Chatham Lodging Trust Series A Cumulative Redeemable Preferred Shares (CLDT.PRA): High Yield, Structural Value, and Balance Sheet Turnaround

The Chatham Lodging Trust Series A Cumulative Redeemable Preferred Shares (CLDT.PRA) currently offer a compelling yield of nearly 8%, driven by a structural undervaluation and a balance sheet turnaround that has bolstered financial resilience. As of June 2025, the preferred shares trade at a meaningful discount to their $25 liquidation preference, while the company's debt reduction efforts and outperforming RevPAR growth position CLDT to sustain dividends amid evolving market conditions.

The High-Yield Opportunity: Discount to Liquidation and Dividend Stability

CLDT.PRA's yield of ~8.1% (as of June 2025) stems from its trading price of $20.37—a 18.5% discount to its $25 liquidation value. This discount has widened periodically, such as on April 11, 2025, when shares dipped to $18.26, briefly pushing the yield above 9%. The annualized dividend of $1.65625 per share remains fixed, creating a yield floor for investors if the company maintains its payout.

The dividend's sustainability hinges on Chatham's financial health. Recent Q1 2025 results show progress: net debt fell to $365 million from $389 million at year-end 2024, and the net debt-to-hotel-investments ratio dropped to 22%—its lowest in over a decade. This deleveraging reduces refinancing risks and supports Chatham's ability to cover preferred dividends, which are cumulative and senior to common shareholders.

Balance Sheet Turnaround: Debt Reduction and Asset Optimization

Chatham's aggressive debt management has been a key driver of its improved financial flexibility. Over the past two years, the company refinanced nearly $500 million in maturing debt, lowering its average interest rate to 6.4% and extending maturities. Critical metrics include:
- Fixed-Rate Exposure: $143 million in mortgages at 7.2%, reducing sensitivity to rising rates.
- Liquidity: A $100 million revolving credit facility, fully available as of March 2025, provides a buffer against cash shortfalls.

Moreover, asset sales—such as the $83 million disposal of five older hotels—have freed capital for strategic investments. The proceeds, paired with stable EBITDA margins (31% in Q1, expected to expand to 34-35% in 2025), reinforce Chatham's capacity to fund dividends even if RevPAR growth slows.

RevPAR Growth: Resilience in Key Markets

Chatham's portfolio has shown uneven but encouraging RevPAR trends. While coastal Northeast properties lagged (-8% year-over-year), tech-driven markets like Silicon Valley (+8% RevPAR) and Los Angeles (+14% RevPAR) offset declines. Management's focus on high-demand markets—such as Austin and Mountain View—aligns with long-term growth strategies.

The company's guidance projects flat-to-1% RevPAR growth for 2025, with second-half improvements expected. This cautious outlook accounts for April's 4% dip (due to holiday timing and economic uncertainty) but balances optimism in Q2's stabilization and Q3/Q4's typical demand peaks.

Risks and Mitigation

1. Dividend Call Risk: CLDT.PRA is callable starting June 30, 2026. If redeemed, investors may face reinvestment challenges at lower yields. However, Chatham's deleveraging reduces urgency to call shares unless rates fall sharply.
2. Economic Downturn: A prolonged slowdown could pressure RevPAR and FFO. Yet, Chatham's 22% net debt ratio and $1.8 billion in hotel assets create a cushion.

Investment Thesis: A High-Yield Play with Structural Upside

CLDT.PRA offers an attractive entry point for income investors seeking a near-8% yield with limited maturity risk. The shares' deep discount to liquidation ($2.63 below value) creates a margin of safety, while Chatham's debt reduction and asset-light strategy enhance dividend sustainability.

However, historical backtesting of a specific strategy reveals critical insights. A strategy of purchasing CLDT.PRA on its ex-dividend date and holding until the next quarterly earnings announcement from 2020 to 2025 generated an average return of -0.75%, significantly trailing the benchmark's 108.04% return. This approach also faced a maximum drawdown of -59.67%, underscoring the risks of short-term timing. These results emphasize the importance of a long-term holding focus on dividend stability rather than attempting to time around earnings cycles.

Actionable Takeaway:
- Buy: For investors seeking income with a 7-10% yield target, given the discount to liquidation and improving leverage.
- Hold: If you already own CLDT.PRA, the call risk in 2026 is manageable unless yields drop significantly.
- Avoid: If you prioritize capital preservation over income, as equity volatility in common shares (CLDT) may spill over to preferreds in a downturn.

In conclusion, Chatham Lodging Trust's preferred shares present a rare blend of high yield, structural undervaluation, and balance sheet progress. While risks remain, the combination of dividend sustainability and RevPAR resilience makes CLDT.PRA a compelling pick for income-focused portfolios.