CLDT - Chatham Lodging: Bring Home Up To 8.3% Yield

2023-04-10 08:10:00 ET

Summary

• Chatham Lodging Trust has made an impressive turnaround, yet the market doesn't seem to appreciate it.
• Operating fundamentals and the balance sheet have improved over the past year.
• Income investors have two options for yield, with one being far higher than the other.

REITs often get painted with a broad brush, but not all of them are created equal. While office REITs are getting caught up in market fears around commercial real estate, it appears that hotel REITs have also fallen by the wayside.

This includes Chatham Lodging Trust ( CLDT ), which I last covered near the start of the year in January here , in which I noted the return of the dividend and improvements in operating fundamentals. I revisit the stock in this article by highlighting recent developments as well as a higher yield option for income investors, so let’s get started.

Why CLDT?

Chatham Lodging Trust is a Hotel REIT focused on the premium-branded extended stay property segment. It’s self-managed and at present, owns 39 hotels totaling 5,914 rooms in 16 states and Washington D.C.

CLDT’s property focus is a competitive advantage, as extended stay hotels come with lower operating costs (and thus higher property-level margins) due to their select service nature. This is reflected by CLDT having the highest EBITDA margin amongst its publicly-traded peer group, at 38% for the full year 2022.

This was driven by continued improvements in operating fundamentals, as RevPAR (revenue per available room) increased by 24% YoY to $117 during the fourth quarter. As shown below, both RevPAR and Occupancy have rebounded strongly to either exceed or closely match levels in March of 2020.

Also, considering the seasonal nature of hotels stays, I would expect for the upward trajectory for both metrics to continue into the summer months. This could be especially true considering the fact that CLDT’s properties mostly cater to business travel, and with unemployment levels remaining very low. This is supported by the March employment report released by the Bureau of Labor Statistics, showing that the unemployment rate remained virtually unchanged at 3.5%. As shown below, the unemployment rate has remained sticky at sub-4% since the start of 2022.

Notably, CLDT’s cash flow before capital expenditures has doubled year-on-year to $10 million in the last reported quarter, and importantly, growth is translating to the bottom line, with AFFO per share of nearly doubled from $0.12 to $0.20 over the same time period. This gave CLDT the financial flexibility to reinstate the dividend in late last year to $0.07 per quarter, giving it plenty of AFFO coverage and breathing room.

Meanwhile, CLDT appears ready to go back on the offensive, as it recently completed development on 170-room hotel in the highly desirable Warner Center submarket of Los Angeles in January. Performance on this property is ramping up quickly, with occupancy of 83% and an average daily rate that sits above CLDT’s portfolio average, at $189. This property was carefully selected, as it has limited nearby competition, with the closest competitor hotel being nearly 5 miles away.

Near term headwinds include higher interest rates, which affect cost of debt for all REITs. However, Hotel REITs like CLDT are among the best positioned for an inflationary environment, considering their ability to raise rates on a daily basis. Moreover, higher funding costs makes it more expensive for leveraged private market investors to build competing hotel properties.

Management has also positioned CLDT for balance sheet strength, as it reduced net debt by $80 million last year, and carries a safe long-term debt to gross assets ratio of 27%. CLDT also has plenty of liquidity on hand, with $380 million comprised of cash and availability on its credit facility.

Lastly, CLDT appears to be well within value territory at the current price of $10.46 with a forward P/FFO 8.4. At this low of a valuation, the market is essentially pricing in a no growth future for the company, but analysts estimate 4.4% to 9.5% annual growth over the next two years. They also have a consensus Buy rating with an average price target of $14.50, implying potential for very strong double-digit returns in the near term.

Those investors seeking lower risk and higher yield may want to consider the ( CLDT.PA ) preferred shares, which come with an 8.3% yield at the current price of $20 and a substantial 20% discount to redemption value. This preferred issue won’t be called until June 30, 2026 at the earliest and its dividends are cumulative.

Investor Takeaway

Chatham Lodging has executed a remarkable turnaround over the past year, and its fundamentals have mostly recovered from the pandemic-induced lows of 2020. The company is positioned to capitalize on the continued uptick in business travel and demand for hotel stays heading into the summer travel months.

Plus, CLDT has done a good job of deleveraging its balance sheet, and should be well positioned for an inflationary environment. Those investors seeking long-term growth potential may want to consider the common shares, while those who are more risk averse and prefer a higher immediate yield at a discount may want to look at the preferred shares.

For further details see: