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Combined NAV $24.15/sh Overview-
August 19th, 2013
CLDT is a self-advised lodging REIT that invests primarily in premium-branded upscale extended-stay, selectservice and full-service hotels in the 25 largest metropolitan markets in the United States. They are 1 of 4 public players today in the hotel REIT space focusing on the select service category. Approximately 58% of Chatham’s portfolio is located in the attractive gateway CBDs of New York, Washington DC, Boston and Southern Californiacentered around the premium select-service flags of Residence Inn, Homewood Suites, Courtyard by Marriott, and Hampton. These segments are characterized by higher-than-industry average occupancy levels and lower operating costs and high margins. In addition, there is a greater pool of acquisition targets within the limited service space when compared to full service, with only a few other lodging REITs targeting these hotels. Footprint-
BackgroundCLDT’s initial portfolio was purchased at an attractive valuation. Chatham purchased six Homewood Suites properties for $73.5M, or ~11x ‘09 EBITDA. In addition, the company soon after went into contract on four additional hotels for $61M, or ~11.5x ’09 EBITDA. In its April 15, 2010 IPO, CLDT offered 7,500,000 shares at $20 per share, raising $150M. Concurrent with the IPO, CEO Jeff Fisher made a private placement of $10M into the company at the listing price. On April 20, Chatham announced the full exercise of the underwriters’ overallotment option to purchase an additional 1,125,000 shares at the listing price. Proceeds from the IPO were allocated toward purchasing the portfolio of six Homewood Suites from RLJ and four additional hotels, which were announced in May of that yr. CLDT mgmt. was clear that in the initial years as a public co they planned to make roughly $200M in acquisitions per year in the premium-branded upscale extended stay and select-service segments. Looking at their initial portfolio deal: Chatham’s purchase of its initial hotel portfolio in April ‘10 from RLJ Development LLC for $73.5M, implied an average of $90,406 per key. The portfolio is comprised of six highquality Homewood Suites, each located within a top 25 MSA with relatively high barriers to entry. The hotels had
agreed to be managed by a subsidiary of Hilton. As determined by third-party appraisal prior to the purchase, the value of this portfolio implied a 36% discount to the estimated replacement value of $142,000 per key. On a yield basis, the hotels were purchased at an 8.6% ‘09 property-level cap rate, or 7.5% once including planned renovation capex. ValuationWhile the analysis of the property portfolio is fairly straightforward given the limited number of assets and consistent asset type, most sell-side (and buy side) analyses either ignore or grossly under appreciate the incremental value of CLDT’s Innkeepers promote and the value of that fee income to an owner/operator in the event of sale. Furthermore, the near 5% current cash-pay dividend yield is at the upper end of the lodging REIT comp set. On a cap rate basis, the portfolio trades today at ~ 8.9% on next yr hotel-level NOI. That’s almost a turn higher than Blackstone’s recent purchase of Apple REIT, a close comp., and sub 11x AFFO. As seen below, even on ’13 #’s, the comps set trades predominantly ~12-17x.
Portfolio Valuation Calc. EBITDA multiple Cap Rate - Cash Flow EBITDA 2014E Less: Maintenance Capex Operating Cash Flow Implied Value of Properties NOI Plus: Cash and Cash Equivalents Plus: Other Assets Estimated Market Value of Assets Less: Debt Implied Net Asset Value Shares Outstanding Implied NAV Per Share Current Stock Price Premium to Share Price 12.75x 7.50% $56,843 (2,467) $54,376 $724,747 $18,690 $12,936 $756,373 $287,300 $469,073 22,558 $20.79 $17.55 18.5%
Current Implied Valuation:
Enterprise Val. 2014E EBITDA EV/EBITDA 2014 AFFO AFFO/Sh AFFO Mult. 664,503 56,843 11.7x 36,821 1.63 10.75x
Ignoring the Innkeepers promote entirely, a property-by-property replacement cost analysis yields ~$20/sh in value for the wholly owned and consolidated JV assets.
Replacement Cost Check (Wholly Owned + Consolidated JV Props.) Replacement cost Val. Asset Per Room Val. ($000) 180,000 215,000 165,000 155,000 165,000 130,000 210,000 255,000 160,000 295,000 285,000 185,000 325,000 330,000 325,000 335,000 325,000 250,000 225,000 225,000 275,000 242,515 avg. value 26,460,000 26,015,000 23,760,000 21,235,000 23,595,000 15,730,000 25,200,000 31,620,000 16,800,000 39,235,000 35,340,000 15,910,000 65,000,000 63,360,000 39,325,000 35,175,000 47,450,000 30,500,000 44,325,000 40,050,000 39,875,000 705,960,000
Brand Homewood Suites Homewood Suites Homewood Suites Homewood Suites Homewood Suites Homewood Suites Hampton Inn Residence Inn Courtyard Residence Inn Residence Inn Springhill Suites Residence Inn Residence Inn Residence Inn Residence Inn Homewood Suites Hampton Inn Courtyard Hyatt Place Homewood Suites Total Boston, MA Bloomington, MN Brentwood, TN Dallas, TX Farmington, CT Maitland, Fl Houston, TX Holtsville, NY Altoona, PA White Plains, NY New Rochelle, NY Washington, PA Anaheim, CA San Diego, CA Tysons Corner, VA Washington, DC San Antonio, TX Portland, ME Houston, TX Pittsburgh, PA Carlsbad, CA
# Keys 147 121 144 137 143 121 120 124 105 133 124 86 200 192 121 105 146 122 197 178 145 2,911
Plus: Cash Plus: Other Assets Less: Debt Equity Value Shares Out. Equity Value Per Share Current Price Premium to Share Price
$18,690,000 $12,936,000 ($287,300,000) $450,286,000 22,558,000 $19.96 $17.55 13.7%
What both portfolio NAV valuations and portfolio replacement cost valuations exclude, and what sell-side has done limited work on, is the incremental value associated with the Innkeepers promote attributable to CLDT. The tiered promote structure is a meaningful, and could be as high as a 20% split at current performance hurdles. The result is a combined price target of $24.15/sh.
