Chatham Lodging Trust: What To Do Now?

Summary

• CLDT has dropped precipitously in the last couple of days.
• However, Chatham Lodging Trust's monthly dividend is covered by cash flow.
• The lodging REIT's shares sell for a reasonable run-rate multiple.
• Insiders gobbled up a bunch of shares on the sell-off.
• An investment in CLDT yields 7.21 percent.

Chatham Lodging Trust (NYSE:CLDT) is a "Strong Buy" on the drop. The lodging REIT recently reported fourth quarter results that were robust enough to support the investment case. Chatham Lodging Trust covers its monthly dividend with adjusted funds from operations. However, the real estate investment trust has become a lot cheaper lately as investors were put off by the company's weak AFFO guidance. Shares are now oversold, and an investment in CLDT comes with an entry yield of 7.21 percent.

Chatham Lodging Trust's shares have dropped nearly 20 percent this year. Investors sold into the weakness after the lodging REIT missed fourth quarter profit estimates, and issued a soft guidance for 2018. I think the sell-off is widely exaggerated, offering income investors a good entry point into the stock.

Chatham Lodging Trust's shares are now oversold as the Relative Strength Index flashes a value of 25.69. Shares have also fallen to a new 52-week low yesterday @$18.00.

Source: StockCharts

Chatham Lodging Trust - Business Overview

The U.S. lodging REIT invests in upscale, extended-stay hotels and premium-branded, select-service hotels. The portfolio is largely concentrated in coastal markets with strong economic fundamentals.

Source: Chatham Lodging Trust Investor Presentation

Chatham Lodging Trust operates a portfolio of high-quality hotels. Marriott's Residence Inn contributed more than half of the company's LTM EBITDA. Brand strength and geographic concentration in attractive urban markets are two key properties of an investment in Chatham Lodging Trust.

Source: Chatham Lodging Trust

Importantly, Chatham Lodging Trust is leading the industry in terms of EBITDA-margins.

Source: Chatham Lodging Trust

What About The Dividend?

Chatham Lodging Trust covers its dividend with adjusted funds from operations rather easily which is why I think there is only a low risk of a dividend cut.

The company covered its dividend in each of the last six quarters with AFFO. Chatham Lodging Trust pulled in $0.55/share in adjusted funds from operations, on average in the last six quarters which compares to $0.33/share in quarterly dividends.

Source: Achilles Research

Guidance And Valuation

A main reason why Chatham Lodging Trust's shares have sold off in the last couple of days was that the lodging REIT issued a weak guidance for 2018. Chatham Lodging Trust earned $2.14/share in AFFO in 2017, but expects to pull in only $1.87/share (midpoint guidance) in 2018, reflecting an expected year-over-year decline of ~12.6 percent.Source: Chatham Lodging Trust

Based on the 2018 guidance, shares currently sell for ~9.8x 2018e AFFO.

Insiders Are Capitalizing On The Sell-Off

A couple of corporate insiders at the C-level have used the opportunity to double down on Chatham Lodging Trust on the sell-off.

Jeffrey Fisher, Chairman, President and CEO, purchased 5,500 shares at an average price of $18.48. Total transaction volume: $101,640.

Peter Willis, EVP and Chief Investment Officer, bought 2,000 shares at an average price of $18.30. Total transaction volume: $36,600.

Dennis Craven, EVP and Chief Operating Officer, gobbled up 2,215 shares at an average price of $18.35. Total transaction volume: $40,645.

All transactions occurred on 2/28/2018. You can see the SEC filings here.

Your Takeaway

Chatham Lodging Trust may have issued a weak guidance for 2018, but the dividend is not at risk in my opinion. The lodging REIT covers its dividend payout with cash flow, and the monthly distribution frequency is attractive. Thanks to the sell-off, shares are oversold, cheap, and the dividend yield has spiked to more than seven percent. Insiders clearly see the value in the drop. Buy for income and capital appreciation.

If you like to read more of my articles, and like to be kept up to date with the companies I cover, I kindly ask you that you scroll to the top of this page and click 'follow'. I am largely investing in dividend paying stocks, but also venture out occasionally and cover special situations that offer appealing reward-to-risk ratios and have potential for significant capital appreciation. Above all, my immediate investment goal is to achieve financial independence.

Analyst’s 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[Derf]

Nomadicist,

I'm with you on the subject of using REIT ETF's for the bulk of my REIT exposure. Someone said that when buying an ETF you get the "whole universe" which is not true at all. Between the passive ones that track cap-weighted indexes and the factor weighted ones, you get a good subset.

Discl: long a couple REITs (eg CBL, WPG, UNIT) for long shot upside potential and high current yields, but mostly VNQ and KBWY to get exposure to both cap-weighting and factor-weighting of a sector being IMO unduly down-pressured due to collateral bond market tectonics to do with rising interest rates.

[Bubrub]

Maybe I missed it, but this article doesn't at all address their YoY decline outside of simply pointing it out. Growth is the most important attribute in a stock. In theory, it doesn't matter one bit how well covered the div is now if FFO continues to decline, for obvious reasons. This article needs to tell us why their YoY decline should be viewed as a blip and not as the beginning of the sort of trend that destroys your total return. Some insider buying is nice, but this alone should not be enough for anyone.

I sold out of CLDT several months ago. I'd be happy to get back in if it was clear that they will be returning to growth, meaning this is a buying opportunity (if they're not, it isn't).

[OZuro]

If it's such a great bargain, why is it selling for less than its IPO price 7 years ago? Over the last seven years, your total annual return has been about 4.5%. If you're satisfied with that, buy it and hold it, but with the headwinds REITs are facing now, not for me.

