Another Hotel REIT Hit by the Unpredictable Economy

For being in general undervalued and having good dividend yields, hotel REITs are a sound path investors might choose if they want to see potential good returns on their long-term investment. However, it is imperative for investors to understand that all hotel REITs are affected by the economy. Let’s take a close look at what is taking place with Chatham Lodging Trust.

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  1. Due to a decline in business travel, Chatham Lodging Trust has lowered its guidance for 2016.
  1. For two trading days following the announcement, the share price dropped by 13%.
  1. Chatham joins the ranks of other hotel REITs that are being affected by macroeconomic factors.
  1. We felt it, but we are still optimistic about the sector and the stock.

Due to the decline of business travel, the hotel REIT Chatham Business Lodging Trust has lowered its annual guidance for revenue per available room (RevPAR) and AFFO per share. Despite the average daily rate (ADR) and occupancy remaining strong, the RevPAR figure did not meet the company’s expectations. During the Q2 conference call last week, the company revealed that it believes this pattern will continue for the rest of the year. The management stated that business travel is declining due to poor GDP growth. Until they see more GDP growth, business travel should be restricted.

After the release of the Q2 results, the share price has dropped by 13%, offsetting all of July’s return. However, the year to date return is still positive since the stock is yielding close to 6%. If nothing dramatic takes place by the end of the year (except a possible Federal hike in September), Chatham investors should be pleased with the stock performance.

Pebblebrook, FelCor Lodging Trust, and Hilton Worldwide have been some of the hotel REITs that reported restrain on Q2 growth for the same reason as Chatham. Besides poor business demand, Chatham has pointed out that discounted rates from online travel agents and increased supply in some gateway markets are two factors that are influencing their performance.

Despite the overall results, we still feel good about the stock. During the call, Chatham stated that numbers for July were not impressive, but they expect them to get better in August and September. The REIT has a solid portfolio that is supported by a sound investment strategy and multiple catalysts. It is also important to point out the following: stock has traded at a mid-range level over the previous twelve months, multiple is in line with peers, and dividend has been covered well.

In short, despite the negative impact on our REIT portfolio, we are not panicking. Our due diligence leads us to believe they can weather through.

Source: Chatham Lodging Trust(NYSE:CLDT)

Written on 04 Aug 2016

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author is long FCH, XHR, CLDT, and PEB.

Data Center REITs Gained Attention Again

chart01This week U.S. equity REIT stocks have been slightly up, with a 0.8% average increase. The S&P500 also saw a similar trend. This time we noticed that the market was holding stronger opinions towards sectors. Generally, the more popular sectors suffered losses while underappreciated sectors experienced gains.

Data center gained attention because all data center REITs lost ground, with a median share price decline of -3.2%. Most stocks dropped between 2% and 4%, but that was not the case for CoreSite Realty.

CoreSite share price plummeted by 8.1%, the worst among all U.S. equity REITs last week. The most dramatic drops occurred on Wednesday and Thursday, just two weeks before the company releases their Q2 results. Hopefully their results will be on par.

Despite the drop, CoreSite remains the most successful data center REIT in 2016. They have returned with 48% percent to date. The stock has remained one of the top five best performing stock among U.S. equity REITs. It is also important to mention that CoreSite is a midcap REIT with 17 data centers across the United States. They also have the second highest multiple when compared to peers.

Data center, the best performing REIT sector of 2016 so far, has definitely been the center of several online publications. Fundamentals have been spectacular leading the average multiple to surpass 20 times AFFO. For that particular reason, investors have been very cautious in adding new positions; some have done the opposite and realized profits. Manufactured homes and self-storage were among the other sectors who did poorly last week.

Lodging and timber saw quite a bit of gains. Several lodging stocks were among the weekly top twenty returns. Pebblebrook Hotel Trust and Chatham Lodging Trust returned around 6%-7%. Their portfolios are skewed toward the west coast, where the lodging industry should demonstrate much better results.

We are approaching the start of Q2 results season, so this could very well tell us how things will unfold.

Source: Chatham Lodging Trust(NYSE:CLDT), Pebblebrook Hotel Trust(NYSE:PEB), CoreSite Realty Corporation(NYSE:COR)

Disclaimer: This is not a recommendation to buy or sell stocks. The highest-yield stocks are not necessarily the best portfolio investment choice. The purpose of this report — which is essentially a snapshot of information available on July 15, 2016 — is to reduce your stock analysis by enabling you to compare stock and sector performance. Please do your own due diligence before making any investment decision.

As of May 31, 2016, the equity REITs are constituent companies of the FTSE NAREIT All REITs Index. Companies whose equity market capitalization is lower than $100 million have been disregarded.

This report is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author is long FCH.

There’s Room in This Hotel REIT

chart01One of the best motivations to seriously consider investing in the hotel REIT Chatham Lodging Trust is its quality properties. The property portfolio is oriented towards the West Coast, a region where the lodging industry is expected to show strength in 2017. Furthermore, the REIT serves a diversified mix of customers, but it has in business travelers its principal base. The positive news is that the share price has not rebounded entirely from last year’s selloff so it has upside.

In fact, Chatham’s stock has a 23% upside from its 52-week peak. The highest price was at $28.85, but fell to $16.12 in January and is currently around $22. Furthermore, the stock has not reached its full potential while trading at 9 times its AFFO projected for 2016. There is room for optimism.

chart02The majority of Chatham hotels are made up of Marriott Residence Inn and Hilton Homewood suites (24 out of 38 locations). These locations are high end, long-term inns, which cater to business associates who require a longer time frame in an area to complete their work. The remaining are select hotels with leaner cost structure and better profit margins.

