Chatham Lodging Trust (NYSE:CLDT) is a real estate investment trust specializing in upscale or premium-branded hotel properties in high-growth U.S. markets. The company pays an attractive, but not incredible, 4% annual dividend via monthly installments.
Generally, monthly dividend stocks are an income investor's dream. So is Chatham Lodging Trust a good buy now, or should investors stay away?
What Chatham invests in
Chatham's investments include Hampton Inn, Courtyard by Marriott, and Homewood Suites by Hilton properties, to name a few, and management is always seeking new investment opportunities to acquire more properties at prices below the cost of new construction.
Chatham owns (either solely or jointly) nearly 80 hotel properties across the United States. While the company likes to invest in premium, recognizable brands, it also focuses on select-service hotels (such as extended stay properties), which tend to have higher margins than full-service establishments.
Chatham likes to acquire properties in desirable markets, especially those with high-growth industries such as technology or oil and gas. The trust's highest concentration of properties is in Silicon Valley (34% of the total), and it also has a large presence in markets such as Washington, D.C., Seattle, Houston, and New York.
As an REIT, Chatham cannot directly operate its hotels, but the company takes an active role in their management. The company maintains excellent relationships with managers and operators -- in fact, all but two of the properties are managed by the same company.
Two ways to make money
Property-based REITs like Chatham can make money for shareholders through both dividend income and asset appreciation. Both have the potential to grow dramatically over time.
Chatham's dividend income comes from the profits from the hotels themselves. Over time, hotels can charge more for the same accommodations. By positioning its hotels in markets with growing industries, Chatham is trying to grow the properties' revenue at an even faster rate. As industries and the companies that participate in them are built up, hotel rooms become a much more valuable commodity.
When it comes to property appreciation, as the actual hotel buildings increase in value, the shares of the trust are effectively worth more and more.
The dynamics of the hotel market are somewhat different than those of residential real estate, but the same basic principles apply. Commercial properties derive their value from their ability to generate revenue. For example, if a building that can generate $1 million in annual revenue is worth $10 million in a certain market, a building that can generate $2 million should be worth roughly twice that amount. Of course, other factors contribute to commercial property values, such as the condition of the property, how much land is owned, and more, but revenue potential is the biggest factor.
If Chatham succeeds in its mission to acquire hotel properties in markets with growing industries, not only could shareholders see a massive rise in income, but the value of the trust's real estate portfolio could grow dramatically as well.
A good buy, or a little too expensive?
My only concern with Chatham is that its price (and the U.S. real estate market in general) might be due to cool off. Since hitting bottom in early 2012, property values have risen by nearly 25%. Shares of Chatham Lodging Trust, meanwhile, have spiked by nearly 120%.
However, just because a stock has risen like this doesn't necessarily mean it's expensive. Actually, it appears that the opposite may be true here. Chatham is expected to produce $1.95 per share in earnings for 2014, and $2.46 in 2015.
In other words, the stock trades for just 12.5 times this year's earnings, which are expected to grow by 26% next year.
If you have a positive outlook for the hotel industry over the coming years, Chatham seems to have a winning business model that could make a nice addition to any income-seeker's portfolio.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.