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

Introduction

Previously few months I’ve been making the most of the comparatively low worth of the popular shares of Chatham Lodging Belief (NYSE:CLDT) as I believe the danger/reward ratio seems to be fairly good proper now. Because it has been some time since I final mentioned (NYSE:CLDT.PR.A), I wished to double examine on the latest monetary outcomes to ensure there aren’t any surprising surprises. For a extra detailed overview of the resort REIT’s property and enterprise focus, I’d wish to refer you to this older article.

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

I’m primarily fascinated with Chatham’s most well-liked shares, which suggests I deal with two particular parts: How effectively is the popular dividend coated, and is there a steadiness sheet danger that might 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 needs to be spent on.

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

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

I’m wonderful 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 take 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 suggests the $2M in most well-liked dividends (which as soon as once more is already included within the AFFO steerage talked about above) leads to a payout ratio of simply over 10%.

There’s one caveat although: The REIT plans to spend $37M in capex this yr, and that also needs to be deducted from the AFFO. That’s a comparatively excessive capex, however it is going to permit Chatham to finish renovations at 5 accommodations. And simply to offer 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 virtually $68M so even when there can be no development this yr, the popular dividends and the capital expenditures needs to be absolutely coated this yr.

the steadiness sheet, the REIT has in extra of $90M in money and restricted money leading to a internet debt of slightly below $400M. Additionally vital: 25 accommodations are at the moment unencumbered.

Not solely is that fairly low vs. the $1.2B in actual property property, understand that $1.2B in ebook worth for the resort property already contains an gathered depreciation of in extra of $450M. Even if you happen to’d exclude the furnishings and fixtures, the acquisition price of the land and buildings exceeded $1.5B.

And because the liabilities facet of the steadiness sheet reveals, the overall fairness worth on the steadiness sheet is $765M, of which $120M is represented by the popular fairness. This implies there’s virtually $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 ebook worth of the property – if the truthful worth is increased than the ebook worth, the “cushion” is even greater.

The main points on the Collection 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 Collection A cumulative most well-liked shares (CLDT.PR.A). The cumulative nature of the popular shares is a vital component 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 instances, even throughout robust instances. The popular shares have been issued in 2021, when the distribution on the widespread models was suspended.

The Collection 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 fascinated with them as I favor the income-focused most well-liked securities. I believe 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 price of fairness for Chatham, I don’t suppose 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 steadiness sheet, I like the chance/reward ratio supplied by the popular shares of Chatham Lodging Belief, and I proceed to construct my place in the popular shares.