Asset Recycling Will Reshape US Hotel Portfolios Amid Market Risks

Key Takeaways

• Asset recycling and technological efficiencies are strengthening portfolio quality, margins, and long-term revenue growth potential in key travel markets.
  
• Conservative financial management enhances flexibility for acquisitions and buybacks, while demographic tailwinds support sustained occupancy and rate growth.
  
• Heavy dependence on concentrated markets and business travel, plus rising costs and alternative lodging competition, create structural risks limiting earnings growth and revenue stability.

Catalysts

A self-advised, publicly traded real estate investment trust (REIT) focused primarily on investing in upscale, extended-stay hotels and premium-branded, select-service hotels.

• The rising global demand for business and leisure travel, alongside significant corporate investments-particularly in technology-centric regions like Silicon Valley-are driving a sustained recovery, which is expected to boost occupancy, ADR, and ultimately revenue growth across Chatham's portfolio.
  
• Asset recycling-divesting lower-performing, older hotels and using proceeds to invest in higher-quality properties, fund developments in high-growth markets, and undertake meaningful renovations-is improving the average quality and earnings power of the portfolio, supporting higher long-term margins and potential revenue expansion.
  
• Technological and operating efficiencies-including improved labor productivity, targeted use of data-driven booking channels, and expense discipline-are leading to stable or even rising gross operating profit margins, strengthening near
• and long-term net margins despite a flattish RevPAR environment.
  
• Conservative balance sheet management, reduced leverage (now at 21%), and enhanced financial flexibility from refinancing enable Chatham to execute opportunistic share repurchases and acquisitions, which can drive accretive growth in earnings per share and AFFO.
  
• Persistent underappreciation of structural demand tailwinds from demographic shifts-such as the prioritization of experiences and travel by younger generations-positions Chatham for sustained occupancy and rate growth, providing long-term revenue expansion potential often not reflected in near-term stock valuations.

Chatham Lodging Trust Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Chatham Lodging Trust's revenue will decrease by 0.5% annually over the next 3 years.
• Analysts are not forecasting that Chatham Lodging Trust will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Chatham Lodging Trust's profit margin will increase from 0.4% to the average US Hotel and Resort REITs industry of 4.7% in 3 years.
• If Chatham Lodging Trust's profit margin were to converge on the industry average, you could expect earnings to reach $14.2 million (and earnings per share of $0.28) by about August 2028, up from $1.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 40.2x on those 2028 earnings, down from 242.6x today. This future PE is greater than the current PE for the US Hotel and Resort REITs industry at 27.2x.
• Analysts expect the number of shares outstanding to grow by 0.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.7%, as per the Simply Wall St company report.

Chatham Lodging Trust Future Earnings Per Share Growth

Risks

• Geographic concentration in markets like Silicon Valley, Texas, and select Sun Belt cities exposes Chatham to localized economic or demand downturns-such as convention center closures, reduced Canadian and European travel, or temporary underperformance in certain tech or leisure hubs-which can drive revenue volatility and muted RevPAR growth.
  
• Heavy reliance on business travel and convention traffic, as highlighted by weaknesses in the Austin, Dallas, and San Diego markets, makes Chatham vulnerable to long-term secular risks such as increased remote work, reduced corporate travel budgets, and shifts in meeting formats; this could result in structurally lower occupancy and hotel revenues.
  
• Although Chatham has shown recent improvement in margins-helped by nonrecurring refunds and strong cost controls-the company still faces industry-wide threats from persistent labor cost inflation and increased guest acquisition costs (e.g., a 15% increase in commission costs this quarter), which may erode net margins in the medium to long term as these cost pressures mount.
  
• Accelerating asset recycling and hotel sales, while improving near-term balance sheet flexibility, could reduce the size and income-generating capability of the portfolio if proceeds are not redeployed effectively; combined with a subdued acquisition and development environment (noted by wide bid-ask spreads and construction uncertainties), this may limit AFFO and future earnings growth.
  
• Continued growth of alternative lodging platforms and consumer travel pattern shifts (especially if preferences move away from the select-service and extended-stay models Chatham operates) pose secular threats by capping pricing power or diverting demand away from traditional hotels, putting downward pressure on occupancy rates and overall revenue over the long run.

Valuation

• The analysts have a consensus price target of $8.667 for Chatham Lodging Trust based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $305.6 million, earnings will come to $14.2 million, and it would be trading on a PE ratio of 40.2x, assuming you use a discount rate of 9.7%.
  
• Given the current share price of $6.83, the analyst price target of $8.67 is 21.2% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.