Updated on August 12th, 2021 by Bob Ciura
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 166 publicly-traded REITs here.
Chatham Lodging Trust (CLDT) had been a high-yielding REIT until last year, 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 nearly 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.
Chatham Lodging Trust manages and invests in upscale extended stay and premium branded hotel services. The company wholly owns 39 hotels with nearly 6,000 rooms across 15 states and the District of Columbia. Chatham also has an interest in 85 hotels with almost 12,000 rooms/suites. 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 August 3rd, Chatham Lodging Trust announced second quarter results. Portfolio revenue per available room (RevPAR) increased 170% to $87, compared to the same quarter last year. Average daily rate (ADR) rose 32% to $127, and occupancy rate more than doubled to 68% for the 39 comparable hotels owned.
All of Chatham’s hotels remained open throughout the pandemic. These are promising metrics given the decreases experienced over the last few quarters. Adjusted FFO was positive for the first quarter since the beginning of the pandemic, from a loss of $(0.26) last year to $0.10 in this quarter.
As the U.S. economy gradually reopens, we expect 2021 to be a year of recovery for Chatham, with continued growth in 2022.
Chatham’s growth is being challenged by multiple fronts. Not only did the hotel industry have to grapple with the pandemic last year 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 profitability, which is one reason we like its fundamentals. Chatham’s EBITDA margin is in excess of 38%, and while that is down from 2018, Chatham continues to lead the way.
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 the 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. Indeed, we can see that Chatham drives better RevPAR than all of its competitors by using this strategy.
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 begun construction on a 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 be about $70 million. To date, the company has spent $59 million on this project. The hotel is expected to open during the fourth quarter.
Investments like these, along with growth at existing properties, fuel our expectations of 5% annual FFO-per-share growth over the next five years.
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 does not expect to pay a dividend for 2021, and if it does, will only be the minimum to satisfy the 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 as early as 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 time to repair the balance sheet until it needs to refinance debt. Chatham also has a net-debt-to-enterprise value ratio of 47%, which is roughly in the middle of its peer group.
Chatham, as a hotel REIT, was one of the hardest-hit REITs from the pandemic. While 2020 was an extremely difficult year, conditions have improved materially over the course of 2021. 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 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. We expect Chatham to offer total returns of ~3%, primarily focused on earnings growth from this low point, which is speculative. At current prices, we do not see a margin of safety and see the company as overvalued, and thus rate the stock a sell.