Chatham Is Cheaper, Is It A Keeper?
- Framing the macro picture, tax reform and accelerated growth are the catalysts driving sentiment for the bulls, while immigration and Airbnb continue to drive the bears.
- There is no doubt that Chatham Lodging and most all Lodging REITs have experienced secular volatility in 2017, in large part due to the increased supply hurdles and modest RevPAR.
- Chatham is freely sellable and there are no termination fees, so it would be interesting to see M&A activity.
In a few days, I am commencing a March Madness series exclusively for Marketplace subscribers. As many of you know, this is my third year of March Madness in REIT-dom and I enjoy the friendly competition in which I hand pick the best REITs in every property sector.
The Lodging sector has certainly seen its share of pre-tournament suspense as oversupply and rising rates have set the tone for an exciting battle for REIT supremacy. Framing the macro picture, tax reform and accelerated growth are the catalysts driving sentiment for the bulls, while immigration and Airbnb (Private:AIRB) continue to drive the bears.
While we are not over-weight Lodging, we are continuing to expand coverage as our interest has sparked a few new trades including Ryman Hospitality(RHP) and Summit Hotel Properties (INN). In a research report, Jeff Donnelly, CFA, Senior Analyst at Wells Fargo Securities weighed in at a recent conference:
“The mood was optimistic tax reform could accelerate growth and sustain the business cycle. However, concerns around pockets of oversupply and rising interest rates were a consistent source of uncertainty. Specific to lodging, the focus was brand integration risks, topical markets (New York, Hawaii, San Francisco) as well as the probability and timing of a reacceleration in corporate profits to fuel a widespread recovery in demand.”
Overall, we are maintaining a mood of cautious optimism as we are encouraged by the economic indicators fueling the U.S. economy, namely GDP growth (was 2.3% in 2017) and the fact that Americans are shopping, businesses are investing, and the stock market is booming. What about REITs?
Lodging REITs in my opinion, should outperform (other REIT sectors) in 2018, based on the fact that rising rates have very little impact to sentiment. Remember that hotels adjust their rates daily and this allows them to adjust to rates in real-time.
However, year-to-date, all REIT sectors have underperformed, suggesting that all are being painted by the same brush, so to speak.
Last week, one of my favorite Lodging REITs, Chatham Lodging Trust(CLDT), saw shares fall over 15% after the company announced Q4-17 and year-end 2017 results.
That was painful to watch, especially considering the fact that Chatham had already dropped, and as illustrated below, shares have fallen by 20% year-to-date:
The question on many investors’ minds is, in the words of The Clash, “should I stay or should I go?”