Updated on March 18th, 2019 by Josh Arnold
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 publicly-traded REITs here.
One such stock is Chatham Lodging Trust (CLDT). It currently yields 7%, putting it in somewhat exclusive company in the U.S. stock market in terms of yield. In fact, it is one of only about 400 stocks with a 5%+ dividend yield.
Not only does it have a very high dividend yield, but it also makes its payments each month. This helps differentiate Chatham, as there are currently just 41 monthly dividend stocks.
You can download the full list of monthly dividend stocks from our database below:
Stocks with high yields can also carry significant risk. As a result, it is critical for investors to make sure the high dividend payouts are sustainable over the long term.
In the case of Chatham, we see the dividend as sustainable based upon the trust’s earnings capacity. Combined with the 7% yield, Chatham looks attractive for investors focused on income generation.
Business Overview
Chatham Lodging Trust is a self-advised REIT that invests in upscale extended-stay hotels, as well as premium-branded select service hotels.
Select service hotels tend to be somewhat cheaper to stay in for guests as they don’t offer a full suite of benefits that a premium, full-service hotel would, such as concierge service.
That means they appeal to a wider audience, but also tend to generate lower revenue-per-available-room, or RevPAR. Chatham’s hotels are located in major markets that have high barriers to entry, and it acquires properties near primary demand generators for both business and consumer guests.
The trust is relatively small at less than $900 million in market capitalization, and its initial public offering was completed just under nine years ago.
Source: March 2019 investor presentation, page 3
Chatham currently has a total portfolio of 42 wholly-owned hotels in the premium-branded extended stay and select service categories.
In addition, it has nearly 100 other properties where it owns an interest through joint ventures.
Its properties are scattered throughout the country, with its highest concentration in the Northeast. The trust’s properties are in major metropolitan areas that have consistent demand for rooms.
Chatham’s geographic focus not only helps drive occupancy, but average rate as well.
Source: March 2019 investor presentation, page 4
Chatham’s mix of brand and geographical exposure is quite attractive as well, as it is in many different markets. None of which makes up even one-quarter of revenue on its own.
And while it is highly concentrated with the Residence Inn brand, it is still just half of revenue.
The trust has made a point of investing in markets and brands that are diversified in order to not only help facilitate long-term growth, but protect itself from weakness in any particular brand or market performance.
Growth Prospects
Chatham reported Q4 earnings on 2/25/19 and results were very strong. RevPAR came in 4.1% higher than the year-ago period to $125 for Chatham’s comparable base of 40 wholly-owned hotels.
Average daily rate grew 1.5% to $162 and occupancy was up 2.4% to 77%.
Adjusted funds-from-operations, or FFO, was up 15.2% to 39 cents, which was well above the guided range of 32 cents to 36 cents.
The gain came from higher revenue as well as better operating margins, which rose 30bps to 44.1% of revenue, which also exceeded guidance.
We believe these results are indicative of Chatham’s long-term performance as the trust has a strong history of operating performance, which Q4 results confirmed once again.
Source: March 2019 investor presentation, page 10
Chatham 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 near 40%, and none of its competitors come particularly close to that level.
Select-service lodging provides higher margins than full-service, with Chatham focuses on the former in part for that very reason.
Source: March 2019 investor presentation, page 7
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.
Source: March 2019 investor presentation, page 9
Not only are Chatham’s RevPAR numbers today better than competitors, but they are growing more quickly as well. RevPAR growth was up 4.1% in Q4, well in excess of the prior year’s Q4 total and any of its 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.
Dividend Analysis
Chatham’s yield is obviously a major draw for shareholders, as it is at 7% today. Many REITs have yields near this level, but we believe Chatham’s yield has an important distinction, which is sustainability of the dividend.
Source: March 2019 investor presentation, page 11
Chatham’s payout ratio against its adjusted FFO-per-share guidance for 2019 is just 72%. The monthly dividend is still 11 cents, or $1.32 per share annually, and it has been that way for three years.
Chatham’s dividend has grown by 89% since the IPO, but growth hasn’t occurred since March of 2016. Given Chatham’s reticence in raising the payout, we don’t see dividend growth as imminent.
Thus, if investors are looking for dividend growth, Chatham may not be an appealing stock. However, if investors are focused more on current income, it appears to offer a level of safety not often found with such a high yield.
Final Thoughts
While many REITs offer high yields, we believe Chatham offers an intriguing blend of high yield and safety that differentiates it from the rest of the pack.
The stock offers a very strong yield and robust growth prospects that we believe protects the payout over time. While the lack of dividend growth has been an issue, for those seeking a high yield and the a monthly payout instead of quarterly, we see Chatham as attractive at current prices.
