I recently took advantage of the lower prices of the preferred shares of Chatham Lodging Trust (NYSE:CLDT) as I believe the risk/reward ratio looks favorable at the moment. I wanted to revisit the recent financial results to ensure there are no surprises, especially since it has been a while since I last discussed (NYSE:CLDT.PR.A).
Chatham’s financial performance remains strong, which is essential for preferred shareholders like myself. I focus on two key elements: the coverage of the preferred dividend and any balance sheet risks that could impact the value of the preferred shares. In the first quarter, Chatham generated $7.9M in FFO and $7.9M in AFFO, which includes the $2M in preferred dividends. This means that the REIT only needed just over 20% of its Q1 AFFO to cover the preferred dividends, which is a good sign.
Looking ahead, Chatham’s Q2 AFFO guidance indicates an adjusted FFO of $16.8-18.5M, with a payout ratio of just over 10% after factoring in the $2M in preferred dividends. Despite planning to spend $37M in capex this year for hotel renovations, the AFFO should still cover the preferred dividends and capex costs. The REIT has over $90M in cash and restricted cash, with a net debt of just under $400M, indicating a strong financial position.
Chatham Lodging Trust’s only series of preferred shares outstanding is the Series A cumulative preferred shares (CLDT.PR.A). These shares have a fixed annual preferred dividend of $1.65625 per share, payable quarterly, resulting in a current yield of approximately 8.1% based on the trading price. With the five-year US Treasury yield at 4.33%, the markup of almost 380 bp makes the preferred shares an attractive investment option.
I do not hold any common shares of Chatham, as I prefer the income-focused preferred securities. The 8.1% preferred dividend yield remains appealing in the current interest rate environment. Given the strong coverage ratio of the preferred dividends and the solid balance sheet, I see the preferred shares of Chatham Lodging Trust as offering a favorable risk/reward ratio. Consequently, I am continuing to increase my position in the preferred shares of the company.