Chatham Lodging Trust (CLDT) FY 2021 MD&A

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

COVID-19 Pandemic

The lodging industry has been significantly impacted by the COVID-19 pandemic. Steps have been taken to restrict

inbound international travel and there has been a significant decline in domestic travel. The full impact of the COVID-19

pandemic on the lodging industry continues to evolve and will depend on future developments including the continuing severity and duration of the pandemic, and the possibility of additional subsequent widespread outbreaks and variant strains and the impact of actions taken in response, people's willingness to travel and the strength and timing of an economic recovery. All of these factors are uncertain, and the full impact of the COVID-19 pandemic on the lodging industry and the Company cannot be predicted at this time. The full magnitude of the impact of the COVID-19 pandemic on the Company’s financial condition, liquidity and future results of operations will depend on future developments which are highly uncertain. The Company has taken actions to mitigate the operating and financial impact of the COVID-19 pandemic including suspending common share dividends, reducing capital expenditures, obtaining credit facility covenant waivers and temporarily reducing executive compensation.

Overview

Chatham Lodging Trust (“we,” “us” or the “Company”) was formed as a Maryland real estate investment trust on October 26, 2009. The Company is internally managed and invests primarily in upscale extended-stay and premium-branded select-service hotels in geographically diverse markets with high barriers to entry near strong demand generators. The Company has elected to be taxed as a real estate investment trust for federal income tax purposes ("REIT").

The Company had no operations prior to the consummation of its IPO. The net proceeds from our share offerings are contributed to Chatham Lodging, L.P., our operating partnership (the “Operating Partnership”), in exchange for partnership interests. Substantially all of the Company’s assets are held by, and all operations are conducted through, the Operating Partnership. The Company is the sole general partner of the Operating Partnership and owns 100% of the common units of limited partnership interest in the Operating Partnership ("common units"). Certain of the Company’s employees hold vested and unvested long-term incentive plan units in the Operating Partnership ("LTIP units"), which are presented as non-controlling interests on our consolidated balance sheets.

As of December 31, 2021, the Company owned 41 hotels with an aggregate of 6,169 rooms located in 16 states and the District of Columbia. Prior to September 23, 2021, the Company held a 10.0% noncontrolling interest in a joint venture (the "Inland JV") with affiliates of Colony Capital, Inc. ("CLNY"), which owned 48 hotels acquired from Inland American Real Estate Trust, Inc. ("Inland"), comprising an aggregate of 6,402 rooms. Chatham sold its interest in the Inland JV in September 2021. Prior to March 18, 2021, the Company also held a 10.3% noncontrolling interest in a joint venture (the “NewINK JV”) with affiliates of CLNY, which owned 46 hotels acquired from a joint venture (the "Innkeepers JV") between the Company and Cerberus Capital Management (“Cerberus”), comprising an aggregate of 5,948 rooms. Chatham sold its interest in the NewINK JV in March 2021 for $2.8 million.

To qualify as a REIT, the Company cannot operate its hotels. Therefore, the Operating Partnership and its subsidiaries lease the Company's hotels to taxable REIT subsidiary lessees (“TRS Lessees”), which are wholly owned by the Company’s taxable REIT subsidiary (“TRS”) holding company. Each hotel is leased to a TRS Lessee under a percentage lease that provides for rental payments equal to the greater of (i) a fixed base rent amount or (ii) a percentage rent based on hotel revenue. The initial term of each of the TRS leases is 5 years. Lease revenue from each TRS Lessee is eliminated in consolidation.

The TRS Lessees have entered into management agreements with third-party management companies that provide day-to-day management for the hotels. As of December 31, 2021, Island Hospitality Management Inc. (“IHM”), which is 100% owned by Mr. Fisher, managed all 41 of the Company’s hotels.

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Key Indicators of Operating Performance and Financial Condition

We measure financial condition and hotel operating performance by evaluating non-financial and financial metrics and measures such as:

•Average Daily Rate (“ADR”), which is the quotient of room revenue divided by total rooms sold,

•Occupancy, which is the quotient of total rooms sold divided by total rooms available,

•Revenue Per Available Room (“RevPAR”), which is the product of occupancy and ADR, and does not include food and beverage revenue, or other operating revenue,

•Funds From Operations (“FFO”),

•Adjusted FFO,

•Earnings before interest, taxes, depreciation and amortization (“EBITDA”),

•EBITDAre,

•Adjusted EBITDA, and

•Adjusted Hotel EBITDA.

We evaluate the hotels in our portfolio and potential acquisitions using these metrics to determine each hotel’s contribution toward providing income to our shareholders through increases in distributable cash flow and increasing long-term total returns through appreciation in the value of our common shares. RevPAR, ADR and Occupancy are hotel industry measures commonly used to evaluate operating performance.

See “Non-GAAP Financial Measures” for further discussion of FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA.

