Why Do I Consider Chatham Lodging Trust Undervalued?
I’ve laid out above CLDT’s past performance but we also need to investigate CLDT’s current valuation to see if we would be getting a fair or maybe even a good deal. CLDT is currently priced at about $20.60 per share and it has a 52 week high of $28.85 and a low of $16.15 so it is closer to its low for the year.
The recent release of the April Federal Open Market Committee meeting minutes has pushed the price of CLDT and its peers down. This definitely helps the REIT sector’s overall valuation, but what about CLDT’s valuation relative to its peers?
Today, CLDT’s dividend yield is higher than it peer average at 5.8%. While CLDT’s Price/FFO at 11 is a little higher than its peer average at 10, with CLDT you are buying a strong past performance, solid and conservative management history, and a consensus forecast of future growth. Of the six analysts that follow CLDT, 4 rate it as a BUY and 2 rate it as a HOLD with a consensus fair value of $24.75 per share.
What Are The Risks Of An Investment in Chatham Lodging Trust?
The first risk is the potential for interest rates to rise significantly. Chatham Lodging Trust (NYSE:CLDT) is primarily an income investment with slow to medium growth with a significant dividend yield. It therefore falls into the category of bond surrogate and will likely see its share price fall if interest rates begin to rise.
Because CLDT is able and expected to grow along with the economy, a fall in CLDT’s valuation due to rising interest rates would likely be temporary. The second impact of a rising rate environment would be an increase in CLDT’s borrowing costs to continue to grow its real estate footprint. CLDT’s cost of growth capital would go up in a rising rate environment.
All that said, I don’t expect the US Federal Reserve will make any significant move to raise interest rates. It is an election year, the US economy is soft, the employment metrics have turned down over the last couple of months, and the rest of the world is still trying to juice their economies via loose monetary policy. If there is to be an increase in the Federal Funds Rate in June, I expect it will be a small one.
The second risk would be a general economic slump or recession in the US. An economic downturn would negatively impact business and leisure travel and CLDT’s revenue and earnings would likely be adversely impacted. I’m not expecting to see a recession or significant economic downturn in the US. My expectation is for more of the same low interest rate and slow grow environment that we have had over the last few years. Gasoline consumption is on a tear in the US and I expect that to continue through the summer vacation season suggesting that CLDT’s hotels will continue to their streak of high occupancy and high earnings.
Disclosure: This article was originally published on Sure Dividend by Dirk S. Leach.
