Chatham Lodging Trust (CLDT)

Executive Summary / Key Takeaways

• Balance Sheet Transformation Complete: Chatham Lodging Trust has engineered a remarkable deleveraging, reducing its leverage ratio from nearly 35% in 2019 to 23% by 2024 while addressing $500 million in maturing debt. This positions the company with its lowest leverage since its 2010 IPO and creates unprecedented strategic flexibility.

• Capital Allocation Pivot to Shareholders: Management has initiated its first-ever share repurchase program, buying back approximately 500,000 shares at an average price of $6.85 through October 2025. This move signals that leadership views the stock as significantly undervalued relative to asset values, with approximately $21.6 million remaining under the $25 million authorization.

• Asset Recycling Creates Value: The opportunistic sale of five older hotels (average age 25 years) at a 6% capitalization rate generated $83 million in proceeds. These assets were among the six lowest RevPAR properties in the portfolio, and management is redeploying capital into higher-yielding opportunities including share buybacks, acquisitions, and a development project in Portland, Maine.

• Operational Resilience Amid Volatility: Despite a 2.5% same-property RevPAR decline in Q3 2025 driven by specific headwinds in Silicon Valley and Washington D.C., Chatham has beaten industry RevPAR growth for 14 consecutive quarters. The company's extended-stay focus has maintained GOP margins at 44% while peers face more severe pressure.

• Silicon Valley Recovery Represents Asymmetric Upside: The company's four Silicon Valley hotels remain over 20% below 2019 RevPAR levels, creating a potential catalyst for significant earnings expansion if the market recovers. Management's decision to maintain rate integrity rather than discount aggressively suggests confidence in long-term pricing power.

Setting the Scene: The Quiet Transformation of a Select-Service Lodging REIT

Chatham Lodging Trust, formed as a Maryland real estate investment trust in October 2009 and commencing operations in April 2010, has spent the past three years executing one of the most deliberate balance sheet repositionings in the lodging REIT sector. While most investors focus on RevPAR fluctuations and occupancy rates, the real story at Chatham is a fundamental transformation from a highly leveraged property owner to a nimble capital allocator with multiple levers to create shareholder value.

The company operates as an internally managed REIT, a structure that eliminates external management fees and aligns management incentives directly with shareholders. This matters because it results in a lower cost structure compared to externally managed peers, directly supporting margin performance. Chatham's investment strategy focuses exclusively on upscale extended-stay and premium-branded select-service hotels, a niche that has proven more resilient through economic cycles than traditional transient-focused properties. The extended-stay model generates higher occupancy stability and longer average length of stay, which translates to more predictable cash flows and lower operating costs per occupied room.

To maintain REIT status, Chatham operates through an operating partnership that leases properties to wholly-owned taxable REIT subsidiary lessees, which then engage third-party managers. Critically, all 34 hotels as of September 30, 2025 are managed by Island Hospitality Management, LLC, a company owned by Chatham's Chairman, President, and CEO Jeffrey H. Fisher. This affiliated relationship provides unique insight into property-level operations and enables faster decision-making, though it also requires careful governance to ensure arms-length transactions.

The lodging industry structure has shifted dramatically since 2019. Construction costs have risen so substantially that new hotel development yields inadequate returns in most markets, creating a supply-constrained environment that favors existing owners. Chatham's portfolio is positioned in markets with high barriers to entry near strong demand generators, including technology hubs, medical centers, and government installations. This positioning becomes increasingly valuable as supply growth remains muted at less than 1% across the portfolio.

Strategic Differentiation: The Extended-Stay Moat

Chatham's competitive advantage rests on its concentrated focus on upscale extended-stay hotels, which represent a fundamentally different economic model than traditional select-service or full-service properties. Extended-stay guests typically book for weeks or months rather than nights, creating occupancy stability that transient hotels cannot match. This manifests in tangible financial benefits: lower guest acquisition costs, reduced housekeeping expenses per occupied room, and higher operating margins.