Results of Operations

Industry outlook

The lodging industry has been severely impacted by the COVID-19 pandemic and there has been a significant decline in travel relative to 2019, but trends are improving and we expect continued strong growth in 2022 relative to 2021. Smith Travel Research reported that U.S. lodging industry RevPAR increased 58.2% for the year ended December 31, 2021, with RevPAR down 27.7% in the first quarter of 2021, up 160.4% in the second quarter of 2021, up 83.8% in the third quarter of 2021 and up 96.4% in the fourth quarter of 2021. We expect that in 2022, RevPAR will continue to increase significantly versus 2021 and 2020, but remain below the RevPAR levels achieved in 2019.

Comparison of the year ended December 31, 2021 to the year ended December 31, 2020

The section below provides a comparative discussion of our consolidated results of operations between fiscal year 2021 and 2020. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 for comparative a discussion of our consolidated results of operations between fiscal 2020 and fiscal 2019.

Results of operations for the year ended December 31, 2021 include the operating activities of our 41 wholly owned hotels that were owned for the entire period and two hotels located in Austin, TX which were acquired on August 3, 2021. We sold our investment in the NewINK JV on March 18, 2021, sold our investment in the Inland JV on September 23, 2021, and sold one hotel in San Diego, CA on November 24, 2020. The comparisons below are influenced by the COVID-19 pandemic, the acquisition of two hotels, the sale of our investments in the NewINK JV and the Inland JV, and the disposition of one hotel.

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Revenue

Revenue, which consists primarily of room, food and beverage and other operating revenues from our hotels, was as follows for the periods indicated (dollars in thousands):

Total revenue increased $59.1 million to $204.0 million for the year ended December 31, 2021 compared to total revenue of $144.9 million for the 2020 period. The increase in total revenue primarily was related to the recovery from the COVID-19 pandemic and the two hotels acquired in 2021. The two hotels acquired in 2021 contributed $4.1 million in total revenue. This was partially offset by a decrease in total revenue related to the hotel sold in 2020 of $6.3 million. Since all of our hotels are primarily select service or limited service hotels, room revenue is the primary revenue source as these hotels do not have significant food and beverage revenue or large group conference facilities. Room revenue comprised 91.9% and 90.1%, respectively, of total revenue for the years ended December 31, 2021 and 2020. Room revenue was $187.4 million and $130.6 million for the years ended December 31, 2021 and 2020, respectively, and the increase in room revenue primarily was related to the recovery from the COVID-19 pandemic and the two hotels acquired in 2021. This was partially offset by a decrease in room revenue related to the hotel sold in 2020 was $5.8 million.

Food and beverage revenue was $3.5 million and $2.7 million for the years ended December 31, 2021 and 2020, respectively. The increase in food and beverage revenue primarily was related to an increase in occupancies at our hotels due to the recovery from the COVID-19 pandemic.

Other revenue comprised of parking, meeting room, gift shop, in-room movie and other ancillary amenities revenue, was up $3.8 million for the year ended December 31, 2021. The increase in other operating revenue primarily was related to an increase in occupancies at our hotels due to the recovery from the COVID-19 pandemic.

Reimbursed costs from unconsolidated entities were $1.7 million and $4.0 million for the years ended December 31, 2021 and 2020, respectively. The cost reimbursements were offset by the reimbursed costs from unconsolidated entities included in operating expenses. The decrease in cost reimbursements primarily was related to the sale of the NewINK JV.

As reported by Smith Travel Research, U.S. lodging industry RevPAR for the years ended December 31, 2021 and 2020 increased 58.2% and decreased 47.5%, respectively, as compared to the years ended December 31, 2020 and 2019. Smith Travel Research reported that U.S. lodging industry RevPAR decreased 27.7% in the first quarter, increased 160.4% in the second quarter, increased 83.8% in the third quarter and increased 96.4% in the fourth quarter of 2021. We expect that in 2022, RevPAR will continue to increase significantly versus 2021 and 2020, but remain below the RevPAR levels achieved in 2019.

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In the table below, we present both actual and same property room revenue metrics. Actual Occupancy, ADR and RevPAR metrics reflect the performance of the hotels for the actual days such hotels were owned by the Company during the periods presented. Same property Occupancy, ADR, and RevPAR results for the 40 hotels wholly owned by the Company as of December 31, 2021 and that have been in operation for a full year regardless of our ownership during the period presented, which is a non-GAAP financial measure. Results for the hotels for the periods prior to our ownership were provided to us by prior owners and have not been adjusted by us.

Same property RevPAR increased 49.2% due to an increase in occupancy of 34.3% and an increase in ADR of 11.1%.

Hotel Operating Expenses

Hotel operating expenses consisted of the following for the periods indicated (dollars in thousands):

Hotel operating expenses increased $23.8 million, or 24.9%, to $119.3 million for the year ended December 31, 2021 from $95.5 million for the year ended December 31, 2020. The primary cause of the increase in hotel operating expenses was related to the increase in revenues and occupancy caused by the recovery from the COVID-19 pandemic and the two hotels acquired in 2021. The two hotels acquired in 2021 contributed $1.9 million in hotel operating expenses. The decrease in hotel operating expenses related to the hotel sold in 2020 was $3.5 million.

