I first became interested in hospitality REITs in the early "20 teens" as a frequent business traveler working for the defense industry. Select service hotels near bases were consistently at or near full occupancy during the week and often fairly full when I had to stay over a weekend. While my original thoughts were to buy a hotel near a base, I don't have the liquid capital for this-nor the desire to be a hotel operator. Having already owned triple-net REITs, I investigated hospitality REITs, ending up with Hersha Hospitality (HT) and Condor Hospitality (CDOR) in my portfolio. I've written on both, and inadvertently called the sale of CDOR in an earlier article and sold my position when the buyout was announced, gaining most the jump to the eventual acquisition price.
I began looking for a replacement select service hotel to balance my long-term position in HT and have settled on Chatham Lodging Trust (NYSE:CLDT) as the likely candidate. This article will highlight the positives of investing in Chatham Lodging Trust to both replace my CDOR position and balance my long-term holding in HT. I will conclude by discussing ne drawback I see-not only in CLDT but the hospitality space in general.
The first positive for me is Chatham Lodging Trust's portfolio of 40 select service hotels primarily in three regions: the East Coast, Texas and the West Coast, specifically Southern California. The below image from the company's September 2019 investors' presentation illustrates the geographic clusters of properties.
Figure 1. Chatham Lodging Trust Hotels
While CDOR had recycled the former Supertel portfolio prior to the sale, having only one legacy budget hotel, the portfolio was smaller than Chatham's and not nationwide. Chatham has over twice the properties CDOR had, and operates in three main areas with a few hotels not on the U.S. coasts or in Texas. While not the overt "cluster" strategy HT espouses, it is similar in practice and allows focused management and market awareness. While the NO Northeast is a key location for both HT and CLDT, Chatham's presence in Texas and Southern California is more robust than HTs and makes up a larger percentage of properties.
Additionally, the property mix and branding of Chatham's portfolio is slightly down-market from Hersha's, who has a number of higher service and resort properties along with a few select-service hotels. Slides 4 and 6 of Chatham's Investors Presentation (Sept 209) highlights their focus area and the pie graph on slide 6 clearly states that Residence Inns makes up 55% of Hotel EBITDA, and adding in Hilton Garden Inn and Homewood Suites brings this total to over 75%. These are top quality, well respected brands in the select-service space, familiar to any frequent business traveler.
Chatham currently pays a monthly dividend, having just gone ex-dividend for November. The annual dividend is $1.32, paid monthly at $.11 per month currently. This works out to a yield of 7.24% at recent stock prices. In comparison, CDOR was yielding 7.07% and HT yields slightly over 8%. By reinvesting my CDOR proceeds in Chatham, I'll get slightly more yield paid monthly instead of quarterly. While not a huge difference, for an investor DRIP'ing dividends there will be a slight enhancement in compounding, and for the income investor with monthly bills there is some advantage to the more frequent payouts.
Chatham estimates the 2019 payout ratio at 73%, a conservative figure balancing strong margins and RevPAR with estimates that these numbers could come down slightly in 2019 and into 2020. I feel this is prudent, and knowing the impact reducing dividends can have on a REIT would rather see conservative practices in this area and capital recycling by the company-my next point.
Slide 17 of the presentation outlines the company's active and ongoing portfolio management strategy:
Understanding the slide is a bit of an eye chart, here are the key components of the strategy highlighted since 2017:
Examples are given, and the strategy seems to be paying off, with one redevelopment project giving off cash on cash yield of 13% during year one for example. With property values at or near cyclical highs across most real estate classes, disciplined "smart" growth is key, and selling properties at high valuations is a positive. With a larger portfolio than CDOR the requirement to scale is not present as it was with CDOR as they "flipped" the entire Supertel portfolio. However, Chatham is not showing signs of simply coasting and passively managing the existing portfolio by strategically recycling capital in their key markets to enhance value and return on investment.
In 2018, Chatham refinanced their $250 million credit facility, extending it's due date to 2023. No other debt comes due until 2021, when $13 million comes due. The next large due date is both secured debt and the credit facility come due in 2023. Additionally, the coverage ratio on existing debt is 3.2x. With a strong coverage ratio and conservative dividend payout, Chatham is in a good position to face current and anticipated headwinds if there is a recession in 2020 or early 2021. With the portfolio of hotels in well-respected brands, refinancing or rolling out debt should not be an issue, and maturities are spread out over time.
Interestingly, Chatham currently trades 11% above book value. Hersha trades at a substantial discount, but Chatham's similar peers Summit Hotel Properties (INN) and Apple Hospitality (APLE) trade at roughly the same book value. While not an overt negative, this and a belief the stock would drop a bit ex-dividend (it didn't) has caused my limit buy order to not be executed. I may raise the buy price slightly, as the stock seems to be reasonably well-priced currently. So take this "warning flag" how you will.
The major concern affecting not only Chatham but all hospitality REITs is ongoing recession fears and high asset prices at this point of the economic cycle. The latter point is worth many separate articles-impact of ZIRP, "no other game in town", FOMO and all that. The recession fears are also worthy of ongoing analysis, which is done by more well-versed authors than me, and in great volume. My take is while a recession is possible, there will always be some talk and fear of a recession alongside confidence and positive outlook. I'm currently holding more cash than usual in my securities account due to the sale of CDOR, and a modest position in Chatham Lodging Trust with it's 7.25% yield, FFO and coverage ratio seems to outweigh the risk from anything but a severe recession. Your views and risk tolerance may differ, and with the brand focus squarely in the modest business and leisure travel (but not discount) space, Chatham will likely be impacted during a recession. I am personally looking to take my normal position size, not overweight the position while DRIP'ing dividends and watching the holding like all my holdings.
Best wishes for investment success!
Find this article and my style informative, entertaining or infuriating? Please "like" the article, "follow" me as an author, and comment below. Any of the three will encourage me to keep aiming to publish 2-3 articles a month, and comments help all of us as the shared knowledge and outlooks broaden my viewpoints every article I've written. All I ask is you keep it civil.
Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor or tax professional about your specific financial situation before implementing any strategy discussed herein.
This article was written by
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in CLDT over 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.
Additional disclosure: I am long HT and sold my position in CDOR when the company being bought out was announced a few weeks ago.