Chatham Lodging Trust REIT: A Bargain At 10% Yield And Below Tangible Book Value
Summary
- Chatham Lodging Trust is a $622 million market cap REIT with a 10% yield and selling for 82% of its tangible book value.
- The company invests in 135 U.S. upscale extended stay hotels, mostly Residence Inn, Homewood Suites, Courtyard, Hampton Inn, Hyatt Place, and Hilton Garden Inn.
- This is one of the few REITs that actually covers its dividends with cash flow from operations. So the dividend is well covered.
- I estimate the stock is worth at least its tangible book value or 22.5% above today's price. CLDT's average historical P/TBVPS is 1.14x or 39% above today's price.
- This idea was discussed in more depth with members of my private investing community, Total Yield Value Guide. Get started today »
Chatham Lodging Trust Is A Bargain REIT
Chatham Lodging Trust (NYSE:CLDT) is one of the few REITs that can generate enough cash flow from operations to cover its high dividend yield. CLDT's stock yields 9.95% and is now selling for 82% of its tangible book value per share ("TBVPS"). It is worth at least its TBVPS, or 22.5% above its price today.
CLDT, which own 40 upscale hotels and has two joint ventures involving 95 other upscale extended stay residence hotels, was formed by Jeffrey H. Fisher. Mr. Fisher has an extensive background in managing hotel REITs, having taken a REIT company public in the '90s (Innkeepers USA Trust) and sold it in 2007. He also now owns a controlling interest in a managing/operating company to run the wholly owned hotels. Most of these are Residence Inn (16 hotels), Homewood Suites (9 hotels), Courtyard (5), Hilton Garden Inn (3), Hyatt Place (2), SpringHill Suites (1) and Embassy Suites (1). Most of the company's hotels are located in 25 top US metro markets.
Cash Flow Covers this High Yield Dividend Stock
I am primarily interested in CLDT's stock since it covers its dividend with cash flow from operations. The stock's dividend yield is very high, almost 10%. Therefore, the stock seems depressed beyond measure.
For example, here is the recent history of Cash Flow from Operations (CFFO) compared to the dividend cost, in million dollars:
Source: Mark R. Hake, CFA, using Seeking Alpha data
From this, you can see that the dividends, in blue, are lower than CFFO, in red. However, recently the CFFO, as of Q4 2019, just barely covered the dividend. The estimate for Q1 CFFO is 85% of the prior quarter and is below the cost of the dividend. However, I believe that the dividend will be maintained for the time being unless CFFO begins to significantly drop from here.
In fact, management has said as much. Here is what CEO Jeff Fisher said on February 26 in the Q4 earnings conference call:
Source: Feb. 26, 2020, Earnings Conference Call
This makes it clear that management will maintain the dividend at the $1.32 rate. So at today's price of $13.27, CLDT's stock has an annual dividend yield of 9.95%.
Stock Is Worth Significantly More
Based on the historical dividend yield and the historical TBVPS, CLDT is significantly undervalued. You can see this in the following charts I put together:
Source: Hake, using Seeking Alpha data
This shows that the stock is trading well above the median dividend yield for the past nine years. As mentioned, the yield is now almost 10%, so it is trading well above the median in this chart.
Moreover, the same trend can be seen in the pattern of CLDT's stock compared to its historical price to TBVPS:
Source: Hake, using data from Seeking Alpha
This chart shows that now CLDT stock is now trading at its lowest P/TBVPS ever. In fact, the stock is at 82% of its TBVPS.
Why So Cheap? The simple answer is fear. But you can surmise that since CLDT focuses on business travelers at its extended stay hotels, investors are worried that its business will fall off. Many conferences, conventions, and related business travel mass meetings have been canceled recently due to the impact of the coronavirus outbreak. The fear is that cash flow will drop significantly.
Management addressed this issue in the conference call. Here is some of what it said:
Source: Conference call February 26, 2020
Source: Conference call February 26, 2020
Source: Conference call February 26, 2020
Here management says that it hasn't felt much impact from the coronavirus related cancellations. Nevertheless, let's assume that its general business is going to experience some drag.
But does that mean the stock should sell so far below its median dividend yield and its historical average P/TBVPS? Probably not. Here is the way I value CLDT's stock:
Source: Hake
This shows that if we value the stock at its tangible book value per share (TBVPS), $16.26, the stock is worth 22.5% more.
If we were to value the stock at its average P/TBVPS, it is worth $18.54, or 40% more.
Based on the historical yield, it is worth $18.92, or 42.6% more.
To be conservative, we can say that the minimum CLDT value is at its TBVPS, or an upside of 22.5% from today.
Balance Sheet Risks
What if the economy hits two quarters of negative growth or a classic recession? Can the balance sheet handle this?
Here is what management said in the conference call about its leverage, acquisition and development plans:
Source: Conference call
Management seems to have its net debt-to-assets under control with a low 34.1% leverage ratio. Moreover, CLDT has been able to raise equity to fund its acquisitions and developments.
However, CLDT has just $6.6 million in cash, plus $13.3 million in restricted cash as of 1 December 31, 2019. But its debt stands at $585.5 million. Most of that relates to real estate assets of $1,389 million.
I am not concerned about the debt levels since its tangible shareholder value is higher than debt at $762 million.
Moreover, as pointed out above, the company seems to have an adequate ability to raise capital.
As for coverage ratios, CLDT is well within its historical ranges. You can see this in the following chart I put together:
Source: Hake, using Seeking Alpha data
This shows that Funds From Operation ("FFO") traditionally fall to about 2 times net interest expenses at the end of each year. It was at 2.5x as of the end of Q4 2019. So it has plenty of room to cover its interest payments due each quarter.
I modeled in a 15% drop in Q1 FFO. This still leaves it at twice its normal interest expenses. I am not concerned about the company's ability to manage its debt coverage even if there is a mild recession due to the recent coronavirus outbreak.
Summary and Conclusion
It appears that the market has overdone its fears about travel and lodging in relation to CLDT's stock. It is now trading well below its tangible book value per share. This is too much. The stock is now worth at least 23% more.
Moreover, the 10% dividend yield is well covered. I have also shown that the debt leverage and debt coverage ratios are conservative and manageable. In short, this stock is a great bargain.
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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.
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Comments (14)
Conventions canceling people are traveling only if they must who needs a hotel room.
This is going to effect all of us in time it will play out but not in Q! or Q2.
With far to go before we have any clarity on the virus effects on the US economy, am holding off adding to ANY positions, but hotels are high on my watch list. Also like HT and PK here. My current buy stock today however is PRU, for both safety and dividend returns.
Pros: the stock will go up after the cure/vaccine is announced
Hold od speculative buy? 🤔