Room expenses, which are the most significant component of hotel operating expenses, increased $8.5 million from $31.9 million in 2020 to $40.4 million in 2021. The increase in room expenses primarily was related to an increase in occupancy and revenues at our hotels due to the recovery from the COVID-19 pandemic and the two hotels acquired in 2021. The decrease in room expenses related to the hotel sold in 2020 was $1.2 million.

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The remaining hotel operating expenses increased $15.3 million, or 24.0%, from $63.6 million in 2020 to $78.9 million in 2021. The increase in other remaining expenses primarily was related to an increase in occupancies and revenues at our hotels due to the recovery from the COVID-19 pandemic and the two hotels acquired in 2021. The decrease in other remaining expenses related to the hotel sold in 2020 was $2.4 million.

Depreciation and Amortization

Depreciation and amortization expense increased $0.3 million from $53.9 million for the year ended December 31, 2020 to $54.2 million for the year ended December 31, 2021. The increase was primarily due to the two hotels acquired in 2021 partially offset by the sale of one hotel. Depreciation is generally recorded on our assets over 40 years for buildings, 20 years for land improvements, 15 years for building improvements and one to ten years for hotel furniture, fixtures and equipment from the date of acquisition on a straight-line basis. Depreciable lives of hotel furniture, fixtures and equipment are generally assumed to be the difference between the date of acquisition and the date that the furniture, fixtures and equipment will be replaced. Amortization of franchise fees is recorded on a straight-line basis over the term of the respective franchise agreement.

Impairment Loss

Impairment loss was $5.6 million for the year ended December 31, 2021. There was no impairment loss in 2020. The loss in 2021 is due to the impairment recorded at a hotel that is under contract to be sold. The hotel is not presented as held for sale at this point given uncertainties around whether the sale will ultimately close.

Impairment Loss on Investment in Unconsolidated Real Estate Entities

Impairment loss on investment in unconsolidated real estate entities decreased $15.3 million for the year ended December 31, 2021. The Company recorded an impairment of the entire carrying value of $15.3 million on our investment in the Inland JV during the year ended December 31, 2020 related to a decline in operating performance caused by the COVID-19 pandemic.

Property Taxes, Ground Rent and Insurance

Total property taxes, ground rent and insurance expenses increased $0.8 million from $23.0 million for the year ended December 31, 2020 to $23.8 million for the year ended December 31, 2021. The increase attributable to the two hotels acquired in 2021 was $0.3 million offset by $0.7 million related to the one hotel sold in 2020. The remaining increase was primarily related to increased property insurance premiums across the portfolio of hotels.

General and Administrative

General and administrative expenses principally consist of employee-related costs, including base payroll, bonuses and amortization of restricted stock and awards of LTIP units. These expenses also include corporate operating costs, professional fees and trustees’ fees. Total general and administrative expenses (excluding amortization of stock based compensation of $4.8 million and $4.6 million for the years ended December 31, 2021 and 2020, respectively) increased $3.9 million to $10.9 million in 2021 from $7.0 million in 2020, with the increase primarily due to the Company's decision to temporarily reduce compensation in the year ended December 31, 2020 due to the COVID-19 pandemic and the sales of the NewINK JV and the Inland JV in 2021 which reimbursed the Company for some of its general and administrative expenses prior to their sales.

Other Charges

Other charges decreased from $4.4 million for the year ended December 31, 2020 to $0.7 million for the year ended December 31, 2021. Other charges primarily includes severance costs related to the departure of our former Chief Investment Officer during the year ended December 31, 2020 and deductibles for insurance claims.

Reimbursable Costs from Unconsolidated Entities

Reimbursable costs from unconsolidated entities, comprised of corporate payroll and rent costs were $1.7 million and $4.0 million for the years ended December 31, 2021 and 2020, respectively. The cost reimbursements were offset by the

cost reimbursements from unconsolidated entities included in revenues. The decrease in cost reimbursements primarily was

related to the sale of the NewINK JV.

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(Loss) gain on Sale of Hotel Property

(Loss) gain on the sale of hotel property increased $21.1 million for the year ended December 31, 2021 compared to the year ended December 31, 2020 due to the sale of the Residence Inn Mission Valley on November 24, 2020, which resulted in a gain of $21.1 million.

Interest and Other Income

Interest on cash and cash equivalents and other income was $0.2 million for the year ended December 31, 2020 compared to $0.2 million for the year ended December 31, 2021.

Interest Expense, Including Amortization of Deferred Fees

Interest expense decreased $3.7 million, or 13.0%, from $28.1 million for the year ended December 31, 2020 to $24.5 million for the year ended December 31, 2021. Interest expense is comprised of the following (dollars in thousands):

The decrease in interest expense for the year ended December 31, 2021 as compared to the year ended December 31, 2020 is primarily due to a decrease in mortgage debt interest from the sale of the Residence Inn Mission Valley in November 2020 and the repayment of the mortgage loan on that property, the repayment of the mortgage loan on the Residence Inn New Rochelle in April 2021, and a reduction of the outstanding balance on the revolving credit facility.

