2023-04-21 02:36:16 ET
Summary
- Ashford Hospitality's Series I preferreds are paying a $1.88 annual coupon for a double-digit 11.4% yield on cost.
- Whilst the coupon payments were suspended for more than a year during the pandemic, the current high-interest rate macroeconomic environment does not pose the same level of risk.
- Dividends to common shareholders are yet to be reinstated as Ashford's tangible book value moves further into the red.
Ashford Hospitality ( AHT ) finds itself in a conundrum with its dividends suspended since the pandemic, its commons down 61% over the last year, and a negative tangible book value ("TBV"). The hotel REIT held a portfolio of 22,316 rooms across 100 hotel properties as of the end of its fourth quarter. These realized a RevPAR of $118 during the fiscal 2022 fourth quarter, an increase of 24.9% over the year-ago comp.
The REIT is externally managed by Ashford ( AINC ) and is a sister to Braemar Hotels & Resorts ( BHR ), another Ashford-managed REIT that's reinstated its quarterly payouts. At the core of Ashford's headwinds are that around 79% of its hotel properties are cash traps. Essentially, pandemic-era stay-at-home orders disrupted hotel-level cash flows to render the bulk of the REIT's property portfolio in violation of loan covenants. Ashford at an operating level is not allowed to realize cash from these properties and has to retain cash against these hotels to come back in compliance with its covenants. These hotels constituted 79% of its portfolio at the end of the fourth quarter.
A Negative Tangible Book Value
Hence, the play here is an increase in RevPAR and the gradual shedding of cash traps. Indeed, the REIT expects 40% of its hotels to remain in cash traps under their respective loans for its fiscal 2023 first quarter, down sequentially from 79%. Critically, the hotels coming out of their cash trap during the first quarter generated 70% of the REIT's full-year EBITDA. Ashford now expects RevPAR of around $125 for the first quarter, a 30% increase from the year-ago comp. Although less useful due to seasonality, this would also represent RevPAR growth of 6% sequentially.
This has placed the company's TBV into view as Ashford recorded a negative TBV of $151.25 million as of the end of its fourth quarter, a deterioration from a negative TBV of $3.5 million in the year-ago quarter. This came against total debt of $3.9 billion, only partially offset by cash and cash equivalents of $417.1 million as of the end of the fourth quarter. However, the company held restricted cash of $142 million in lender and manager-held reserve accounts. Negative TBV should start to improve as the REIT emerges from its cash traps over the next few years.
An 11.4% Yield With The Series I Preferreds
Ashford Hospitality Trust 7.50% Series I Cumulative Preferred Stock ( AHT.PI ) is the play here. The company has five outstanding preferreds and most of these should make a good pick except for the Series D which has the lowest yield on cost and the smallest discount to par. There's a ton to like here with the Series I. Firstly, they're currently swapping hands for $16.55 per share against a fixed annual coupon of $1.88 for an 11.4% yield on cost.
Further, they're trading below their $25 redemption value by $8.45, a 34% discount to par to form the next backdrop for total returns for the preferred shareholders. Essentially, you're getting paid $0.47 every quarter whilst you wait for these to anchor more firmly to their redemption price. However, they're currently trading 5 months past their November 17, 2022 call date. Hence, whilst there is a risk that they're redeemed in the near term to deny income, the preferred shareholders would still be provided with what would be a 34% uplift in their position.
I also like that they're cumulative which reduces the likelihood of their coupon payments being suspended against the current rising rate environment. Payments were suspended for more than a year during the pandemic with Ashford following up with a large $2.81 coupon payment in a single quarter after attempting to swap the Series I and other preferreds for its common shares.
To be clear, Ashford is not a REIT for investors who want to sleep well at night. Its management has engineered two reverse stock splits within three years, suspended the common dividends and seen through a 61% decline in the company's valuation over the last year. The commons might be undervalued but the better play for income and capital upside is the preferreds.
Indeed, the performance dichotomy between both securities is stark. The Series I are up 276% on a total return basis over the last three years versus a loss of 95% for the commons. Over the last year and the preferreds are down by 19.3% versus a loss of 61% for the commons. The risk here, albeit highly improbable, is that the REIT is unable to cover the $3.1 million in quarterly payments to its preferred shareholders in any specific quarter and is forced to once again suspend payment for an undefined amount of time. The negative TBV also opens up a unique level of risk that could provide headwinds to the Series I moving back up to par when aggregated with an environment of elevated interest rates and below-average economic growth. Hence, Ashford's medium to long-term future still looks murky even with the removal of cash traps and investors should consider the preferreds over and above the common shares.
For further details see:
Ashford Hospitality: After 2 Reverse Stock Splits, Consider The 11.4% Yield Preferreds