Last week, we cautioned not to anticipate a rate hike by the Fed, because of below target inflation. We also pointed out that the REITs and utilities sectors should benefit by the market anticipating a rate hike, and not getting one.
Both of these forecasts turned out to be correct, and while we have a utilities pick forthcoming, today we wanted to highlight a REIT opportunity that we do not think will last.
We noticed that Chatham Lodging Trust (NYSE:CLDT) is off significantly from its 52-week high, more than 44%, and we think it looks like a great buy right now.
We are not the only ones who noticed - the great Brad Thomas recently featured Chatham in his "Millionaires' REITs That Pay Monthly" article, and has a deeper dive on the REIT coming as well.
The iron is hot on this one, and here are the four reasons we think it is time to strike.
1) 52-Week Low
As of this writing Chatham is priced at $21.85, and made a new 52-week low today of $21.83. At that valuation, the stock is yielding a very hearty 5.49% - more than two-and-a-half times the yield of the 10-Year Treasury (2.12%).
That dividend is quite healthy too - in the first six months of this year, adjusted funds from operations were $0.71. Chatham's $0.10 monthly dividend comes to $0.60 for the first six months and is only 84.5% of AFFO, very healthy coverage for a REIT.
REITs pay ordinary (as opposed to qualified) dividends, and as such are best kept in an IRA. Because of this, the fact that Chatham pays monthly is not too much of a benefit for most income-oriented shareholders, but the earlier payouts do provide for a small amount of additional compounding benefit versus monthly payers.
Chatham has a high yield, and a healthy one at that.
2) High Quality
Chatham is a hospitality REIT, and the hotels it owns are on the classy side. As the company puts it in the latest 10-Q, it "invests primarily in premium-branded upscale extended-stay and select-service hotels."
The hotels it owns are upscale, and the communities it invests in are affluent and economically robust - Silicon Valley, Marina del Rey, San Diego, Washington DC, Seattle, and Denver represent most of its holdings.
These upscale hotels in prosperous communities should do reasonably well in good economic times and bad. Chatham's holdings are very high quality.
That AFFO of $0.71 per share represented a 27% gain versus the $0.56 per share in the first six months of 2014 - very healthy growth. And per CEO Jeff Fisher on the latest conference call, the outlook is very good (RevPAR is revenue per available room, ADR is average daily rate):
Demand continues to outpace supply with demand up 3.3% year-to-date through June and only a moderate increase in new supply at a little over 1%. As matter of fact most of the so-called industry experts have in fact reduced their supply estimates additions to supply during this year and for 2016. The projects are not coming out as fast as they anticipated for a variety of reasons, nonetheless the net effect we think is the ability to continue to grow RevPAR and for us of course and for most folks that's mostly ADR, as we move forward in the next couple of years...
...I think if the stocks were priced for perfection before, you know there's certainly not priced that way now. And on a relative value basis if you can have mid to upper single-digit RevPAR gains for the next two or three years and that seems to be what's on the horizon a very good friend of mine at one of the brand companies confirmed that kind of view, and I think we also are in the same camp. So our earnings, you know like others are growing, although ours frankly are growing as you know in that 25% to 30% range, very, very quickly and we certainly look down the road in a very positive way...
...For the full year, we are currently projected to grow FFO per share another 24% in 2015 and that 24% growth is on top of approximately the 30% growth we've experienced since 2010.
Chatham's business is healthy, and its outlook is quite good.
Chatham is internally-managed - its own officers have their fingers on the pulse of the company, managing the portfolio of assets. Insiders are some of the largest shareholders, and have been buying lately.
As we have noted, inside buying is one of the best keys to understanding what is really happening in a company. In the last year-and-a-half at Chatham, the two most important officers - the CEO and CFO - have been putting their money where their optimistic mouths are, adding to their holdings.
Just as important as their buys are, this company traded as high as $31.60 this year, and nobody sold a share.
Corporate officers would not be very good company stewards if they were to say the future is bleak, whatever they really think, so it is always good to see them buying in addition to painting a rosy picture.
Chatham Lodging Trust hit a new 52-week low today, and it looks like a great buying opportunity, especially in your IRA. With interest rates that we think are likely to stay low for a long time, a high yield that has healthy coverage, robust growth, high quality properties, and insiders buying, Chatham looks like a great buy here. The iron is hot for Chatham, and it looks like it's the time to strike.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Chatham Lodging Trust is part of both the Strong Dividends Portfolio and the Insiders Buying Portfolio maintained at the Wall Street Exclusive, and subscribers of the WSE newsletter may have a vested interest in this equity's performance.