Loss from Unconsolidated Real Estate Entities

Loss from unconsolidated real estate entities decreased $6.2 million from a loss of $7.4 million for the year ended December 31, 2020 to a loss of $1.2 million for the year ended December 31, 2021. The decrease is primarily due to the sale of the NewINK JV.

Gain on Sale of Investment in Unconsolidated Real Estate Entities

Gain on sale of investment in unconsolidated real estate entities was $23.8 million for the year ended December 31, 2021. There was no gain on sale of investment in unconsolidated real estate entities in 2020. The gain in 2021 is due to the sale of the NewINK JV.

Income Tax Expense

Income tax expense remained unchanged at zero for the year ended December 31, 2020 and 2021. We are subject to income taxes based on the taxable income of our TRS Lessees at a combined federal and state tax rate of approximately 25%. The Company's TRS is expecting taxable losses in 2022 and recognizes a full valuation allowance equal to 100% of the net deferred tax assets due to the uncertainty of the TRS's ability to utilize these net deferred tax assets.

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Net Loss

Net loss was $18.8 million for the year ended December 31, 2021, compared to net loss of $77.0 million for the year ended December 31, 2020. The change in net loss was primarily due to an increase in occupancy and revenues at our hotels due to the recovery from the COVID-19 pandemic, the sale of the NewINK JV which resulted in a large gain on sale of investment in unconsolidated real estate entities, and the other factors discussed above.

Material Trends or Uncertainties

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 this section and the risk factors identified in the “Risk Factors” section of this Annual Report on this Form 10-K.

Non-GAAP Financial Measures

We consider the following non-GAAP financial measures useful to investors as key supplemental measures of our operating performance: (1) FFO, (2) Adjusted FFO, (3) EBITDA, (4) EBITDAre, (5) Adjusted EBITDA and (6) Adjusted Hotel EBITDA. These non-GAAP financial measures should be considered along with, but not as alternatives to, net income or loss as prescribed by GAAP as a measure of our operating performance.

FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA do not represent cash generated from operating activities under GAAP and should not be considered as alternatives to net income or loss, cash flows from operations or any other operating performance measure prescribed by GAAP. FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA are not measures of our liquidity, nor are FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA or Adjusted Hotel EBITDA indicative of funds available to fund our cash needs, including our ability to make cash distributions. These measurements do not reflect cash expenditures for long-term assets and other items that have been and will be incurred. FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA may include funds that may not be available for management’s discretionary use due to functional requirements to conserve funds for capital expenditures, property acquisitions, and other commitments and uncertainties.

We calculate FFO in accordance with standards established by Nareit, which defines FFO as net income or loss (calculated in accordance with GAAP), excluding gains or losses from sales of real estate, impairment write-downs, the cumulative effect of changes in accounting principles, plus depreciation and amortization (excluding amortization of deferred financing costs), and after adjustments for unconsolidated partnerships and joint ventures following the same approach. We believe that the presentation of FFO provides useful information to investors regarding our operating performance because it measures our performance without regard to specified non-cash items such as real estate depreciation and amortization, gain or loss on sale of real estate assets and certain other items that we believe are not indicative of the property level performance of our hotel properties. We believe that these items reflect historical cost of our asset base and our acquisition and disposition activities and are less reflective of our ongoing operations, and that by adjusting to exclude the effects of the items, FFO is useful to investors in comparing our operating performance between periods and between REITs that report FFO using the Nareit definition.

We calculate Adjusted FFO by further adjusting FFO for certain additional items that are not addressed in Nareit’s definition of FFO, including other charges, costs associated with the departure of our former Chief Investment Officer, losses on the early extinguishment of debt and similar items related to our unconsolidated real estate entities that we believe do not represent costs related to hotel operations. We believe that Adjusted FFO provides investors with another financial measure that may facilitate comparisons of operating performance between periods and between REITs that make similar adjustments to FFO.

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The following is a reconciliation of net (loss) income to FFO and Adjusted FFO for the years ended December 31, 2021, 2020 and 2019 (in thousands, except share data):

Diluted weighted average common share count used for calculation of adjusted FFO per share may differ from diluted weighted average common share count used for calculation of GAAP Net Income per share by LTIP units, which may be converted to common shares of beneficial interest and if Net Income per share is negative and Adjusted FFO is positive. Unvested restricted shares and unvested LTIP units that could potentially dilute basic earnings per share in the future would not be included in the computation of diluted loss per share for the periods where a loss has been recorded because they would have been anti-dilutive for the periods presented.