InnKeepers Promote Calc. 2013 Property NOI Est. Property Cap Rate Imp. Valuation Less: 2013 Net Debt Imp. JV Equity Est. Promote Value Hurdle Assumptiom Promote Split Assumption Promote Value/Sh $ 88,963 8.00% 1,112,034 732,635 379,399 75,880 18% 20% 3.36
CLDT announced a 5% increase to their dividend ($0.84/share) in calendar ‘13 (implies 4.8 percent yield). That represents one of the highest div. yields in the sector and should provide valuation floor. Looking at their balance sheet, the consolidated non-Innkeepers leverage is termed out ’15-’17. At ~4.7x ’14 net debt/EBITDA, the company has considerable corporate borrowing capacity to fund future deals and growth without needing to issue equity.
Innkeepers JV- Misunderstood & Highly ValuableIn October 2011, Chatham invested $37M for a 10.3% interest in a JV with Cerberus that acquired 64 hotels from the bankruptcy estate of Innkeepers USA Trust. Since that time, the company has been hesitant to provide much of any quantitative information on the profitability or value of this asset. That’s beginning to change. The Innkeepers Deal: Paid a net purchase price ~$118,000/key, representing ~35% discount to Apollo’s ‘07 investment in the portfolio . By yearend ’12, $21.2M (~57% of initial investment) of invested capital had been returned to CLDT with net proceeds from incremental mortgage financing, the sale of eight non-core hotels and distributions of cash flow from operations. Just last yr. the co received over $4M in cash dividends from the JV. In the co’s recent Q2 2013 transcript, mgmt. referenced the refinancing of the co’s current ~$790M of gross Innkeepers debt with a new $950M facility, which will bear a meaningfully lower blended rate and associated cash interest payments. The closing of that refinancing will allow CLDT and Cerberus to distribute the remainder of their initial equity investments in JV, thus allowing them to give more specific detail on the hurdles and splits that govern the promote waterfall. We think will prove a very favorable refi.
Catalysts to ComeIn the coming quarter CLDT should announce the completion of the recently announced refinancing of the Innkeepers debt, with a new $950M facility at what could be ~150bps of rate improvement over the current ~6.75% in place. Following the closing, which will allow CLDT & Cerberus to distribute out their remaining principal investment in the JV, mgmt. should be able to provide greater clarity on CLDT’s share of the Innkeepers promote. Also of note, a few weeks ago CLDT’s largest stock holder or record, HG Vora Capital Management (9.8% holder), took the deliberate step of amending their existing 13G filing to a more aggressive 13D. The section 4 language of the filing mad clear they’re interested in fomenting and/or participating in strategic alternatives for the co, including a potential sale or take-private transaction. “ As part of their ongoing monitoring and assessment of their investment in the Company’s Common Stock, the Reporting Persons conducted a review of the Company’s assets, liabilities, capital structure, operating performance, business prospects, market valuation and other related matters based on publicly available information. Based on the information reviewed, the Reporting Persons in conjunction with one or more real estate and private equity oriented investment firms, are interested in discussing a range of alternatives with the Company, including but not limited to the potential privatization of the entire Company, subject to further due diligence and other conditions. The purpose of this filing is to facilitate such discussion.” ManagementExperienced management team with proven track record: Chatham’s management team is led by Chairman, President, and Chief Executive Officer Jeffrey Fisher, age 54. Mr. Fisher has over 20 years of lodging industry experience and a proven track record of creating and preserving shareholder value. Prior to founding Chatham, Mr. Fisher was CEO of Innkeepers USA Lodging Trust, a public lodging REIT, from 1994 to 2007. Innkeepers USA Trust was founded in 1994 also by Mr. Fisher, and the company was taken public via an IPO that year. Innkeepers focused on acquiring limited-service and extended-stay hotels, similar to the strategy that Chatham plans to employ. The company grew from seven hotels at the IPO in 1994 to 74 hotels by 2007, when Innkeepers was sold to Apollo for $800M, or 14x last 12 months (LTM) EBITDA. Fisher is president, founder, and 90% owner of Island Hospitality Management, a privately-held hotel-management company. For better or worse, many traditional REIT investors recall that Mr. Fisher’s management of the Innkeepers hotels netted him $45M when Apollo terminated the contracts. Subsequently, Mr. Fisher’s management company was rehired as manager of the properties but with short term contracts, which provided Apollo with more flexibility. While the public markets obsess over the use of a management co. owned by the landlord’s CEO, this is in reality no different than what we see in other lodging REITs such as AHT.