Chatham Lodging Belief Inventory: I Proceed To Purchase The 8.1% Most well-liked Yield (NYSE:CLDT)

Introduction

Up to now few months I’ve been profiting from the comparatively low value of the popular shares of Chatham Lodging Belief (NYSE:CLDT) as I feel the chance/reward ratio appears fairly good proper now. Because it has been some time since I final mentioned (NYSE:CLDT.PR.A), I needed to double examine on the latest monetary outcomes to verify there aren’t any sudden surprises. For a extra detailed overview of the resort REIT’s belongings and enterprise focus, I’d prefer to refer you to this older article.

Chatham’s monetary efficiency stays sturdy – from the attitude of a most well-liked shareholder

I’m primarily keen on Chatham’s most well-liked shares, which implies I deal with two particular components: How properly is the popular dividend coated, and is there a stability sheet danger that would jeopardize the worth of the popular shares?

To reply the primary query, I all the time need to take a look on the FFO and AFFO generated by the resort REIT as that in the end decides how a lot money movement is coming in and what it must be spent on.

Because the picture under reveals, Chatham generated $7.9M in FFO and $7.9M in AFFO. This already consists of the $2M in most well-liked dividends.

This implies the Q1 AFFO earlier than taking most well-liked dividends under consideration was nearly $10M, which implies the REIT solely wanted simply over 20% of its Q1 AFFO to cowl the popular dividends.

I’m high-quality with that most well-liked dividend protection ratio as the primary quarter historically is a weak quarter for Chatham. That additionally turns into clear if you have a look at the Q2 AFFO steerage. As you possibly can see under, Chatham is guiding for an adjusted FFO of $16.8-18.5M for the quarter, which implies the $2M in most well-liked dividends (which as soon as once more is already included within the AFFO steerage talked about above) ends in a payout ratio of simply over 10%.

There’s one caveat although: The REIT plans to spend $37M in capex this 12 months, and that also must be deducted from the AFFO. That’s a comparatively excessive capex, however it should enable Chatham to finish renovations at 5 lodges. And simply to supply some context: In each 2022 and 2023, Chatham reported an AFFO of $59.6M and $59.7M, respectively. This implies the AFFO earlier than taking the popular dividends under consideration was nearly $68M so even when there could be no progress this 12 months, the popular dividends and the capital expenditures ought to be totally coated this 12 months.

Wanting on the stability sheet, the REIT has in extra of $90M in money and restricted money leading to a internet debt of just below $400M. Additionally vital: 25 lodges are at the moment unencumbered.

Not solely is that fairly low vs. the $1.2B in actual property belongings, needless to say $1.2B in e book worth for the resort belongings already consists of an amassed depreciation of in extra of $450M. Even for those who’d exclude the furnishings and fixtures, the acquisition value of the land and buildings exceeded $1.5B.

And because the liabilities aspect of the stability sheet reveals, the entire fairness worth on the stability sheet is $765M, of which $120M is represented by the popular fairness. This implies there’s nearly $650M in widespread fairness which ranks junior to the popular fairness to soak up the primary potential losses. And that’s primarily based on the $1.2B e book worth of the belongings – if the truthful worth is increased than the e book worth, the “cushion” is even greater.

The main points on the Sequence A most well-liked shares

As defined in a earlier article, Chatham Lodging Belief solely has one collection of most well-liked shares excellent, the Sequence A cumulative most well-liked shares (CLDT.PR.A). The cumulative nature of the popular shares is a crucial factor as though Chatham suspended the dividend on its widespread shares from Q2 2020 till early 2023, it continued to pay the popular dividend. That’s why I am comparatively assured that the REIT will proceed to make the popular dividend occasions, even throughout powerful occasions. The popular shares had been issued in 2021, when the distribution on the widespread models was suspended.

The Sequence A most well-liked shares have a hard and fast annual most well-liked dividend of $1.65625 per share, which is payable in 4 equal quarterly installments of $0.414 per share leading to a professional forma yield of 6.625% primarily based on the $25 principal worth per most well-liked share. However because the preferreds are at the moment buying and selling at simply over $20.5/share, the present yield is roughly 8.1%.

With the five-year US Treasury yield at 4.33%, the markup of just about 380 bp is sufficiently fascinating for me to proceed to construct my place in Chatham Lodging Belief’s most well-liked shares.

Funding thesis

I’ve no place in Chatham’s widespread shares and I’m additionally not very keen on them as I want the income-focused most well-liked securities. I feel the 8.1% most well-liked dividend yield stays fascinating within the present rate of interest local weather, and as 6.625% is a reasonably low-cost value of fairness for Chatham, I don’t assume the REIT will retire the popular shares anytime quickly (Chatham can name the popular shares from mid-2026 on).

Given the wonderful protection ratio of the popular dividends and the sturdy stability sheet, I like the chance/reward ratio provided by the popular shares of Chatham Lodging Belief, and I proceed to construct my place in the popular shares.