EBITDA is defined as net income or loss excluding: (1) interest expense; (2) provision for income taxes, including income taxes applicable to sale of assets; (3) depreciation and amortization; and (4) unconsolidated real estate entity items including interest, depreciation and amortization excluding gains and losses from sales of real estate. We consider EBITDA useful to an investor in evaluating and facilitating comparisons of our operating performance between periods and between REITs by removing the impact of our capital structure (primarily interest expense) and asset base (primarily depreciation and amortization) from our operating results. In addition, EBITDA is used as one measure in determining the value of hotel acquisitions and dispositions.

In addition to EBITDA, we present EBITDAre in accordance with Nareit guidelines, which defines EBITDAre as net income or loss excluding interest expense, income tax expense, depreciation and amortization expense, gains or losses from sales of real estate, impairment, and adjustments for unconsolidated joint ventures. We believe that the presentation of EBITDAre provides useful information to investors regarding the Company's operating performance and can facilitate comparison of operating performance between periods and between REITs.

We also present Adjusted EBITDA which includes additional adjustments for items such as other charges, gains or losses on extinguishment of indebtedness, costs associated with the departure of our former Chief Investment Officer, amortization of share-based compensation and certain other expenses that we consider outside the normal course of operations. We believe that Adjusted EBITDA provides useful supplemental information to investors regarding our ongoing operating performance that, when considered with net income, EBITDA and EBITDAre, is beneficial to an investor's understanding of our performance.

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The following is a reconciliation of net (loss) income to EBITDA, EBITDAre and Adjusted EBITDA for the years ended December 31, 2021, 2020 and 2019 (in thousands):

Adjusted Hotel EBITDA is defined as net income before interest, income taxes, depreciation and amortization, corporate general and administrative, impairment loss, loss on early extinguishment of debt, other charges, interest and other income, losses on sales of hotel properties and income or loss from unconsolidated real estate entities. We present Adjusted Hotel EBITDA because we believe it is useful to investors in comparing our hotel operating performance between periods and comparing our Adjusted Hotel EBITDA margins to those of our peer companies. Adjusted Hotel EBITDA represents the results of operations for our wholly owned hotels only.

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The following is a presentation of Adjusted Hotel EBITDA for the years ended December 31, 2021, 2020 and 2019 (in thousands):

Although we present FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA because we believe they are useful to investors in comparing our operating performance between periods and between REITs that report similar measures, these measures have limitations as analytical tools. Some of these limitations are:

•FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

•FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA do not reflect changes in, or cash requirements for, our working capital needs;

•FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA do not reflect funds available to make cash distributions;

•EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debts;

•Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may need to be replaced in the future, and FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA do not reflect any cash requirements for such replacements;

•Non-cash compensation is and will remain a key element of our overall long-term incentive compensation package, although we exclude it as an expense when evaluating our ongoing operating performance for a particular period using Adjusted EBITDA;

•Adjusted FFO, Adjusted EBITDA and Adjusted Hotel EBITDA do not reflect the impact of certain cash charges (including acquisition transaction costs) that result from matters we consider not to be indicative of the underlying performance of our hotel properties; and

•Other companies in our industry may calculate FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA differently than we do, limiting their usefulness as a comparative measure.

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•In addition, FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA do not represent cash generated from operating activities as determined by GAAP and should not be considered as alternatives to net income or loss, cash flows from operations or any other operating performance measure prescribed by GAAP. FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA are not measures of our liquidity. Because of these limitations, FFO, Adjusted FFO, EBITDA, Adjusted EBITDA and Adjusted Hotel EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA only supplementally. Our consolidated financial statements and the notes to those statements included elsewhere are prepared in accordance with GAAP.

Liquidity and Capital Resources

We plan to maintain a prudent capital structure and intend to maintain our leverage over the long term at a ratio of net debt to investment in hotels (at cost) (defined as our initial acquisition price plus the gross amount of any subsequent capital investment and excluding any impairment charges) at a level that will be similar to the levels at which we have operated in the past. A subsequent decrease in hotel property values will not necessarily cause us to repay debt to comply with this limitation. At December 31, 2021, our leverage ratio was approximately 30.6%, which decreased from 35.8% at December 31, 2020 based on the ratio of our net debt (total debt outstanding before deferred financing costs less unrestricted cash and cash equivalents) to hotel investments at cost. At December 31, 2021, we had total debt of $544.9 million at an average rate of approximately 4.7%. We intend to continue to fund our investments with a prudent balance of debt and equity. Our debt may include mortgage debt collateralized by our hotel properties and unsecured debt.

At December 31, 2021 and 2020, we had $70.0 million and $135.3 million, respectively, in outstanding borrowings under our revolving credit facility. We had $35.0 million and $13.3 million in outstanding borrowings under our construction loan for the Warner Center hotel development at December 31, 2021 and 2020, respectively. At December 31, 2021, the maximum borrowing availability under our revolving credit facility was $250.0 million. We also had mortgage debt on individual hotels aggregating $439.9 million and $461.1 million at December 31, 2021 and 2020, respectively.

