2023-09-13 04:36:38 ET
Summary
- Ashford Hospitality Trust Inc. has experienced a 23% drop in value since our previous coverage.
- The company's preferred shares have similar total returns despite a large quarterly dividend.
- We tell you why the preferred dividends are likely to continue for some time and the cut will happen too late to use as a signal.
On our last coverage of Ashford Hospitality Trust Inc. ( AHT ) we showed no desire to go dumpster diving and suggested investors avoid the common and the preferred shares. The latter was because their dividend was unsustainable and the former was because infinite dilution was likely at some point.
The company has shown zero reservations in diluting common shareholders so if they do one massive round of share issuance again, it might buy the preferred shares some time.
Source: You Can Check Out Any Time You Like
It was a solid call as AHT dropped 23% since then.
Ashford has five classes of preferred shares.
1) Ashford Hospitality Trust, Inc. PFD Series D ( AHT.PR.D ), coupon 8.45%, current yield 16.41%.
2) Ashford Hospitality Trust, Inc. PFD Series F ( AHT.PR.F ), coupon 7.375%, current yield 15.63%.
3) Ashford Hospitality Trust, Inc. PFD Series G ( AHT.PR.G ), coupon 7.375%, current yield 14.00%.
4) Ashford Hospitality Trust, Inc. PFD Series H ( AHT.PR.H ), coupon 7.5%, current yield 15.94%.
5) Ashford Hospitality Trust, Inc. PFD Series I ( AHT.PR.I ), coupon 7.5%, current yield 15.90%.
Those have generally fallen in line with AHT (only AHT.PR.I and AHT.PR.D shown below to keep chart easy to read), and have a similar total return despite that big quarterly dividend.
We go over three reasons why even the 16% yields have zero attraction for us at this point.
1) Quarterly Interest Likely To Exceed The Market Capitalization Of Common Shares
You heard that right. Quarterly interest expense for Q2-2023 was nearing $90 million, almost twice that of Q2-2022.
Of course the headline press releases focused on REVPAR and revenues, and even some mentions on the Adjusted EBITDA front. But the key number here was the $360 million annual interest payment, which compares rather unfavorably to the market capitalization. One reason the impact has not been worse is that the trailing 12 month figure is still a bit lower.
Once we see a few more quarters at the current run-rate, AHT will feel the full effects.
2) Adjusted Funds From Operations (AFFO) Does Not Tell Half The Story
If you go by the AFFO or FFO numbers, AHT does seem incredibly cheap. After all, 78 cents of FFO in Q2-2023 means that the stock's FFO multiple is going to be close to 1X on an annualized basis. Investors must keep in mind that the FFO is reached after a lot of addbacks. Those additions are regular costs for the company, especially one having to constantly find expensive ways to refinance their debt stack.
AHT 10-Q
So realistically, that FFO number should be interpreted with loads of caution. More importantly, that FFO number should be taken in context of the total debt of almost $4.0 billion.
AHT 10-Q
3) 19 Hotels To Be Surrendered Soon
If you go back to 2021, there was an insane amount of investor confidence in the hotel assets being worth far more than the debt. The comments on this article for example , show the unbridled optimism in the face of daunting challenges. In one way though, the investors got part of the thesis right. The economic rebound from COVID-19 was stupendous. Travel demand came back in spades. Hotel revenues hit all-time highs What part they got wrong was that expenses also rose rapidly. We are not referring to AHT's "all-in" bet on variable interest rates which we covered above. We are referring to operating expenses which grew at almost the same pace as revenues. So here we are at possibly peak GDP prior to another recession and AHT decided to hand back 19 hotels to lenders.
In the interest of protecting stockholder value and liquidity, the company has elected not to make the required paydowns to extend" three KEYS pool loans, which are secured by 19 properties, it said.
The company believes it's in the best interest of its common and preferred stockholders to not make the required paydown of approximately $255M for the non-extended KEYS Hotels," it added. Based on estimates of hotel values and supported by recent comparable transactions and brokers' opinion of values, the REIT believes that the non-extended KEYS Hotels have negative equity value.
