Ashford: The Right REIT for Right Now

Nov. 6.08 | About: Ashford Hospitality (AHT)

Ashford Hospitality Trust (NYSE: AHT) reported Q3 earnings yesterday.  Just as I wrote a few days ago, I believe the company is extraordinarily undervalued and carries a mammoth dividend with little chance of being cut in any significant way, if at all.  This doesn’t even mention that the amount of cash they have on hand is equal to the market capitalization.  That’s just insane, the result of a totally irrational market.

Its strategy of making mezzanine loans to other hotel companies also gives it far more flexibility in how it allocates its capital, unlike pure-play hotel companies like Starwood (NYSE: HOT), Marriott (NYSE: MAR), Felcor (NYSE: FCH), Hospitality Properties Trust (NYSE: HPT), Host Hotels (NYSE: HST), and LaSalle (NYSE: LHO).

With hotel REITs, we are reminded that net income is not a terribly important number.  We first want to examine ADR, Occupancy, and RevPAR data to determine how the economy is affecting Ashford’s ability to meet expenses, service debt, pay preferred and common dividends, and meet Capex requirements.

For its year-over-year results, occupancy declined 2.06% vs. the industry average decline of 3.7%.  Nevertheless, Ashford retained pricing power and so ADR actually rose 1.9% vs. the industry average of 2.7%.  The net result was a 0.9% decrease in RevPAR for all of its hotels (it was nearly flat for hotels not under renovation) vs. a 1.1% industry decline.  Considering the doom-and-gloom forecasts for the hotel industry, and the large cutbacks in airline capacity, Ashford is holding its own along with the rest of the sector. Meanwhile, Ashford’s expenses dropped by 0.9% as well, keeping pace with the revenue decline. 

Reading through the rest of the financial statements, the cash flow provided by operations was more than sufficient to cover the expenses, service the $38.4 million of interest, pay all dividends, and meet the $25.3 million Capex requirements.  We’ll note that Cash Available for Distribution (CAD) came in a penny shy of what was needed, but that Ashford had more than offset any shortfall during their first two quarters.  Total CAD coverage so far this year is 131%, so they remain ahead of the game going into Q4.   We’ll also note that Q3 is historically their weakest quarter.

As I discussed in my last article, Ashford has barely any debt due over the next two years, and plenty of flexibility to push off payments for several years.  Their debt service will be limited, having purchased rate caps, giving their current LIBOR-based debt a weighted average of 6.25%.  As we’ll see in a moment, even a devastating hit to revenue will still not affect their ability to meet all of the criteria set forth above.

The great news is that because the market has clocked Ashford so badly – at one point recently its stock was marked down to $0.86 – management has taken the opportunity to gorge itself on its own shares.  Besides buying back 9.9 million shares in Q3, the company announced it has already purchased 17.2 million this quarter, and that $20 million of their $75 million buyback plan remains.  

With Wednesday’s closing price of $2.07, expect Ashford to buy back as much common as they can, probably in the range of 6 – 7 million more common shares.

It gets better. After my last article, several astute readers alerted me to the fact that Ashford's Series D Preferred shares were trading at 30 cents on the dollar! As these shares are callable in 2012, owners at today's price of $7.36 are getting a huge discount on their investment – and that doesn't even include the $2.11 per share in annual dividends (currently a 30% yield). As long as Ashford doesn’t go under, which seems highly unlikely to me, those dividends are cumulative and must be paid.  No wonder the Board has permitted management to buy back the Preferred, as well. 

Wait, there’s more. Ashford is sitting on $225 million in cold cash…and has a market cap of $207 million. Am I to believe that their 103 hotels are worth nothing?  Ha!  Even if we ignore the fact that book value for the company is $10, assume the hotels are “only” worth $6 per share, the company is still ridiculously undervalued.

Between the 17.2 million shares repurchased so far this quarter, and projecting another 6 million common and, say, 1 million Preferred, their total dividend payment requirement will decrease by almost $20 million.  That gives them a hedge against a RevPAR decline of almost 10% in this quarter -- which is unheard of in modern hotel history, even after 9/11.

Ashford is in solid shape.  If you disagree, then I again invite you to challenge me by leaving a comment below or sending a note to mailto:pdlcapital@earthlink.net.  Nobody threw down the gauntlet after my last article, so am I to believe there isn’t a single naysayer out there? 

Full Disclosure:  Long AHT Common and Preferred Series D.