Our revolving credit facility contains representations, warranties, covenants, terms and conditions customary for credit facilities of this type, including a maximum leverage ratio, a minimum fixed charge coverage ratio and minimum net worth financial covenants, limitations on (i) liens, (ii) incurrence of debt, (iii) investments, (iv) distributions, and (v) mergers and asset dispositions, covenants to preserve corporate existence and comply with laws, covenants on the use of proceeds of the revolving credit facility and default provisions, including defaults for non-payment, breach of representations and warranties, insolvency, non-performance of covenants, cross-defaults and guarantor defaults. We were in compliance with all financial covenants at December 31, 2021.

On October 26, 2021, Chatham executed an amendment to its credit facility which extended a waiver of financial covenants until June 30, 2022, provided for the immediate exercise of an option to extend the maturity of the entire $250 million facility through March 8, 2023, and added two six-month options to further extend the maturity of the facility through March 8, 2024 from lenders representing $227.5 million of commitments. In conjunction with the amendment, Chatham provided credit facility lenders with equity pledges on three unencumbered hotels. The spread on the facility did not change as a result of the amendment. The amendment places limits on the Company’s ability to incur debt, pay dividends, and make capital expenditures during the covenant waiver period. During the covenant waiver period interest will be calculated as LIBOR (subject to a 0.5% floor) plus a spread of 2.50% if borrowings remain at or below $200 million and a spread of 3.0% if borrowings exceed $200 million. As of December 31, 2021, the Company was in compliance with all of its modified financial covenants.

Our mortgage debt agreements contain “cash trap” provisions that are triggered when the hotel’s operating results fall below a certain debt service coverage ratio or debt yield. When these provisions are triggered, all of the excess cash flow generated by the hotel is deposited directly into cash management accounts for the benefit of our lenders until a specified debt service coverage ratio or debt yield is reached. Such provisions do not allow the lender the right to accelerate repayment of the underlying debt. As of December 31, 2021, the debt service coverage ratios or debt yields for eight of our mortgage loans were below the minimum thresholds such that the cash trap provision of each respective loan could be enforced. As of December 31, 2021, none of our mortgage debt lenders has enforced cash trap provisions. We do not expect that such cash traps will affect our ability to satisfy our short-term liquidity requirements.

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In December 2017, we established a $50 million dividend reinvestment and stock purchase plan (the "Prior DRSPP"). We filed a new $50 million shelf registration statement for the dividend reinvestment and stock purchase plan (the "Current DRSPP" and together with the Prior DRSPP, the "DRSPP") on December 22, 2020 to replace the Prior DRSPP. Under the DRSPPs, shareholders may purchase additional common shares by reinvesting some or all of the cash dividends received on the Company's common shares. Shareholders may also make optional cash purchases of the Company's common shares subject to certain limitations detailed in the prospectuses for the DRSPP. During the year ended December 31, 2021, we issued 149,686 shares under the Current DRSPP at a weighted average price of $13.77, which generated $2.1 million of proceeds. As of December 31, 2021, there were common shares having a maximum aggregate sales price of approximately $47.9 million available for issuance under the Current DRSPP.

In December 2017, we established an "at-the-market" offering program (the "Prior ATM Plan") whereby, from time to time, we may publicly offer and sell our common shares having an aggregate maximum offering price up to $100 million by means of ordinary brokers transactions on the New York Stock Exchange (the "NYSE"), in negotiated transactions or in transactions that are deemed to be "at-the-market" offerings as defined in Rule 415 under the Securities Act of 1933, as amended. We filed a $100 million registration statement for a new ATM program (the "ATM Plan") on January 5, 2021 to replace the prior program. At the same time, the Company entered into a sales agreement with Cantor Fitzgerald & Co., Barclays Capital Inc., BMO Capital Markets Corp., BofA Securities, Inc., BTIG, LLC, Citigroup Global Markets Inc., Regions Securities LLC, Stifel, Nicolaus & Company, Incorporated and Wells Fargo Securities as sales agents. During the year ended December 31, 2021, we issued 1,595,528 shares under the ATM Plan at a weighted average price of $14.13 per share, which generated $22.5 million of proceeds. As of December 31, 2021, there were common shares having a maximum aggregate sales price of approximately $77.5 million available for issuance under the ATM Plan.

We expect to meet our short-term liquidity requirements generally through existing cash balances and availability under our credit facility. We believe that our existing cash balances and availability under our credit facility will be adequate to fund operating obligations, 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, such as hotel property acquisitions and debt maturities or repayments through additional long-term secured and unsecured borrowings, the issuance of additional equity or debt securities or the possible sale of existing assets.

The COVID-19 pandemic has caused, and is continuing to cause, significant disruption in the financial markets both globally and in the United States, and will continue to impact, possibly materially, our business, financial condition and results of operations. We cannot predict the degree, or duration, to which our operations will be affected by the COVID-19 outbreak, and the effects could be material. While we believe the liquidity provided by our unrestricted cash and credit facility availability, and aggressive cost reduction initiatives will enable us to fund our current obligations for the foreseeable future, COVID-19 has resulted in significant disruption of global financial markets, which could have a negative impact on our ability to access capital in the future. Because the situation is ongoing, and because the duration and severity remain unclear, it is difficult to forecast any impacts on our future results.

