I recently published an article entitled “The Best Monthly Dividend Stocks” where I evaluated 17 C-corporation stocks that pay dividends monthly. In that previous article I covered the benefits of monthly dividends and provided the reader with a red/yellow/green recommendation on investment potential and a brief rationale for the recommendation on each of the 17 stocks.
To provide more granularity on those stocks ranked green in the previous article, I’m covering in more detail the four stocks I consider “The Best of the Best Monthly Dividend Stocks”. I previously covered STAG Industrial in the first of this series. This article covers the second stock in the series, Chatham Lodging Trust (NYSE:CLDT).
Introduction to Chatham Lodging Trust
In the spirit of providing currently actionable investment recommendations, I chose to cover the four “Best of the Best” monthly paying stocks in order of most undervalued to least undervalued. I believe CLDT is currently undervalued when compared to its peers in the industry.
Many investors view the REIT sector as a fairly uniform group of companies (trusts) that own property or make loans on property with the investor focusing on the highest yield in the sector. This approach to primarily looking at REIT’s yield is a mistake. All REITs are not created equally and equity REITs and mortgage REITs are as different as apples and oranges.
When selecting a REIT for investment, it is important to interpret dividend yield through a qualitative (versus strictly quantitative) lens looking at the underlying risk adjusted performance to ensure the overall metrics such as the balance sheet, diversification, earnings growth, and payout ratios support continued growth of the REIT and its dividend. Consistent with this approach, the investment thesis for CLDT is laid out in the following paragraphs and charts.
Chatham Lodging Trust (NYSE:CLDT) is a lodging REIT that invests in Premium-Branded, Upscale Extended Stay, and Select Service hotels. This category of hotels typically have higher profit margins than full service hotels with a higher growth profile due to higher consumer demand. CLDT has a coastal preference with 50% of the portfolio located on the West Coast and 24% in the Northeast. CLDT has the 2nd highest exposure to West Coast markets of all U.S. lodging REITs.
In 2015, the company acquired four high-quality hotels in San Diego, Boston, Ft. Lauderdale, and Los Angeles. All strong market growth, multiple demand generators, with high barriers to new supply in each of these markets. At the end of 2015, the company owned 38 hotels with an aggregate of 5,675 rooms and a 10% interest in two joint ventures owning 95 hotels.
As of March 31, CLDT was in the portfolios of ten of the investors tracked by Insider Monkey, which held 14.30% of its shares in aggregate. That was down from 13 investors with long positions in the company at the end of 2015. REIT investor Castle Ridge Investment Management, managed by Michael Swotes, sold out of its CLDT position during the first quarter, which had contained 104,350 shares on December 31.