Chesapeake: A Broad Look For Income Portfolios

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About: Chesapeake Lodging Trust (CHSP)
by: Abrar Hassan Saadi
Summary

Occupancy rates and revenue per room stats are improving.

Demand may grow at a faster pace than supply due to strong economic outlook.

Payouts are attractive and pricing is fair.

A number of risk factors may affect the firm.

Investment Thesis

Chesapeake (CHSP) holds a relatively small but attractive portfolio of hotels that has benefitted income investors over the years. Although yoy revenue growth fell short to -3.06%, the REIT boasts a stellar performance when one considers last three to five years’ performance on average. Sales increased by 8.22% in 3y revenue growth while earnings went up by 44.45% in the same period. In its latest quarter Chesapeake featured a RevPAR( room revenue per available room) of $210.28 representing a 5% increase compared to the same quarter the previous year. Q3 's occupancy rate was 89.7% and average daily rate was $234.51, both of which reflected 140 bps and 330 bps increase, respectively, compared to prior year. For Q4, the firm expects RevPAR growth in between 2%-4% along with $0.48-$0.52 in AFFO per diluted share. Overall, the full year outlook represents RevPAR growth of 3.9%-4.4% and AFFO per diluted share of $2.28-$2.32. Chesapeake’s performance potential coupled with nice payouts, pricing and favorable economic outlook, the stock is an attractive choice for income portfolios.

Portfolio performance

In Q3 the $5.5 million increase in total revenue was driven by JW Mariott San Francisco. Demand from customers in San Francisco during the quarter was negatively impacted by the temporary closure of the Moscone Center. In Miami demand was negatively impacted by Hurricane Irma, and Boston. Performance was affected by decreases in its Chicago hotels where a two-week labor strike negatively impacted demand. During the quarter Chesapeake sold the Hyatt Centric Santa Barbara for a price of $90.0 million, recognizing a gain of $33.1 million.

Chesapeake hotel statistics

Source: 10-Q

Financials stats

Chesapeake has maintained an average of 33.28% in gross margin based on last seven quarters, profit margin and FCF margin averaged 13.96% and 15.85%, respectively, in the same period. Debt to Assets currently stands 42.25% which averaged about 40.10% for last seven quarters.

Chesapeake financial ratios

Source: Stockrow

Chesapeake’s earnings growth and dividend yield is just slightly lower than median estimates, but the pricing looks fair.

Company Name

Market Cap

Div Yield

DGR 3YR

Payout Ratio

PE Ratio

Price/Book

EV/EBITDA

Revenue 3YR

Earnings 3YR

Chesapeake Lodging Trust

$1.79B

5.39%

11.31%

89.89%

15.95

1.68

13.87

8.22%

44.45%

MedEquities Realty Trust, Inc.

$220.49M

12.14%

-

77.06%

18.66

0.64

13.23

249.82%

19.33%

Summit Hotel Properties, Inc.

$1.18B

6.41%

13.49%

56.69%

15.88

0.97

12.33

8.73%

67.71%

Starwood Property Trust, Inc.

$6.21B

8.52%

2.02%

88.07%

15.6

1.34

22.15

7.28%

18.37%

Iron Mountain Inc.

$9.7B

7.21%

0.61%

181.04%

42.34

5.01

12.85

7.58%

166.23%

Chatham Lodging Trust

$934.51M

6.57%

12.93%

58.93%

25.76

1.15

13.76

7.11%

54.53%

Median

6.89%

11.31%

82.57%

17.31

1.25

13.50

7.90%

49.49%

Source: Seeking Alpha

Economic outlook

CBRE forecasts that supply of new hotels will peak at a 2.0 percent gain in 2018 and then stabilize at the long-run average of 1.9 percent for the next two years, but at the same time, demand for accommodation may grow at a faster a pace due to strong economic outlook driven by favorable GDP growth, unemployment and consumer confidence. Chesapeake’s strong positioning in the market combined with a strong economic outlook and fair pricing makes it among the top choices for income investors.

u.s. economic outlook

Data: Chart from thebalance, data from Fed.

“On a broad national basis, the supply increases have been surpassed by lodging accommodation demand growth for the past eight years, and this trend is forecast to continue through 2019,” said R. Mark Woodworth, senior managing director of CBRE Hotels’ Americas Research. “However, when you look at the projected 2019 performance of the 60 major U.S. markets in our Hotel Horizons® universe, you can clearly see the impact of new lodging supply at the local level.”- CBRE

Risk Factors

Some of the key risk factors include Chesapeake’s cyclical nature, operations and management by 3rd party, covenants and leverage. Chesapeake’s REIT status makes it unable to operate or manage its operations directly through the trust or operating partnership, it leases its hotels to taxable REIT subsidiaries (TRS) which are wholly owned subsidiaries of the Operating Partnership and are treated as TRSs for federal income tax purposes, the TRSs then engage hotel management companies to operate the hotels pursuant to management agreements. So the operational risk cannot be directly managed. The presence of negative covenants may restrict the firm to obtain finance or engage in business activities that are important for its growth.

Conclusion

Chesapeake has demonstrated solid fundamentals over the years. The firm has a strong portfolio that has provided good occupancy rates, average daily rates and revenue per available room. As economy reflects strengthening outlook, I expect these metrics to go up through 2019. Chesapeake’s price looks fair and trading at entry-point levels. All these factors make Chesapeake one of the top choices for income seeking portfolios.

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.