We intend to continue to invest in hotel properties as suitable opportunities arise. We intend to finance our future investments with free cash flow, the net proceeds from additional issuances of common and preferred shares, issuances of common units in our Operating Partnership or other securities, borrowings or asset sales. The success of our acquisition strategy depends, in part, on our ability to access additional capital through other sources. There can be no assurance that we will continue to make investments in properties that meet our investment criteria. Additionally, we may choose to dispose of certain hotels as a means to provide liquidity.

We had no material off-balance sheet arrangements at December 31, 2021.

Sources and Uses of Cash

Our principal sources of cash include net cash from operations, availability under our revolving credit facility, and proceeds from debt and equity issuances. Our principal uses of cash include acquisitions, capital expenditures, operating costs, corporate expenditures, interest costs, debt repayments and distributions to equity holders.

Cash, cash equivalents, and restricted cash totaled $29.9 million as of December 31, 2021, a decrease of $1.6 million from December 31, 2020, primarily due to net cash provided by operating activities of $28.8 million, net cash used in investing activities of $(101.9) million, and net cash provided by financing activities $71.6 million.

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Cash from Operations

Net cash flows provided by operating activities increased $48.7 million to $28.8 million in 2021 compared to ($19.9) million in 2020. The increase in cash from operating activities was primarily due to improving operating results from our hotels which generated RevPAR growth of 45.6% in 2021 versus 2020.

Investing Activities Cash Flows

Net cash flows used in investing activities increased $128.7 million to $101.9 million in 2021 compared to ($26.8) million in 2020. For the year ended December 31, 2021, net cash flows used in investing activities of $101.9 million consisted of $71.3 million related to the acquisitions of the RI Austin and TPS Austin hotels, $9.5 million related to capital improvements on our 41 wholly owned hotels and $23.9 million related to the development of the Home2 Suites Warner Center, offset by $2.8 million of proceeds from the sale of an unconsolidated real estate entity (the NewINK JV). For the year ended December 31, 2020, net cash flows provided by investing activities of $26.8 million consisted of $14.4 million related to capital improvements on our 39 wholly owned hotels and $23.2 million related to the development of the Home2 Suites Warner Center, offset by proceeds from the sale of the San Diego, CA hotel of $64.4 million.

We expect to invest approximately $23.7 million on renovations, discretionary and emergency expenditures on our existing hotels in 2022, including improvements required under any brand PIP, and expect to spend $2.4 million in 2022 on the Home2 Suites Warner Center development.

Financing Activities Cash Flows

Net cash flows provided by financing activities increased $67.2 million to $71.6 million in 2021 compared to $4.4 million in 2020. For the year ended December 31, 2021, net cash flows provided by financing activities of $71.6 million were comprised of $115.9 million of net proceeds from our Series A Preferred Shares offering, $24.6 million of common equity proceeds raised through sales under our DRSPPs and ATM Plan, and net borrowings on our construction loan of $21.7 million, offset by net repayments of our senior unsecured revolving credit facility of $65.3 million, amortization payments on mortgage debt of $8.7 million and the repayment of the $12.5 million mortgage loan on the Residence Inn New Rochelle, payments of financing and offering costs of $1.6 million, distributions to unit holders of $0.3 million and distributions on preferred shares of $2.3 million. For the year ended December 31, 2020, net cash flows provided by financing activities of $4.4 million were comprised of $0.2 million of common equity proceeds raised through sales under our Prior DRSPP, net borrowings on our credit facility of $45.3 million, and net borrowing on our construction loan of $13.2 million, offset by principal payments on mortgage debt of $35.7 million, payments of deferred financing and offering costs of $2.4 million, and distributions to shareholders and LTIP unit holders of $16.2 million.

We declared total dividends of $0 and $0 per common share and LTIP unit for the year ended December 31, 2021 and $0.22 and $0.22 per common share and LTIP unit for the year ended December 31, 2020, respectively. We declared total dividends of $0.89713 and $0 per Series A preferred share for the years ended December 31, 2021 and 2020, respectively.

Material Cash Requirements

Our material cash requirements include the following contractual obligations:

•At December 31, 2021, we had total debt principal and interest obligations of $582.7 million with $34.7 million of principal and interest payable within the next 12 months from year-end 2021. See Note 7, “Debt” to our consolidated financial statements for additional information relating to our property loans and revolving credit facility.

•Lease payments due within the next 12 months from year-end 2021 total $2.1 million. See Note 13, “Leases” to our consolidated financial statements for additional information relating to our corporate office and ground leases.

Related Party Transactions

We have entered into transactions and arrangements with related parties that could result in potential conflicts of interest. See “Risks Related to Our Business” and Note 15, “Related Party Transactions”, to our consolidated financial statements included in this Annual Report on Form 10-K. See also Item 13 of this Form 10-K.

