You Don't Have To Own Boardwalk To Collect Monthly Dividends
Brad Thomas wrote this article and it has appeared previously on Seeking Alpha.
- One of the reasons why I favor Chatham is because of the company's focus on upscale extended-stay and premium-branded select service hotels.
- I like this category because the hotels have higher profit margins than full service, with a higher growth profile as it relates to consumer demand.
- I believe patient investors will do well if they hold Chatham for a few more quarters.
A few months ago I wrote an article on Pebblebrook Hotel Trust (NYSE:PEB), a Lodging REIT that invests in higher-quality boutique hotels. I explained that "everyone wants to own the hotel on Boardwalk, the most expensive property on a standard Monopoly Board and the highest in rent revenue."
Of course, I was alluding to Pebblebrook, the Lodging REIT with the highest Hotel EBITDA Per Key (~$38,600, compared to the peer average of $28,400 per key). As it turns out, my recommendation to own PEB was a good one, as shares have outperformed the peer group YTD.
In the game of Monopoly, one of my primary strategies is to own Boardwalk and Park Place, hoping to build a monopoly in the high rent district.
However, that's not the only way to win the game. I have also found success in cherry-picking the less visible properties, like Connecticut Avenue or St. Charles Place. The cost to entry is less (than Boardwalk), and the returns can be equally satisfying.
Today, I'm going to provide you with one of my top Lodging REIT picks. In my upcoming newsletter, I plan to provide a detailed report on the Lodging REIT sector with a list of all of my choice Lodging REITs, including my top pick.
There is no doubt that Chatham Lodging (NYSE:CLDT) and most all Lodging REITs have experienced secular volatility, in large part due to the increased supply hurdles and negative RevPAR growth.
However, I am gradually warming up to the sector due to the greater transparency related to job growth, GDP growth and corporate profits - all strong catalysts that provide stable earnings and dividend growth.
One of the reasons why I favor Chatham is because of the company's focus on upscale extended-stay and premium-branded select service hotels. I like this category because the hotels have higher profit margins than full service, with a higher growth profile as it relates to consumer demand.
In over seven years (the IPO was in April 2010), Chatham has grown in assets from around $222 million to more than $1.339 billion.
As of Q1-17, it owned 38 hotels with an aggregate of 5,500 rooms located in 15 states and the District of Columbia. The company also owns a 10.3% non-controlling interest in a joint venture with NorthStar Realty Finance Corp. (NRF), which was formed in the second quarter of 2014 to acquire 47 hotels from a joint venture between Chatham and Cerberus Capital Management, comprising an aggregate of 6,097 rooms, and held a 10.0% non-controlling interest in a separate joint venture with NorthStar, which was formed in the fourth quarter of 2014 to acquire 48 hotels from Inland American Real Estate Trust, Inc., comprising an aggregate of 6,401 rooms.
Chatham's wholly-owned hotels include upscale extended-stay hotels that operate under the Residence Inn by Marriott (NYSE:MAR) brand (fifteen hotels) and HomewoodSuites by Hilton (NYSE:HLT) brand (nine hotels), as well as premium-branded select service hotels that operate under the Courtyard by Marriott brand (four hotels), the Hampton Inn or Hampton Inn and Suites by Hilton brand (three hotels), the Hilton Garden Inn by Hilton brand (three hotels), the SpringHill Suites by Marriott brand (two hotels) and the Hyatt Place (NYSE:H) brand (two hotels).
As you can see below, Chatham's premium branded, select service hotels generate RevPAR higher than other select service brands and comparable to full service brands.
The REIT primarily invests in upscale extended-stay hotels, such as Homewood Suites by Hilton and Residence Inn by Marriott. Upscale extended-stay hotels typically have the following characteristics:
- Their principal customer base includes business travelers who are on extended assignments and corporate relocations;
- Services and amenities include complimentary breakfast and evening hospitality hour, high-speed internet access, in-room movie channels, limited meeting space, daily linen and room cleaning service, 24-hour front desk, guest grocery services and an on-site maintenance staff; and
- Physical facilities include large suites, quality construction, full separate kitchens in each guest suite, quality room furnishings, pool and exercise facilities.
