Monthly Dividend Stock In Focus: Chatham Lodging Trust - Sure Dividend

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Monthly Dividend Stock In Focus: Chatham Lodging Trust


Updated on April 11th, 2022 by Quinn Mohammed

Real Estate Investment Trusts are popular investments among income investors, and for obvious reasons.

They are required to pass along the vast majority of their earnings in order to retain a favorable tax structure, which often results in very high dividend yields across the asset class. You can see our full list of all 207 publicly-traded REITs here.

Chatham Lodging Trust (CLDT) had been a high-yielding REIT until 2020, when the company suspended its dividend due to the coronavirus pandemic. The company has not yet reinstated its dividend payout, but we expect it to at some point over the next year.

Chatham had been paying a monthly dividend prior to the suspension, making it one of the more than 50 monthly dividend stocks we cover.

You can download our full Excel spreadsheet of all monthly dividend stocks (along with metrics that matter like dividend yields and payout ratios) by clicking on the link below:

 

Buying stocks with sustainable dividends is a major goal for income investors. As a result, it is critical for investors to make sure high dividend payouts are sustainable over the long-term. Chatham is working its way back, but the stock remains a risky bet for income investors.

Business Overview

Chatham Lodging Trust manages and invests in upscale extended stay and premium branded hotel services. The company owns 42 hotels with over 6,000 rooms across 16 states and the District of Columbia. The company looks to buy properties at a discount in large city centers.

Chatham operates under brand names like Hyatt, Marriott, and Hilton.

Source: Investor Presentation

On February 24th, Chatham Lodging Trust announced Q4 and FY 2021 results. Portfolio revenue per available room (RevPAR) increased 93% to $92, compared to the same quarter last year. Average daily rate (ADR) rose 36% to $141, and occupancy rate soared 43% for the 40 comparable hotels owned.

All of Chatham’s hotels remained open throughout the pandemic. Adjusted FFO was positive for the third quarter since the beginning of the pandemic, from a loss of $(0.18) last year to $0.12 in this quarter. These are promising metrics given the decreases experienced over the heights of the pandemic.

As the U.S. economy gradually reopened in 2021, Chatham swung from a $(0.40) loss in 2020 to $0.29 in AFFO per diluted share. Further significant recovery is anticipated in 2022.

Growth Prospects

Chatham’s growth is being challenged by multiple fronts. Not only did the hotel industry have to grapple with the pandemic in the last two years which caused many hotels to close for extended periods, but even before that the industry was facing increasing competition from Airbnb (ABNB).

Still, Chatham is a well-run REIT. It is at the top of the pile among its competitors in terms of extended stay rooms as a percent of total rooms. Additionally, Chatham believes their same store operating margins will grow beyond pre-pandemic levels.

Select-service lodging provides higher margins than full-service, and Chatham focuses on the former in part for that very reason.

Source: Investor Presentation

Chatham’s focus on the best markets and brands in the select-service sector has boosted its RevPAR above some other REITs that focus on select-service properties.

This helps drive not only higher revenue, but better margins as well as fixed costs are leveraged down. Using this strategy, Chatham drives better RevPAR than some competitors.

Chatham’s focus on the select-service model and its execution has been outstanding thus far. This should serve it well in the years to come in terms of growth, meaning Chatham’s future is bright. And, the company is still investing in growth.

For example, Chatham has constructed a 170-room hotel in the Warner Center in Los Angeles, CA. This is the first ground-up development since the company’s inception. Total development costs are expected to amount to $70 million. To date, the company has spent $68 million on this project. The hotel opened in January 2022. It is expected to generate one of the highest RevPARs in the Trust’s portfolio.

Competitive Advantage & Recession Performance

Chatham does not have any public information from the last recession. During recessionary periods, hotel REITs experience difficulty because their revenue is linked to consumers discretionary income. This means that Chatham would not be very resistant to recessions.

Chatham operates in large metropolitans which generally attract a lot of consumers; but during the COVID-19 pandemic, almost all business travel halted. Business travel has yet to roar back in the way it was pre-pandemic, and it may not for a while still.

Due to the coronavirus pandemic, Chatham slashed the distribution for 2020 and 2021 and will only pay out what is necessary to hold its REIT status at this time.

Dividend Analysis

Chatham’s lack of a dividend is obviously a major negative for shareholders, as the stock had been a high-yielder before the suspension. Chatham management noted in the most recent earnings release that the company will only pay the minimum to satisfy its REIT requirements.

Thus, if investors are looking for current income, Chatham may not be an appealing stock. However, if investors are willing to wait, Chatham could return to a high dividend yield by next year. Of course, investors should always monitor the quarterly results of high-yield stocks like Chatham, to ensure the recovery remains intact.

One positive is that with the company no longer burning cash, it can improve liquidity and its balance sheet. Chatham has a reasonable level of leverage and well-balanced maturities.

Source: Investor Presentation

Chatham has no maturities until 2023, which gives it some time to repair the balance sheet until it needs to refinance debt. Chatham also has a net-debt-to-enterprise value ratio of 39%, which is roughly in the middle of its peer group.

Final Thoughts

Chatham, as a hotel REIT, was one of the hardest-hit REITs from the pandemic. While 2021 was year of recovery following the pandemic, conditions continue to improve materially, and strong year-over-year results are anticipated in 2022. However, Chatham is still not paying dividends to shareholders, which instantly makes the stock less appealing for income investors.

We believe Chatham will likely return to paying a dividend late this year or next year, although at what level remains uncertain. It is likely the company will initiate a lower dividend payout at first while it continues to improve its financial results.

Overall, Chatham Lodging has a good reputation as an REIT with popular name brands, but the issues facing the hotel sector weighs very heavily on the company.

If you are interested in finding more high-quality dividend growth stocks suitable for long-term investment, the following Sure Dividend databases will be useful:

The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly:

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