- 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.
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.
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.
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.
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