Chatham also invests in premium-branded select service hotels, such as Courtyard by Marriott, Hampton Inn, Hampton Inn and Suites by Hilton, Hyatt Place, Hilton Garden Inn by Hilton and SpringHill Suites by Marriott. The service and amenity offerings of these hotels typically include complimentary breakfast or a smaller for-pay dining option, high-speed internet access, local calls, in-room movie channels and daily linen and room cleaning service.
As you can see (above map), Chatham has a coastal preference: 50% of the portfolio is located on the West Coast and 24% in the Northeast. It has the 2nd highest exposure to West Coast markets of all U.S. lodging REITs.
Also, Chatham has NO exposure in Manhattan. In 2015, the company acquired four high-quality hotels in leading MSAs (San Diego, Boston, Ft. Lauderdale and Los Angeles). It benefits from strong market growth, multiple demand generators and high barriers to new supply in each of these markets.
On the recent earnings call, Chatham's CEO, Jeff Fisher, explained:
Our long-term goal is to be the best pure-play select service and limited service hotel REIT…once RLJ closes on the acquisition of FelCor, Chatham will possess the highest RevPAR, ADR and margins among all select or limited service hotel REITs.
He went on to say:
Today's traveler is very much in tune with the quality and value of hotels such as ours provide, which enables us to grow our top line, similar if not better than other hotel classes, while our margins significantly outperform and so does our cash flow.
Chatham's Balance Sheet
Chatham is smaller than many of the Lodging REITs, so the company flies under the radar of many of institutional investors.
As of Q1-17, its net debt was $575 million and the leverage ratio was 40%. The company is currently working with Colony NorthStar (NYSE:CLNS) (its partner in 2 joint ventures) to refinance the debt on both joint ventures.
Chatham's weighted average cost of total debt is 4.5%, and 90% of debt outstanding is fixed rate. The company has borrowings outstanding under the Revolving Credit Facility of $56.5 million.
Chatham's weighted average debt maturity is approximately 6.5 years with no debt maturing before 2019. Its fixed charge coverage is 3.6x.
Chatham Should Turn First
On the earnings call, Chatham's CEO explained:
... we believe Chatham recovers earlier than most because other hotel REITs - where our hotels are located and the fact that we've been hit a little bit earlier being mostly urban, particularly as we look back to 2016.
So we think that as we move forward through 2017 and into 2018, that supply will get absorbed. Our revenue management strategies will hold on to ADR and will be able to move forward, as I suspect supply will, of course, subside.
The company expects Q2 RevPAR growth to be -1.5% to flat and full-year 2016-2017 RevPAR growth to be -1% to +1%.
In Q1-17, Chatham benefited from the inauguration in Washington, D.C., the Super Bowl in Houston and the timing of Easter relative to 2016. The company does not expect Q2-17 RevPAR growth to be as strong as Q1, given the positive impact these items had in Q1.
For the full year, Chatham's RevPAR guidance assumes the current trend of modest GDP growth combined with above-average new supply and the upscale segment will continue throughout 2017. The full-year forecast for corporate cash G&A is $8.9 million.
In Q1-17, Chatham outperformed the market's average RevPAR growth by 90 basis points, which is admirable considering the tough comparison, given RevPAR growth for the company (in Q1-16) was almost 3%. Its ADR growth in Q1-17 was 2.5% to $163. That strong ADR is a testament to the quality of Chatham's portfolio. When most people think of select service hotels, they don't think of an average daily rate of $163.
Its hotel EBITDA margins expanded 70 basis points to 39.9%. The incremental improvement in hotel EBITDA margins of 30 basis points can be attributed to about $0.5 million property tax refund related to one of the hotels.
Will The Dividend Continue ToGrow?
One of the reasons that I own Chatham, as I am sure many readers do, is because of the predictable dividend growth history. As you can see below, the company has maintained a steady growth history (remember that it also pays monthly dividends).