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Inflation

Operators of hotels, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. However, competitive pressures may limit the ability of our management companies to raise room rates.

Critical Accounting Estimates

We consider the following estimates critical because they require estimates about matters that are inherently uncertain, involve various assumptions and require management judgment. The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates and assumptions.

Investment in Hotel Properties

We allocate the purchase prices of hotel properties acquired as asset acquisitions based on the fair value of the acquired real estate, furniture, fixtures and equipment, identifiable intangible assets and assumed liabilities. In making estimates of fair value for purposes of allocating the purchase price, we utilize a number of sources of information that are obtained in connection with the acquisition of a hotel property, including valuations performed by independent third parties and information obtained about each hotel property resulting from pre-acquisition due diligence.

Our hotel properties are carried at cost and are depreciated using the straight-line method over the estimated useful lives of the assets, generally 40 years for buildings, 20 years for land improvements, 5 to 20 years for building improvements and one to ten years for furniture, fixtures and equipment. Renovations and/or replacements at the hotel properties that improve or extend the life of the assets are capitalized and depreciated over their useful lives, while repairs and maintenance are expensed as incurred. Upon the sale or retirement of property and equipment, the cost and related accumulated depreciation are removed from the Company’s accounts and any resulting gain or loss is recognized in the consolidated statements of operations.

Our hotel properties are periodically reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the hotel properties may not be recoverable over management's estimated holding period.This estimated holding period incorporates management’s intent and ability to hold the hotel properties over the estimated holding period. Events or circumstances that may cause a review include, but are not limited to, adverse changes in the demand for lodging at the properties due to declining national or local economic conditions and/or new hotel construction in markets where the hotels are located. When such conditions exist, management will perform an analysis to determine if the estimated undiscounted future cash flows, without interest charges, from operations and the proceeds from the ultimate disposition of a hotel property exceed its carrying value. If the estimated undiscounted future cash flows are less than the carrying amount, an adjustment to reduce the carrying amount to the related hotel property's estimated fair market value is recorded and an impairment loss recognized. For the year ended December 31, 2021, we recorded an impairment loss on a hotel that is under contract for sale (See Note 5). For the year ended December 31, 2020, there were no impairment losses.

For properties the Company considers held for sale, depreciation and amortization are no longer recorded and the value the properties is recorded at the lower of depreciated cost or fair value, less costs to sell. If circumstances arise that were previously considered unlikely, and, as a result, the Company decides not to sell a property previously classified as held for sale, the Company will reclassify such property as held and used. Such property is measured at the lower of its carrying amount (adjusted for any depreciation and amortization expense that would have been recognized had the property been continuously classified as held and used) or fair value at the date of the subsequent decision not to sell. The Company classifies properties as held for sale when all criteria within the Financial Accounting Standards Board's ("FASB") guidance on the impairment or disposal of long-lived assets are met. As of December 31, 2021, we had no hotel properties held for sale.

Revenue Recognition

Revenue from hotel operations is recognized when rooms are occupied and when services are provided. Revenue consists of amounts derived from hotel operations, including sales from room, meeting room, gift shop, in-room movie and other ancillary amenities. Sales, use, occupancy, and similar taxes are collected and presented on a net basis (excluded from revenues) in the accompanying consolidated statements of operations.

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Share-Based Compensation

We measure compensation expense for the restricted share awards based upon the fair market value of our common shares at the date of grant. The Company measures compensation expense for the Time-Based and Performance-Based LTIP units based upon the Monte Carlo approach using volatility, dividend yield and a risk free interest rate in the valuation. Compensation expense is recognized on a straight-line basis over the vesting period and is included in general and administrative expense in the accompanying consolidated statements of operations. We pay dividends on vested and non-vested restricted shares and Time-Based LTIP units. The Company has also issued Performance-Based LTIP units as part of its compensation plan. Under the terms of the Performance-Based LTIP units, a holder of a Performance-Based LTIP unit will generally (i) be entitled to receive 10% of the distributions made on a common unit of the Operating Partnership during the period prior to vesting of such Performance-Based LTIP unit (the “Pre-Vesting Distributions”), (ii) be entitled, upon the vesting of such Performance-Based LTIP unit, to receive a special one-time “catch-up” distribution equal to the aggregate amount of distributions that were paid on a common unit during the period prior to vesting of such Performance-Based LTIP unit minus the aggregate amount of Pre-Vesting Distributions paid on such Performance-Based LTIP unit, and (iii) be entitled, following the vesting of such Performance-Based LTIP unit, to receive the same amount of distributions paid on a common unit of the Operating Partnership.

Income Taxes

We elected to be taxed as a REIT for federal income tax purposes commencing with our 2010 taxable year. In order to qualify as a REIT under the Code, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our annual REIT taxable income to our 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 GAAP). As a REIT, we generally will not be subject to federal income tax to the extent we currently distribute our taxable income to our shareholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our 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 IRS grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to shareholders. However, we believe we have been organized and that we operate in such a manner as to qualify for treatment as a REIT.

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