2023-06-29 15:00:49 ET
Summary
- The company's portfolio comprises 100 hotels across 26 states, with Marriott, Hilton, and Hyatt brands contributing to approximately 90% of the FY 2022 EBITDA.
- The company has a substantial debt burden of approximately $3.8 billion, with $590 million due by the end of 2024 and an additional $2.6 billion due in 2025.
- The company's current cash on hand is barely sufficient to cover 1 year of interest payments, raising concerns about its financial stability and sustainability.
- Ashford Hospitality Trust does not pay any dividends and has a history of diluting its shares, causing a significant decline in the company's share price.
Introduction
I have written about several hospitality REITs in the past few months, covering full-service REITs such as Hersha Hospitality Trust ( HT ) as well as select-service REITs like Apple Hospitality REIT ( APLE ). The focus of this article, Ashford Hospitality Trust ( AHT ), is similarly a hospitality REIT. In this article, I will evaluate the company to determine if it will be a worthwhile investment.
The Business
Ashford Hospitality Trust is a hospitality REIT specializing in upscale and upper upscale full-service hotels. The company's hotels are mainly under prominent brands, with its Marriott, Hilton and Hyatt contributing to approximately 90% of the FY 2022 EBITDA. As at 31 March 2023, the company's portfolio comprises 100 hotels across 26 states, with a total of 22,316 rooms.
In addition to its core hotel operations, the company has several other interests. The company holds various investments in other sectors, including condominium units in Florida, a 15.1% ownership stake in OpenKey, a 32.5% ownership stake in the developer of Le Meridien Fort Worth and an investment in an entity that owns two resorts in Napa, California. However, the company's hotel portfolio represents the bulk of the company's revenue stream.
Q1'23 Performance
For Q1 2023, Ashford Hospitality Trust reported revenue of close to $330 million, reflecting an increase of 30% compared to the same period last year. However, despite this surge in revenue, the company incurred a loss of $64.6 million or a loss of $1.88/share, up from a loss of $58.5 million or $1.71/share for Q1 2022. The primary factor behind this loss was a significant rise in the company's interest expense, nearly doubling from $43.5 million in Q1 2022 to $81.5 million in Q1 2023.
On a positive note, however, the company saw improvements in several other metrics. Its adjusted funds from operations (AFFO) came in at $0.19/share, compared to a loss of $0.04/share in Q1 2022. The company also saw its revenue per available room (RevPAR) increase by nearly 30% to approximately $125, driven mainly by a 17% rise in occupancy and a 10% increase in average daily rates (ADR). In terms of comparable EBITDA, the company saw a growth rate of 61% to $90.8 million. Additionally, there has been a substantial reduction in the number of the company's hotels classified as cash traps. As at Q1 2023, 40% of its hotels are cash traps, compared to 79% in Q4 2022. It should be highlighted that the hotels no longer classified as cash traps generated approximately 70% of the company's EBITDA for the FY 2022. As more of the company's hotels exit their cash trap status, additional cash will become available to the company and the company's performance should improve.
Balance Sheet
As of Q1, 2023, the company had $344.9 million in cash and cash equivalents. While this may seem like a large amount, this pales in comparison to the company's substantial debt burden of approximately $3.8 billion. This high level of leverage raises some concerns about the company's financial stability and sustainability. Of particular concern is the debt maturity schedule.
By the end of 2024, the company will have to repay $590 million of its debt. Just this obligation alone will completely deplete the available cash and cash equivalents currently held by the company. To compound matters, an additional $2.6 billion is due in 2025. These upcoming maturities highlight the urgent need for the company to find various avenues to either refinance the debt or repay it. It also does not help that the company's debt has a high interest rate. While 93% of its debt is fixed-rate, which would ordinarily be a positive as it provides stability and protection against potential interest fluctuations, the company's average interest rate is currently 7.1%. To provide some context, the company's current cash of $344.9 million is approximately 9% of its total debt. In other words, the company's current cash on hand is barely sufficient to cover 1 year of interest payments, let alone any principal repayments.
Dividend
Similar to other hospitality REITs, the company saw its dividend payments affected by the pandemic. As a result, the company suspended its dividends in 2020. However, unlike some of its peers, the company has yet to resume any dividend payments. In fact, during the Q1 2023 earnings call , management explicitly stated that they did not anticipate reinstating its common dividends for the foreseeable future.
Before the pandemic, the company had been paying a quarterly dividend of $0.06/share, representing a 50% reduction from its previous dividend amount of $0.12/share. This reduction reflects the challenges faced by the company even prior to the pandemic.
Valuation
When investing in REITs, dividends play a significant factor for investors. However, as the company doesn't pay any dividends, we will need to consider if there are other possible reasons for investing. The only other possible reason is if the company is currently undervalued, allowing potential investors to benefit from any appreciation in the company's share price.
A brief look at a history of the company's share price shows a substantial decline over the past few years. From around $75 during the height of the pandemic, the company's share price has fallen significantly to the current level of approximately $3.50. This would seem to suggest that the company's shares are undervalued, company to a couple of years ago.
The Seeking Alpha quant rating for the company's valuation is an overall "A+", indicating that the shares are attractively valued. In terms of price-to-AFFO, the company is trading at a multiple of 1.68, compared to the sector median of 14.04. However, it should be noted that while the overall rating is an "A+", the company gets an "F" when it comes to its debt-to-capital ratio.
Additionally, investors should note that the company has been diluting its common shares repeatedly in recent years. In just a two-year period, from 31 December 2020 to 31 December 2022, the company diluted its shares by over 20 times. Using a rough estimate, dividing the company's previous share price of $75 by 20 times gives us a share price of $3.75, approximately the current share price today. Thus, with all things considered, if the only change is in the number of outstanding shares, the company's valuation doesn't seem to have changed over the years.
In fact, a look at the graph below, which shows the market capitalization of the company over the years, show that it is pretty much in line with its 2020 values.
Conclusion
The company is highly leveraged, and there are concerns over its ability to meet its debt obligations in the near future. Additionally, the company has a history of diluting its shares, meaning the shares are not trading at a discount despite their significant decline over the past few years. The company also does not pay any dividends, and it doesn't look likely to do so in the near future as well. Hence, I find no compelling reason to invest in the company and I have a "Sell" rating on the company. I am curious to see how things turn out for the company in the next few quarters as its liabilities mature, and I will evaluate the company again in a few months.
For further details see:
Ashford Hospitality Trust: Substantial Debt, No Dividends