The positive sign is that half of the asset collection is concentrated on the West Coast—one of the largest concentrations amongst hotel REITs. Silicon Valley possesses the majority, but in LA, San Diego, and Seattle, there are also hotels. More vulnerable lodging areas, for instance New York, have minor share and this means that the portfolio should do well over the next year.

Even though the company should continue to grow internally, the main concern is whether or not this will take its share price to a higher level. Hotels in Texas, California, Massachusetts, and Silicon Valley are being upgraded according to information retrieved from the company. However, they have reported they are not pursuing new acquisitions, dispositions, debt or equity issuance.

Despite the uncertainty, investing in Chatham stocks can provide an instant benefit. Dividend yield is a meaty 6%, and because dividend is only 52% of FFO, distributions will most likely remain strong.

Source: Chatham Lodging Trust(NYSE:CLDT), Fast Graphs

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Hotel REITs: Yet To See a Catalyst

chart012016 has yet to see a catalyst that justifies an above average performance of hotel REITs. In fact, the recent performance of hotel REITs hasn’t been all that different from REITs in general. While the stocks did go up by 8.5% this March, they haven’t fared any better than the average equity REIT, whose stocks in aggregate went up by about 9%.

I haven’t observed any changes in the fundamentals that make me think that demand will continue to exceed supply. While it is true that demand has surpassed supply and supply has been below historic average, hotel pipeline has increased. This has caused the gap between supply and demand to narrow, which shows that supply just might catch up with demand soon.

The real question is where in the lodging cycle are we at right now. In 2015, the hotels broke several records, including average daily rate (ADR), demand, occupancy, and revenue per available room (RevPAR). Unfortunately, while the hotels were enjoying one of the best growth rates among REITs and the sector was in the expansion phase, the financial markets believed they reached their peak and share prices tanked.

Thanks to the string of good news, we saw one of the most prolonged selloff periods in recent times, where stocks fell by around 30% over the course of 2015. The market was so sensitive that a change in guidance would prompt new selloffs. The mindset was “what goes up, must come down” and that’s what the market got.

As a result, hotels have become one of the best REIT sectors to harvest high yielding stocks. While the median equity REIT is yielding 4.1%, hotel REITs is just under 6%, which is better than healthcare, for instance. Out of the 17 hotel REITs that we track, only four have a dividend yield that is below average. At the same time, multiples have been lower than the historic norm at 10 times AFFO.

At the same time some investors have argued that REITs with high multiples will go down, some have now argued that REITs with lower multiples will go up. I find it very difficult to believe the latter thesis is sustainable because no new factor has been generated to shift lingering skepticism towards the fundamentals.

Even downplaying the limiting factors that are holding back hotels doesn’t change the picture. The appreciation of the dollar, which affects the number of international guests, impacts mostly gateway markets. Also, Airbnb’s competitive price has created a bunch of hype and appears to be a threat to lodging. That being said Airbnb hasn’t had a substantial impact on ADR in 2015.

Finally, hotel owners quickly adjust rates based on the state of the economy. In an environment where there are constant rumors that the economy is entering a recession, the industry just might be on edge.

In conclusion, even if none of the factors above come true, they don’t appear to change the dynamics.

Source: Pebblebrook Hotel Trust(NYSE:PEB), Chatham Lodging Trust (NYSE:CLDT), hotelnewsnow.com, Fast Graphs

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Hotel REIT Stocks Soar Last Week

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It is interesting to note that hotel REIT stocks have moved in tandem. Last week, hotel REITs increased by an aggregate of 5.2 percent, which is a much higher figure than the aggregate of 1.3 percent for equity REITs as a whole. As a result, it should come as no surprise to learn that hotel REITs claimed 11 out of the 16 top performing REITs last week.

In hindsight, this might not be as surprising as it seems. After all, hotel REITs have had some of the highest dividend yields since the mass sell-off in 2015, meaning that they were attractive choices for investors who were interested in a stable income rather than speculation. However, it should also be noted that they have been held back by beliefs in an oversupply in the market, which has been supported by statistics such as two-thirds of rooms under construction being aimed at upscale and upper upscale markets, which are already believed to be highly competitive.

Still, some hotel REITs have managed to differentiate themselves from their competitors by focusing on either a particular location or a particular segment. That might not be the case of Chatham Lodging Trust, which presented the best stock performance out of its peers last week. Chatham has been focused on upscale extended-stay as well as mid-price segments. In turn, they reported an increase in occupancy of 2 percent as well as an increase in AFFO per share of 14 percent.

Ashford Prime, which saw a 3 percent increase to its shares, continues to suffer because of fighting between its management and activist hedge fund Sessa Capital. Originally, the hedge fund came in with the intention of making a profit on its sale, but ever since its efforts were blocked by Ashford Prime’s management, it has been locked in a bitter struggle, which is made all the worse by the fact that neither party seems willing to relent at the moment, suggesting that they will continue fighting long into the future.

In fact, it is possible that fears of a similar struggle have prompted a farmland REIT called American Farmland Company to address the gap between its share price and its estimated net asset value in order to prevent a similar intervention. So far, the announcement alone has earned results, seeing as how its share price went up by 12 percent, which was enough to make it the best performer last week.

Source: Chatham Lodging Trust(NYSE:CLDT), Ashford Hospitality Prime, Inc(NYSE:AHP),American Farmland Company(AMEX:AFCO)

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.