The portfolio composition reflects this strategy. As of September 30, 2025, Chatham owned 34 hotels with 5,166 rooms across 15 states and Washington D.C., with heavy concentration in extended-stay brands like Residence Inn, Homewood Suites, and Home2 Suites. This focus has enabled the company to achieve the highest RevPAR among select-service lodging REITs for three consecutive years, demonstrating the quality of its assets and markets.

The affiliated management structure through Island Hospitality provides another layer of differentiation. Unlike most REITs that rely on third-party managers with competing priorities, Chatham's management company is exclusively focused on its portfolio. This alignment allows for more aggressive cost control and faster implementation of operational improvements. In Q3 2025, this showed up in labor and benefits costs per occupied room increasing only 2% despite inflationary pressures, while headcount at comparable hotels decreased 3% from year-end.

Recent portfolio actions reinforce this strategic focus. The five hotels sold between December 2024 and April 2025 had an average age of 25 years and were among the six lowest RevPAR properties in the portfolio. By divesting these assets at a 6% cap rate, Chatham eliminated future capital expenditure requirements while generating $83 million for redeployment into higher-yielding opportunities. This is classic asset recycling: selling mature, lower-growth properties to fund investments in assets with superior return profiles.

Financial Performance: Evidence of Strategic Execution

Chatham's third quarter 2025 results tell a story of operational discipline amid external headwinds. Total revenue declined 10.1% to $78.41 million, but this was entirely driven by the sale of five hotels and specific market challenges rather than systemic weakness. Same-property RevPAR decreased 2.5%, but excluding the impact of two Sunnyvale hotels where management deliberately declined substantial discounts to maintain rate integrity, portfolio RevPAR would have declined only 1.7%. This decision cost short-term revenue but preserved long-term pricing power—a trade-off that demonstrates strategic thinking over quarterly optimization.

The Washington D.C. market presented another temporary headwind. The threat of government shutdown impacted Q3 RevPAR by approximately 40 basis points, and in October, the three D.C. hotels were down 19%, dragging overall RevPAR down 170 basis points. However, this creates a potential tailwind when government travel normalizes, as the company maintains strong relationships with federal agencies and contractors.

Despite these challenges, Chatham's margin performance remained robust. Gross operating profit margins declined only 70 basis points to 44% in Q3 2025, a remarkable achievement when RevPAR fell 2.5%. This margin resilience stems from disciplined expense management: property taxes, ground rent, and insurance decreased $1.2 million year-over-year due to successful appeals and asset sales, while hotel operating expenses fell $4.2 million. The ability to maintain margins in a declining RevPAR environment proves the operating leverage inherent in the extended-stay model and the effectiveness of the affiliated management structure.

Year-to-date performance shows similar resilience. For the nine months ended September 30, 2025, same-property RevPAR actually increased 0.2%, driven by a 1% occupancy gain partially offset by a 0.7% ADR decline. Total revenue decreased 6.1% to $227.34 million due to six hotel sales, but this was partially offset by $4.6 million in revenue from the acquired Home2 Suites Phoenix Downtown. The property, purchased in May 2024 for $43.3 million, has outperformed expectations with Q3 RevPAR up 6% and October RevPAR up 8%, validating management's acquisition criteria.

Interest expense decreased $2.1 million in Q3 2025 to $6.2 million, reflecting lower debt balances from the multiyear balance sheet repositioning. This direct flow-through to earnings demonstrates the financial impact of deleveraging. Net income of $3.6 million was down from $4.3 million in the prior year, but this includes the temporary headwinds in Silicon Valley and D.C. that should abate.

Outlook: Multiple Levers for Value Creation

Management's guidance for Q4 2025 reflects conservatism in the face of temporary headwinds. RevPAR is expected to decline 3.5% to 2.5%, with Adjusted EBITDA between $16.7 million and $18.3 million. For the full year 2025, the company projects RevPAR growth of -0.7% to -0.3% and Adjusted EBITDA of $89.2 million to $90.8 million. This guidance assumes no further asset sales or capital markets activity and reflects the impact of the D.C. government shutdown continuing into Q4.