The company did extend its KEYS Pool C loan, secured by five hotels with a paydown of $62M; KEYS Pool D loan, secured by five hotels with a paydown of $26M; and KEYS Pool E loan, secured by five hotels with a paydown of $41M.
Source: Seeking Alpha (emphasis ours)
Lots of nuggets there including the fact that the vertical rise in REVPAR still landed the hotels with negative equity value. The $255 million referenced here for the pay down would be impossible to meet in any case. Even the total cash equivalents are less than that and you can forget about accessing all of the restricted cash for this activity.
AHT 10-Q
There is some murkiness as to when these get transferred over, but this should be happening soon.
Bryan Maher
Right. Which brings up another question that I had that I was holding back on, which is, when do we hand these 19 hotels out of our model? I mean, it's kind of important, right? It's not one or two or three, who cares? It's 19 and $700 million worth of debt. I mean, do you or Deric recommend that we all pull these out effective when beginning of the fourth quarter for conservative state?
Deric Eubanks
I mean, it's a good question, Bryan. Look, from my perspective, I'd go ahead and take them out of the portfolio now. I mean, that could happen imminently and it could drag on. So from our perspective, we're ready to hand the KEYS over and so from a modeling perspective, I'd go ahead and take them out.
Source: Q2-2023 Transcript
Verdict
The punchline here, even after the wipeout of $700 million of debt from the balance sheet, is that the company will conduct a large amount of capex.
For 2023, we anticipate spending between $110 million and $130 million in capital expenditures. Looking forward, we are considering several new initiatives across our portfolio, including brand conversions at several hotels, accretive key additions, and executing high margin ROI projects.
Source: Q2-2023 Transcript
The FFO estimate, which has been swinging all over the place (was $2.00 at one point), is now for 50 cents. We won't even comment on the fact that the perpetually optimistic analysts think even this fluffed up number will be negative next year.
But taking that 50 cents of FFO, we get about $17.25 million in total FFO.
FFO is before capex, so you have a cash flow shortfall of close to $100 million in 2023. The preferred dividends are not remotely safe, all things considered. One fact that supports the preferred dividends for now is that the company has been issuing one class of preferred shares.
AHT 10-Q
These shares are redeemable at the option of the holder (unlike the publicly traded preferred shares).
Each share is redeemable at any time, at the option of the holder, at a redemption price of $25.00 per share, plus any accumulated, accrued, and unpaid dividends, less a redemption fee. Starting on the second anniversary, each share is redeemable at any time, at the option of the Company, at a redemption price of $25.00 per share, plus any accumulated, accrued, and unpaid dividends (with no redemption fee). The Company has the right, in its sole discretion, to redeem the shares in cash, or in an equal number of shares of common stock or any combination thereof, calculated based on the closing price per share for the single trading day prior to the date of redemption. The Series J Preferred Stock is also subject to conversion upon certain events constituting a change of control. Upon a change of control, the Company, at its option, may redeem, within 120 days, outstanding shares at a redemption price equal to the Stated Value plus an amount equal to any accrued but unpaid dividends. The Company must pay the redemption price in cash upon a change of control.
The redemption fee shall be an amount equal to:
• 8.0% of the stated value of $25.00 per share (the "Stated Value") beginning on the Original Issue Date (as defined in the Articles Supplementary) of the shares of the Series J Preferred Stock to be redeemed;
• 5.0% of the Stated Value beginning on the second anniversary from the Original Issue Date of the shares of the Series J Preferred Stock to be redeemed; and
• 0% of the Stated Value beginning on the third anniversary from the Original Issue Date of the shares of the Series J Preferred Stock to be redeemed.
Source: AHT 10-Q
So stopping all preferred dividends would likely trigger mass redemptions on these (and series K) and force the company into a Chapter 11. Hence the preferred dividends are likely to continue until all cash runs out.
For further details see:
Ashford: 16% Yielding Preferreds Won't Stop Paying Just Yet