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Chatham Lodging (CLDT) Acquires Embassy Suites for $68M

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Chatham Lodging Trust (CLDT - Free Report) announced the acquisition of the Embassy Suites by Hilton in Springfield, VA, for $68 million. The transaction has been done for approximately $310,000 per suite.

The company has used cash from its recent 5,000,000 share offering to fund the 219-suite hotel acquisition. It had raised approximately $109 million from the share offering and with this off-market transaction the company has invested around 81% of the offering proceeds.  

The company also noted that Island Hospitality Management will manage the property. Embassy Suites, which opened in August 2013, features 26 extended-stay suites with full kitchen, in addition to the typical all-suite model. It also gives the company flexibility to convert more suites in the extended-stay suite format. This will enable Chatham Lodging to achieve higher average room rate and longer length of stay from long-term extended-stay guests.

Embassy Suites is less than two miles away from Fort Belvoir — the nation’s 5th largest military base that employs more than 51,000 military and civilian employees in Fairfax County. The property also enjoys close proximity to National Geospatial-Intelligence Agency that employs 16,000 people. Also, the recent announcement of the relocation of the Transportation Security Administration headquarters in close vicinity to the hotel is likely to boost employment and training opportunities in the area.

Per management, substantial demand has been rising from government/military business, but corporate demand also remains noticeable. This is because Fairfax County has a high concentration of technology jobs and enjoys presence of eight Fortune 500 companies. This makes the corporate demand not only high but also well diversified in this region.

In addition to the above, Chatham Lodging noted that this premium property has been top ranked within the Embassy Suites brand for two consecutive years. Considering negligible new development and low new supply in the near term, Chatham Lodging will likely enjoy higher pricing power and hence the acquisition is a strategic fit. In fact, management anticipates that the hotel will add around 10% revenue per available room (RevPAR) to its portfolio. This premium asset requires no capital expenditure in the near term and is anticipated to improve the company’s portfolio age.

As such, the above-mentioned acquisition is appropriate for this hotel real estate investment trust (REIT)  which is aimed at acquiring premium branded extended-stay hotels. However, Chatham Lodging’s efforts to sell non-core assets that generate lower RevPAR will result in dilution of earnings in the near term.

This Zacks Rank #3 (Hold) company has outperformed its industry year to date. Chatham Lodging’s shares have gained 9%, while the industry recorded growth of 3.7% during this time frame.

Some better-ranked stocks in the REIT space are Franklin Street Properties (FSP - Free Report) , Columbia Property Trust (CXP - Free Report) and MedEquities Realty Trust (MRT - Free Report) . All three carry a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Franklin Street Properties’ funds from operations (FFO) per share estimates for 2017 remained unchanged at $1.05 over the past month. Its share price has increased 6.8% in three months’ time.

Columbia Property Trust’s FFO per share estimates for the current year have moved up 2.7% to $1.15 in a month’s time. Over the past three months, the company’s shares have gained 4.8%.

MedEquities Realty’s FFO per share estimates for 2017 increased 0.9% to $1.12 over the same time frame. Year to date, its shares have lost 1.9%.

Note: All EPS numbers presented in this write up represent funds from operations (“FFO”) per share. FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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