Chatham Lodging Trust: A Low Double-Digit Return Opportunity

Core Viewpoint - Chatham Lodging Trust is currently one of the weakest-performing REITs in 2024, with an 18% negative return, significantly underperforming the benchmark Vanguard Real Estate Index Fund ETF's 5% drop. Despite this, the company is considered cheap with a cap rate of 10.3% and strong operating performance, although there are concerns regarding revenue growth drivers and high debt costs [2][12]. Company Overview - Chatham Lodging Trust is a lodging REIT that focuses on extended-stay accommodations and premium-branded select-service hotels, with extended stay rooms making up approximately 63% of its 5,883 rooms across 39 hotels [3]. - The company operates in 17 states and D.C., with California representing about 28% of its last twelve-month EBITDA. Residence Inn contributes 46% to the last twelve-month EBITDA [4]. Operational Overview - In an ad-hoc business update for April and May 2024, Chatham Lodging reported a 5% year-over-year increase in revenue per available room (RevPAR), significantly higher than the 1.5% growth in Q1 2024. This increase was primarily driven by higher occupancy rates of 83% and 82% in April and May, respectively [4]. - The company’s Q1 2024 adjusted FFO was $0.16 per share, flat year-over-year, with revenue growth offset by increased interest and operating expenses. For reference, adjusted FFO was $1.18 per share in 2023 [4]. 2024 Outlook - Chatham Lodging initially guided for a 2.5-4% RevPAR increase in Q2 2024, but the latest update suggests the REIT will exceed this guidance, indicating a solid year of RevPAR growth ahead. RevPAR grew 2.5% in 2023 [5]. Capital Structure - As of Q1 2024, Chatham Lodging had net debt of $412 million, which increased to about $450 million in Q2 due to the acquisition of Home2 Suites by Hilton Phoenix Downtown for $43 million. Net debt accounts for 45% of enterprise value, while preferred equity constitutes 12% of the capital structure [6]. - The company plans to address July 2024 maturities with an additional $140 million borrowing at an interest rate of about 7%, which will create a headwind due to high fixed rates on expiring debt [7]. Market-Implied Cap Rate - Chatham Lodging is estimated to generate about $104 million in net operating income on a run-rate basis, reflecting a market-implied cap rate of 10.3% relative to its $1 billion enterprise value. The capital investment budget for 2024 is $37 million, leading to a post-capex cap rate of 6.7% [8]. Series A Preferred Shares - The Series A preferred shares currently offer a 7.8% yield, which is attractive despite being 2.5% below the NOI the company trades at. The preferred shares are valued at about $102 million, indicating they are well-covered by common equity market capitalization [10].