Who’s Cheering For Chatham?

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Summary

  • Chatham has choked, returning -10.4% year-to-date.
  • However, within the limited service lodging REIT sector, I was hoping to see Chatham shine, instead, it has become obvious that Mr. Market is not cheering for Chatham.
  • While Chatham has underperformed the peers year-to-date, I believe the company is well-positioned to move the needle.

As many of my readers know, I have been a fan of Chatham Lodging (CLDT) for quite some time. Many own shares in this monthly-paying REIT that has achieved success for its bi-coastal limited service focus.

While many of my top lodging REIT picks have performed well year-to-date, Chatham has choked, returning -10.4%.

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I have been pleased with many of my calls, namely Ryman Hospitality (RHP) +21.6% Hersha Hospitality (HT) +15.3%, and Braemar Hotels & Resorts(BHR) +14.4%. However, within the limited service lodging REIT sector, I was hoping to see Chatham shine, instead, it has become obvious that Mr. Market is not cheering for Chatham.

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Now that Q1 earnings are in the rear-view mirror, it’s time to take a closer look at Chatham. Fellow Seeking Alpha writer, Dane Bowler, even suggests that Chatham could “be a short as part of a pair trade.” I respect Bowler’s work, as a REIT analyst, and I will take a much closer look at Bowler’s conclusion:

“Lower margins on lower revenue means significantly lower FFO/share.”

Before get started, I want to remind you that, in general, Lodging REITs have higher leverage, and as a result of cyclical revenues, these REITs have more volatility. I am under-weight Lodging REITs and my strategy has been to maintain tactical allocations (no more than 10% exposure). Just take a look at the historical performance of juggernaut, Host Hotels (HST):

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This is not a harbinger, related to a near-term recession, I am simply pointing out the impact to lodging during a recession. Investors should always recognize that lodging is cyclical, and the REITs with conservative leverage, strong market positioning, and solid management teams are the ones that will perform the best during downturns.

So now let’s get started with Who’s Cheering for Chatham?

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Photo Source

Chatham’s Business Model

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