains, New York, a 120-room Hampton Inn & Suites®
in Houston, Texas, a 105-room Courtyard by Marriott® in Altoona, Pennsylvania and an
86-room SpringHill Suites by Marriott® in Washington, Pennsylvania. The purchase and
sale agreement for the hotels provides for an aggregate purchase price for the four properties of
$61.0 million, including the assumption of approximately $12.5 million of debt collateralized by
two of the properties. We will fund the purchase of the four new hotels from the proceeds of our
IPO.
The acquisition of the new hotels is expected to close within four weeks of the date of the
purchase and sale agreement, subject to completion of due diligence and the following closing
conditions:
| • | the closing of the purchase of the Courtyard and the SpringHill Suites may be extended up to an additional 45 days, pending lender approval of our assumption of the debt on those two properties; and |
| • | the closing of the purchase of the Residence Inn may be extended up to an additional 60 days and is subject to the seller’s right to withdraw the property from the acquisition portfolio, in exchange for the payment to us of a breakage fee, if the seller does not receive lender consent to the sale. In the event that the Residence Inn is removed from the acquisition portfolio, we will have the option to purchase the Residence Inn for up to an additional year. |
Because the acquisition of the new hotels is subject to the above conditions, we can give no
assurance that the transaction will be consummated during the expected time period, or at all.
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk. |
We may be exposed to interest rate changes primarily as a result of our assumption of
long-term debt in connection with our acquisitions. Our interest rate risk management objectives
are to limit the impact of interest rate changes on earnings and cash flows and to lower overall
borrowing costs. To achieve these objectives, we will borrow primarily at fixed rates or variable
rates with the lowest margins available and, in some cases, with the ability to convert variable
rates to fixed rates. With respect to variable rate financing, we will assess interest rate risk
by identifying and monitoring changes in interest rate exposures that may adversely impact expected
future cash flows and by evaluating hedging opportunities.
| Item 4T. | Controls and Procedures. |
Disclosure Controls and Procedures
Under the supervision and with the participation of the Company’s management, including the
Company’s Chief Executive Officer and Chief Financial Officer, the Company has evaluated the
effectiveness of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as
of the end of the period covered by this report. Based on that evaluation, the Company’s Chief
Executive Officer and Chief Financial Officer have concluded that these disclosure controls and
procedures are effective.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting during
our most recent fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
| Item 1. | Legal Proceedings. |
The Company is not involved in any litigation nor, to its knowledge, is any litigation
threatened against it.
| Item 1A. | Risk Factors. |
There have been no material changes from the risk factors disclosed in the “Risk Factors”
section of Amendment No. 7 to the Company’s Registration Statement on Form S-11 filed with the SEC
on April 5, 2010.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
In connection with its formation and initial capitalization, on October 30, 2009, the Company
issued 1,000 of its common shares to Jeffrey H. Fisher, the Company’s Chairman, President and Chief
Executive Officer, for $10.00 per share.
Concurrently with the closing of the IPO in a separate private placement pursuant to
Regulation D under the Securities Act, the Company sold 500,000 of its common shares to Jeffrey H.
Fisher at the public offering price of $20.00 per share.
11
Table of Contents
On April 26, 2010, the Company issued 40,000 restricted common shares to its independent
trustees pursuant to its Equity Incentive Plan.
| Item 3. | Defaults Upon Senior Securities. |
None.
| Item 4. | Submission of Matters to a Vote of Security Holders |
None.
| Item 5. | Other information. |
None.
| Item 6. | Exhibits. |
The following exhibits are filed as part of this report:
| Exhibit | ||||
| Number | Description of Exhibit | |||
| 31.1 | Certification of Chief Executive Officer pursuant to
Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act
of 1934, as amended, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 |
|||
| 31.2 | Certification of Chief Financial Officer pursuant to
Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act
of 1934, as amended, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 |
|||
| 32.1 | Certification of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 |
|||
12
Table of Contents
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| CHATHAM LODGING TRUST |
||||
| Dated: May 20, 2010 | /s/ Jeffrey H. Fisher | |||
| Jeffrey H. Fisher | ||||
| Chairman, President and Chief Executive Officer | ||||
13
Table of Contents
Exhibit Index
| Exhibit | ||||
| Number | Description of Exhibit | |||
| 31.1 | Certification of Chief Executive Officer pursuant to
Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act
of 1934, as amended, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 |
|||
| 31.2 | Certification of Chief Financial Officer pursuant to
Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act
of 1934, as amended, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 |
|||
| 32.1 | Certification of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 |
|||
14
EXHIBIT 31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Jeffrey H. Fisher, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Chatham Lodging Trust; | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | ||
| b. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by the report based on such evaluation; and | ||
| c. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of trustees (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | ||
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| CHATHAM LODGING TRUST |
||||
| Dated: May 20, 2010 | /s/ Jeffrey H. Fisher | |||
| Jeffrey H. Fisher | ||||
| Chairman, President and Chief Executive Officer | ||||
EXHIBIT 31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Julio E. Morales, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Chatham Lodging Trust; | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | ||
| b. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by the report based on such evaluation; and | ||
| c. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of trustees (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | ||
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| CHATHAM LODGING TRUST | ||||
| Dated: May 20, 2010 | /s/ Julio E. Morales | |||
| Julio E. Morales | ||||
| Executive Vice President and Chief Financial Officer | ||||
EXHIBIT 32.1
Certification Pursuant To
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Chatham Lodging Trust (the “Company”) on Form 10-Q
for the period ended March 31, 2010 as filed with the Securities and Exchange Commission on the
date hereof (the “Report”), I, Jeffrey H. Fisher, Chairman, President and Chief Executive
Officer of the Company and I, Julio E. Morales, Executive Vice President and Chief Financial
Officer of the Company, certify, to our knowledge, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and | |
| (2) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
|
CHATHAM LODGING TRUST |
||||
| Dated: May 20, 2010 | /s/ Jeffrey H. Fisher | |||
| Jeffrey H. Fisher | ||||
| Chairman, President and Chief Executive Officer | ||||
| /s/ Julio E. Morales | ||||
| Julio E. Morales | ||||
| Executive Vice President and Chief Financial Officer | ||||