Stock Wars: Chatham Lodging Trust Vs. Sunstone Hotel Investors

Benzinga’s weekly Stock Wars matches up two leaders in a major industry sector with the goal of determining which company is the better investment.

This week, the duel is between two real estate investment trusts (REITs) focused on the lodging sector: Chatham Lodging Trust CLDT and Sunstone Hotel Investors Inc SHO.

The Case For Chatham Lodging Trust: This REIT was organized in October 2009 by Jeffrey H. Fisher, who founded the lodging REIT Innkeepers USA Trust in 1994 and ran it through 2007, when he sold it for $1.5 billion. Prior to that, he was president and CEO of JF Hotel Management, Inc.

Chatham Lodging Trust, which went public in April 2010, currently owns 43 hotels totaling 6,451 rooms/suites in 16 states and the District of Columbia. Among its recent corporate developments were last month’s sale of four hotels (three in Texas and one in Massachusetts) for approximately $80 million, and the first quarter opening of the 170-suite Home2 Suites by Hilton Woodland Hills Warner Center in Los Angeles and the off-market acquisition of the beachside 111-room Hilton Garden Inn Destin Miramar Beach in Florida for $31 million.

In its most recent earnings update, the first quarter data published on May 4, Chatham Lodging Trust reported total revenue of $54.8 million, up from $32.1 million one year earlier, and a net loss of $9.7 million versus net income in first quarter 2021 of $2.7 million. The loss per common share of -23 cents was less satisfactory than the 6-cent income per common share one year earlier. And during the quarter, the board of trustees declared a preferred share dividend of 41 cents per share.

“Since getting past the impact from the COVID-19 Omicron variant midway through the first quarter, we have seen an acceleration in travel, especially business travel, across many of our key markets,” said Fisher. “The outlook for business travel continued to strengthen in April and early May, and we are positioned to outperform our peers as the business traveler returns. Occupancy is accelerating, and we are emphasizing the importance of pushing rates to our operating team.”

Fisher added that weekday occupancy was “48% in January before jumping to 60% in February, 68% in March and 72% in April. In fact, April weekday and full-month occupancy of 73% was the second-best performance since the start of the pandemic.”

Chatham Lodging Trust’s shares opened for trading on Wednesday at $13.48, sandwiched between its 52-week range of $11 and $15.12.

See Also: The complete Benzinga Stock Wars series

The Case For Sunstone Hotel Investors: This company traces its roots back to Bob Alter founding Capstone Properties in 1985. He took the company public in 1995 as Sunstone Hotel Investors because the Capstone name was taken. The company was acquired in 1999 in a leveraged buyout and went public again in 2004.

Today, the company owns 15 hotels in six states and the District of Columbia comprised of roughly 7,700 rooms. In its recent corporate developments, Sunstone Hotel Investors acquired the 339-room The Confidante Miami Beach from a Hyatt Hotels Corporation H for $232 million and will rebrand it as the Andaz Miami Beach. It also sold two Chicago hotels: the 368-room Embassy Suites Chicago and the 361-room Hilton Garden Inn Chicago Downtown/Magnificent Mile for $129.5 million. The company also incurred nearly $2 million in restoration expenses for a pair of New Orleans hotels that were damaged in last August’s Hurricane Ida.

In its most recent earnings update, the first quarter data published on May 4, the company reported total revenue of $172.3 million, up from $50.6 million one year earlier. It also reported a net income of $15.1 million, compared to a net loss of $55.2 million in the previous year. The income per common share of 5 cents was an improvement from the first quarter of 2021’s 26-cent loss.

And the board of directors declared cash dividends of 44 cents per share payable to its Series G cumulative redeemable preferred stockholder, 38 cents per share payable to its Series H cumulative redeemable preferred stockholders and 35 cents per share payable to its Series I preferred stockholders.

“Despite getting off to a slow start due to the lingering impact of the omicron variant, we saw significant demand acceleration as the first quarter progressed,” said CEO Bryan A. Giglia. “The positive trends continued into April, and we anticipate that the second quarter will be another quarter of meaningful growth for our portfolio.”

Sunstone Hotel Investors shares opened for trading on Wednesday at $12.68, sandwiched between its 52-week range of $9.93 to $13.91.

The Verdict: Both REITs emerged from the first quarter with great expectations for the second quarter and beyond, thanks to COVID-19's damage to the hospitality industry being reduced as time went on.

However, while COVID-19 appears to be primarily seen today in the rear-view mirror, there are new potholes on the road ahead for the lodging industry: historic high inflation rates and record-breaking gas prices. Whether this lethal one-two punch will keep people from traveling this year has yet to be seen, but it will certainly dampen whatever full-throttle progress the two REITs hoped to make this year.

REITs are a solid (if not sexy) investment vehicle that always pay dividends, so in that sense it would not be a problem to recommend these two companies. However, given the state of the economy and its impact on the lodging sector, the verdict in this Stock Wars duel is a wait-and-see response for at least another two quarters. This is hardly a slam on how these REITs are run, but it is a commentary on the wider economy’s potential impact on the lodging sector.

Photo: Photo Mix / Pixabay