The critical insight in management's commentary is their view that 2025's volatility is temporary while long-term fundamentals remain favorable. Jeffrey Fisher, Chairman, President and CEO, stated that "looking past 2025, current GDP growth rates are encouraging, and the outlook is even more so given the massive investments being made by companies across the U.S." He specifically cited the "super cycle" of capital investment, particularly in the Central and Southeastern U.S., where Chatham is actively seeking acquisitions.

The company's capital allocation priorities provide a clear roadmap for value creation. Proceeds from asset sales are funding three initiatives: share repurchases, hotel acquisitions, and the Home2 Portland, Maine development. The $25 million share repurchase program, representing nearly 10% of the company's equity market cap, demonstrates management's conviction that the stock trades at a significant discount to asset value. Having repurchased approximately 500,000 shares at $6.85 average price through October 2025, they have already acquired 1% of outstanding shares and intend to remain active.

The acquisition pipeline appears promising. Management is "somewhat more bullish" on external growth than in the past 18 months, noting that seller pricing expectations are becoming more reasonable. They are targeting high-quality, premium-branded assets in markets benefiting from population migration and business investment, particularly in the Central and Southeastern U.S. The stated criteria require acquisitions to approximate the implied yield of buying their own stock, creating a high hurdle that should ensure accretive deployment.

The Home2 Portland, Maine development represents a unique value creation opportunity. The company plans to start site work in 2026 with a 21- to 24-month construction timeline targeting early 2028 opening. Portland has recently enacted a hotel moratorium, but Chatham is grandfathered due to its pending entitlement application. This restriction on new supply, combined with strong demand from the shipyard and other demand generators, should yield returns 150-200 basis points higher than acquiring existing hotels. The Hampton Inn Portland is already the company's highest RevPAR hotel, demonstrating the market's pricing power.

Risks: What Could Break the Thesis

The most significant risk to Chatham's investment thesis is the uncertain recovery of its Silicon Valley hotels. This market represents a major portion of the portfolio, and RevPAR remains over 20% below 2019 levels. Management has been candid about the difficulty in predicting when these properties will return to prior peaks. Jeremy Wegner, Senior Vice President and CFO, acknowledged that "it's very difficult for us and our operators who have lived and breathed in that market in some cases for over twenty years to put your finger on what kind of RevPAR increase and what kind of return to our 2019 EBITDA levels and RevPAR levels we're going to get." This uncertainty keeps "a lid on our share price until we really have sort of what I would characterize as double-digit RevPAR growth quarter after quarter."

The tech industry's shift to stipend programs for interns and remote work has structurally altered demand patterns. Dennis Craven, Executive Vice President and COO, explained that "most of the tech companies went to a program where they were giving stipends out for any type of intern, and they could put, you know, as many people as they wanted to in a room, in an apartment, or whatever it might be. So we really didn't get much intern business in 2024." This stipend program appears likely to persist, permanently reducing a previously reliable demand segment.

Government-related travel presents another material risk. The D.C. hotels experienced RevPAR declines of 19% in October due to the government shutdown, and the threat of future shutdowns creates ongoing volatility. While Chatham has diversified away from pure government dependence, the three D.C. hotels still represent a meaningful portion of EBITDA. The company is actively shifting sales efforts toward leisure travelers and special corporate business, but this transition takes time.

Execution risk on capital deployment is the third critical factor. Having generated $83 million from asset sales with potentially more to come, management must redeploy this capital accretively. The share repurchase program is a clear win at current prices, but the acquisition pipeline is less certain. If management cannot find suitable acquisition targets meeting their return thresholds, the company could end up with excess cash earning minimal returns, diluting overall returns. Conversely, overpaying for assets in a competitive market would destroy the value created through asset sales.

