In a strategic move to capitalize on the attractive 8.1% preferred yield, savvy investors are eyeing the preferred shares of Chatham Lodging Trust (NYSE:CLDT). Amidst the current market conditions, the risk/reward ratio of Chatham's preferred shares is deemed favorable, prompting a closer look at the financial performance and investment potential.
Analyzing Chatham's Financial Performance
Chatham's preferred shares are under the spotlight, with a focus on evaluating the coverage of preferred dividends and potential balance sheet risks. The key indicators such as Funds from Operations (FFO) and Adjusted Funds from Operations (AFFO) play a pivotal role in assessing the cash flow and dividend sustainability.
As per the latest data, Chatham generated $7.9M in FFO and $7.9M in AFFO, which already accounts for the $2M in preferred dividends. The first quarter AFFO showcase a promising figure of nearly $10M, translating to a comfortable coverage ratio of over 20% for preferred dividends.
Unveiling Future Prospects
Looking ahead, Chatham's guidance for Q2 AFFO indicates a robust performance, with anticipated adjusted FFO ranging from $16.8-18.5M. Despite a significant capex expenditure of $37M earmarked for renovations at five hotels, the AFFO projections remain encouraging. With historical AFFO figures in 2022 and 2023 surpassing $59.6M, the outlook for this year appears promising in terms of dividend coverage and capital expenses.
Assessing Balance Sheet Strength
Delving into the balance sheet, Chatham exhibits a strong financial position with over $90M in cash and restricted cash. The net debt stands at just under $400M, with 25 unencumbered hotels adding to the asset portfolio's value.
The total equity value of $765M signifies a robust equity base, wherein $120M reflects preferred equity. The common equity of nearly $650M acts as a cushion in absorbing potential losses, underscoring the strength of Chatham's financial foundation.
Insights on Series A Preferred Shares
Chatham Lodging Trust's Series A cumulative preferred shares (CLDT.PR.A) underscore a commitment to preferred dividend payments, even during challenging periods. With a fixed annual preferred dividend of $1.65625 per share, the current yield of approximately 8.1% presents an attractive proposition for income-focused investors.
Amidst a competitive interest rate environment, the favorable yield spread of 380 basis points against the five-year US Treasury yield of 4.33% positions Chatham's preferred shares as a compelling investment choice.
Investment Outlook
Opting for the income-oriented preferred securities over common shares, investors are drawn to the enticing 8.1% preferred dividend yield offered by Chatham Lodging Trust. With a strong coverage ratio, solid balance sheet, and a promising outlook, the preferred shares continue to garner investor interest. The calculated risk/reward ratio underscores the appeal of Chatham's preferred shares, reinforcing the decision to augment positions in this lucrative investment avenue.