[Dalya11]

I think Marriott properties in general are having a tough time. Their credit card gives members one free night at a Category 4 or below, but their categories keep changing upwards, so a Category 4 hotel isn’t no longer desirable. If one stays at a Chatham Lodge property, the quality of the foods offered (I have limited experience with those Chatham properties outside of the west coast) is significantly above those operated by others. Chatham isn’t the problem necessarily, it’s the Marriott brand. Hilton is also annoying it’s most loyal customers by charging “urban” fees when “resort fees” isn’t logical.

[depsee]

I know in Florida at least the motel business seams to be booming over the past year or so. I travel a lot with work and more than on one occasion have had problems finding a room because everything is booked.

[gstucke]

I know Chatham used to have preferred stock, but now I can't find it? Did they redeem them all?

[Amidri]

HT doesn't covering interest?
Can you explain?

[worldly]

I cannot, hence the question

[papaone]

Amidri, is your question for me or the author? Read their financial.

[Landlord Investor]

Any thoughts on CLDT vs HT? Valuations are similar although it seems to me that HT has the better quality portfolio and better EBITDA growth prospects. However, CLDT has less leverage.

[worldly]

consensus (according to TDameritrade) is EPS will drop by 78% during the next year. At the moment HT is not even covering the interest.

Am i reading the consensus wrong?

for the longer term CLDT more attractive to me. I would expect lower volatility in the stock debt is much lower.

[Landlord Investor]

EPS is irrelevant for REITs. You have to look at AFFO, FCF, or EBITDA.

HT's div payout ratio on AFFO is similar to CLDT.

[papaone]

LI, I disagree, earnings are important. FFO and AFFO are adding back non-cash expenses depreciation usually the big one.
However, at least the ROC is not taxed.

[George eFF]

I don’t think anything in the Authors report explains the drops in the last few days. Nor is positive that insiders are buying. Good management in the hotel business knows several quarters prior to a big drop such as 12% as projected. Expect a management change to happen and sooner than later.

[gabby11]

What city is the 2019 Super Bowl going to be played in? CLDT has stores in every major city so at least on hotel should be full for about two weeks.

[George eFF]

It’s these that hold this stock and dumped it on the least report of a downturn . Shareholders such as you and I that hold a few shares didn’t even know guidance for 2018 was cut.

[Dividend Sensei]

Buying my first position on Monday.

Hoping it keeps dropping enough to yield 7.5%.

Then I could buy $4500 eventually vs $4000 at sub 7.5% yield.

of course it's still gonna take a few weeks to get up enough cash for a full position.

[Orphan Brigade]

How many shares is considered a full position? I have seen people reference that term a lot..

[BluechipBargainHunter]

Did you end up buying APLE?. Quite attractively priced right at this time!.

[Javelina]

Orphan Brigade: I am fully invested at 10k.

[merlin10]

Has anyone tried Motif investing. They allow you to create your own ETF with up to 30 stocks. I’ve done a couple of them with decent results. You get instant diversification.

[astro24102]

At this price and monthly divi, I purchased more. With insiders buying and more resilient to interest rate hikes, I like CLDT and SOHO.

[Active Investor Alliance]

the company is too small to be efficient

[worldly]

you mean economies of scale?

I thought smaller companies can be more efficient because there few levels or layers to watch and you get pretty quick to coal face. Therefore they faster or quicker whether, the workers are really mine for coal or just moving around burden and looking very busy?

[BrianSSS]

As I’ve said above: these SEC filings are not insider buys. These are March 1 LTIP conversions.

[mikeinmich]

Thanks for the clarification.

[mikeinmich]

Thanks for the thoughtful analysis. Not currently a holder, but may put some cash to work here. The lower guidance is concerning, but I like the insider buying. Good luck to all.

[careful investor 1]

You best off waiting a little longer. Big drop in ffo.

[User 19362391]

"recession is a long way off."

I guess the question would be, what time frame are you using as "long time off", months, years? If one where to look at probabilities only (comparing historic biz and market cycles), we are certainly likely to see a recession in the next 12 to 18 months. As a long term investor who tends to think of holding companies for decades rather than months, this would suggest to me that a down turn in the economy is "right around the corner".

If you think "this time is different", please show me a time in the past when this statement turned out to be true. You may be right. However again, using probabilities, the odds are not in your favor.

[careful investor 1]

The economy is just getting moving after a very slow 10 years. Tax cuts in place and a tightening labor market. Economy will be growing above 3%. There’s no recession right now or a year from now. Foreign businesses are looking to invest in the US. Europe is getting out of its funk. We’re good right now.

[User 19362391]

Careful, I would agree that we are good right now. Not sure about 12 to 18 months from now......

[52537]

If the economy turns down (overdue), these lodgings stocks have further to fall.

[Investor Dude]

Thats why every DGI Investor should have his limit orders set up for the next algorithm induced flash crash.

People havent fully adopted to these kinds of new flash-crashes. But you need to put your limit oders low enough. Mine sits at 17 for CLDT, but might lower it even more

[thorgood4]

recession is a long way off.

[skireef]

Not if protectionist policies become more pronounced.

[ckarabin]

There are no protectionist policies coming. It's just part of Trump's negotiating style. Threaten first, then make a deal.

[wallstreet368841]

so your plan is to blindly hold Chatham lodging trust until the next recession hits and sell it at $12 a share. Chatham lodging Trust has a decent yield but I don't think it's attractive enough to warrant blindly holding the shares and hoping they appreciate before the next recession. Hotel & lodging rates are some of the most cyclical stocks you can buy and revenue per room has peaked in my opinion.