Valuation Context: Trading at a Historic Discount

At $6.92 per share, Chatham trades at a significant discount to its underlying asset value and historical valuation multiples. The price-to-book ratio of 0.45 indicates the market values the company at less than half its accounting book value, a level typically associated with severe financial distress rather than a company with 23% leverage and strong liquidity.

Management has been explicit about the valuation disconnect. In Q1 2025, Jeffrey Fisher stated the company was "trading at approximately $150,000 per key and at an approximate 9.5% cap rate on forecasted 2025 NOI, a historically low multiple for us as well as most of our peers." This implied cap rate is substantially higher than the 6% rate at which they sold lower-quality assets, suggesting the public markets are pricing the entire portfolio as if it were distressed.

Key valuation metrics support the undervaluation thesis:

• EV/EBITDA: 7.99x, below the 9-11x range of most lodging REIT peers
• Dividend Yield: 5.21% on an annualized basis, well-covered by cash flow with a payout ratio of 34% based on AFFO guidance
• Price-to-Book: 0.45x, indicating significant discount to net asset value
• Price-to-FCF: 5.42x, suggesting strong cash flow generation relative to market cap

The company's balance sheet strength further supports valuation. With net debt to EBITDA of 3.6x as of March 2025, Chatham is among the lowest-leveraged lodging REITs. The September 2025 credit facility upsizing to $500 million ($300 million revolver, $200 million term loan) with an accordion feature to $650 million provides substantial dry powder for acquisitions. As Jeffrey Fisher noted, "We are one of the lowest leveraged lodging REITs and have great flexibility to create value by using that capacity to repurchase shares, acquire hotels and fund our upcoming Home2 Portland, Maine development."

Comparing Chatham to peers highlights its relative undervaluation. Apple Hospitality (APLE) trades at 9.93x EV/EBITDA with 51% debt-to-equity, RLJ Lodging (RLJ) at 9.89x with 106% debt-to-equity, and DiamondRock (DRH) at 10.65x with 75% debt-to-equity. Chatham's 7.99x multiple reflects a valuation discount despite superior balance sheet metrics and consistent outperformance on RevPAR growth.

The share repurchase activity at $6.85 average price provides a clear signal from insiders. When management invests $3.5 million of the company's capital buying back stock, it represents a tangible vote of confidence that the intrinsic value exceeds the trading price by a meaningful margin.

Conclusion: A Transformed REIT at an Inflection Point

Chatham Lodging Trust has completed a quiet but remarkable transformation from a highly leveraged lodging REIT to a nimble capital allocator with multiple levers to create shareholder value. The successful deleveraging from 35% to 23% leverage, combined with the opportunistic sale of lower-quality assets at 6% cap rates, has created a fortress balance sheet that can support accretive growth through share repurchases, acquisitions, and development.

The investment thesis hinges on two critical variables: the recovery of Silicon Valley markets and management's ability to deploy capital accretively. The Silicon Valley hotels represent a coiled spring—if they return to 2019 RevPAR levels, the earnings impact would be substantial. Management's decision to maintain rate integrity rather than chase discounted corporate business suggests they are playing the long game, but the timeline for recovery remains uncertain.

The capital allocation pivot is already delivering value. Share repurchases at $6.85 average price represent immediate accretion given the stock trades at 0.45x book value and a 9.5% implied cap rate. The acquisition pipeline appears more promising than in recent years, with seller expectations becoming more reasonable. The Home2 Portland development offers a unique opportunity to build in a supply-constrained market with returns potentially 150-200 basis points above acquisition yields.

Trading at $6.92 per share, Chatham offers an asymmetric risk-reward profile. The downside is protected by a strong balance sheet, low leverage, and a 5.2% dividend yield. The upside catalysts include Silicon Valley recovery, accretive capital deployment, and potential multiple re-rating as the market recognizes the transformation. For investors willing to look past near-term volatility in D.C. and Silicon Valley, Chatham represents a rare combination of operational excellence, financial strength, and valuation discount in the lodging REIT sector.