As you can see, Chatham's dividend growth has slowed down a bit (only 2% growth in 2017). Let's examine the FFO/share growth history:
As you can see, Chatham has slowed its FFO/share growth - almost flat in 2016 and negative growth forecasted in 2017. As Fisher stated, hopefully the company "recovers earlier than most because other hotel REITs."
Let's examine the FFO trends (and forecasts) for the peers:
As you can see, most of the Lodging REITs are forecasted (consensus estimates) to generate modest FFO/share growth in 2018. However, Chatham's dividend appears safe, as evidenced by the snapshot below:
The company has been consistently paying dividends of around 60% of FFO, and I suspect Chatham can squeeze out another modest bump in 2018. However, I suspect to see a bulk of Total Returns from price appreciation.
Its dividend yield is one of the highest in the Lodging REIT sector:
Chatham's P/FFO multiple is one of the lowest in the sector:
Now let's take a look at the company's P/FFO history from 2012 to 2014. As you can see, the average P/FFO multiple during that period was 13.2x.
The Bottom Line
Chatham is one of my favorite REITs, and the company has been beaten down significantly due to economic forces, while its overall fundamentals are relatively sound. I believe patient investors will do well if they hold Chatham for a few more quarters. I expect Lodging REITs to perform well in the third and fourth quarters of 2017.
The forecast looks strong, but I cannot recommend Chatham as a STRONG BUY, given the small-cap status and overall volatility in the Lodging sector. I am maintaining a BUY recommendation.
Regardless of the political debate,I believe President Trump's infrastructure policies and tax plan will serve as a strong catalyst for corporate profits that, in turn, will lead to enhanced business travel profits. However, there remains no clarity as it relates to the timing of the new tax plan, and that (lack of clarity) also serves as an overhang for hotels and Lodging REITs.
To learn more about Lodging REITs, subscribe to the Forbes Real Estate Investor, where I will provide a detailed research report in the June edition.
REITs mentioned: Condor Hospitality Trust (NASDAQ:CDOR), Sunstone Hotel Investors (NYSE:SHO), Ryman Hospitality Properties (NYSE:RHP), Apple Hospitality REIT (NYSE:APLE), DiamondRock Hospitality Company (NYSE:DRH), Host Hotels& Resorts (NYSE:HST), LaSalle Hotel Properties (NYSE:LHO), RLJLodging Trust (NYSE:RLJ), Xenia Hotels & Resorts (NYSE:XHR), Hospitality Properties Trust (NYSE:HPT), FelCor Lodging Trust (NYSE:FCH), Park Hotels & Resorts (NYSE:PK), Hersha Hospitality Trust (NYSE:HT), Ashford Hospitality Prime (NYSE:AHP) and Ashford Hospitality Trust (NYSE:AHT).
Disclosure: I am on the Advisory Board of NY Residential REIT, and I am also a shareholder and publisher on theMaven (OTCQB:MVEN).
Source: F.A.S.T. Graphs and CLDT Presentation.
To get a first look at my upcoming article, "The Evolution of My Durable Income Portfolio," click here. I also include all of my Rhino REIT Ratings in my marketplace product, REIT Beat.
*Author Note: Brad Thomas is a Wall Street writer, and that means he is not always right with his predictions or recommendations. That also applies to his grammar. Please excuse any typos, and be assured that he will do his best to correct any errors, if they are overlooked. Finally, this article is free, and the sole purpose for writing it is to assist withresearch, while also providing a forum for second-level thinking. If you have not followed him, please take five seconds and click his name above (top of the page).* Disclosure:** I am/we are long APTS, ARI, BRX, BXMT, CCI, CCP, CHCT, CLDT, CONE, CORR, CUBE, DLR, DOC, EXR, FPI, GMRE, GPT, HASI, HTA, IRM, KIM, LADR, LTC, LXP, O, OHI, PEB, PK, QTS, ROIC, SKT, SNR, SPG, STAG, STOR, STWD, TCO, WPC.
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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