The REIT Way To Play A Rebounding Economy

| About: Ashford Hospitality (AHT)

REITs (Real Estate Investment Trusts) are a long-time favorite of many stock market investors for their typically high yields, tax-favored status, and the ability for any investor to gain an equity stake in real property. While many REITs got slaughtered during the brutal real estate crash of 2008, and many others went belly up, there have been survivors who have struggled through and may reward investors greatly in a rebounding economy.

REITs are often a leveraged bet on a certain real-estate sector; you can find REITs servicing a vast array of real estate subclasses, including: single-family housing, multi-family housing, apartment buildings, malls, gas-stations, retail outlets, and senior living facilities. The beauty of this diversity is that it offers investors the ability to pick and choose the specific real-estate exposure they wish to provide their individual portfolio.

The most obvious bets to make on a rebounding economy may be seen through investment in hotels, leisure or gambling facilities, tourist areas, prosperous economic areas, etc. There are also ways to make specific demographic bets based on your analysis of the United States populations. One example could be investing in senior living facilities, hospitals, or areas of the country which tend to attract large amounts of Baby Boomers.

One REIT that I believe will outperform greatly in a rebounding economy is Ashford Hospitality Trust, Inc. (NYSE:AHT) Here is a business summary from Ashford's website:

Ashford Hospitality Trust

"Ashford Hospitality Trust, Inc., (Ashford) together with its subsidiaries, is a self-administered real estate investment trust (REIT) focused on investing in the hospitality industry. The Company owns its lodging investments and conducts its business through Ashford Hospitality Limited Partnership, its operating partnership. Ashford OP General Partner LLC, which is a wholly owned subsidiary of the Company, serves as the sole general partner of its operating partnership. It operates in two business segments within the hotel lodging industry: direct hotel investments include owning hotels through either acquisition or new development, and hotel financing includes owning subordinate hotel-related mortgages through acquisition or origination. In March 2011, the Company acquired 96 hotel condominium units at WorldQuest Resort in Orlando, Florida. During December 1, 2011, the hotel property held by a joint venture in which it had an interest of 89% was leased on a triple-net lease basis."

The latest annual report had many positive developments about the prospects of the company and its view on future business projections. Below are some key excerpts I have selected from the 2011 Year End Financial Results:

Financial Highlights

  • Adjusted funds from operations (AFFO) was $0.42 per diluted share for the quarter, the company's 8th consecutive quarterly year over year increase and a record for the fourth quarter
  • Adjusted funds from operations was a record $1.86 per diluted share for the entire year
  • Hotel operating profit margin increased 143 basis points for all Legacy hotels in continuing operations
  • Hotel operating profit margin increased 177 basis points for the 25 hotels in the Highland Hospitality Portfolio not under renovation in continuing operations
  • Fixed charge coverage ratio was 1.70x under the senior credit facility covenant versus a required minimum of 1.35x
  • In December, Ashford successfully restructured its $203.4 million mortgage loan and extended the maturity date from December 2011 to March 2014 with a one-year extension option
  • Subsequent to the end of the fourth quarter, the company increased the size of its senior credit facility from $105 million to $145 million with the option to expand it further to a maximum size of $225 million
  • The company's only recourse obligation is its senior credit facility, which currently has no outstanding balance
  • At the end of the fourth quarter, Ashford had cash and cash equivalents of $167.6 million
  • In December, the Board of Directors approved a 10% increase in the Company's dividend policy for 2012; Ashford expects to pay a quarterly dividend of$0.11 per share for 2012

The actions and debt re-structuring taken on by Ashford's Management in the most recent year show that it is actively shoring up the financials, decreasing its debt burden, and striving to increase shareholder value. The fact that banks are open to extending loan facilities with the company is a great sign in itself, as bankers are privy to the most detailed financial information available, and are notoriously conservative with their capital in the current lending environment.

Ashford also focuses most of its investment properties in middle to upscale hotels, with the majority of their branded properties being Marriott or Hilton. These hotels cater to a more high-end clientele, the people who have seen their stock investments and extensive portfolios double from the bottom and are feeling much richer.

This demographic has already shown its willingness to spend recently with the resurgence in travel, high-end retail purchases, and a general increase in spending behaviors of the wealthy over the past year. Even the political will seems to be in the affluent's favor, as Wisconsin Rep. Paul Ryan demonstrates with his recent bill to cut food-stamps for the poor while preserving the Bush tax cuts, which benefit the top 10%. Why not make an investment based on the American political and economic circumstances that will further enrich the elite class?

Ashford Hospitality makes for an intriguing investment if you believe that our economy is firmly on the path to recovery. As our economy keeps improving and consumers are able to spend more money on luxuries, travel, accommodations, and vacations; companies that cater to this segment will be rewarded handsomely. The wealthy will be the first demographic to feel the positive affects of a recovering economy, and be the first to spend like it. This will eventually trickle down to the middle and lower income earners as the business owners and wealth creators are encouraged to invest in growth, quality employees, and additional business opportunities.

This makes AHT a great candidate to be an early mover in the upswing of a return to a strong economy. As the jobs picture improves and the general population begins to feel better about their situation, they will begin traveling and staying at Ashford's locations more and more frequently. The higher capacity rates should therefore lead to increasing pricing ability, profits, dividends, and share performance of the company.


The current 4.93% dividend yield that is paid by the company is certainly not as high as other some other alternatives, but is nothing to sneer at. There is room for increasing the payout to shareholders as business fundamentals continue improving. In addition, the book value of the company is $14.31, and the forward P/E ratio is at 4.85. The reason the price is currently depressed at under $9.00 is the worrisome debt load, but in an improving economic backdrop, with improving fundamentals, and a possibility of higher inflation down the road, I do not view this equity at risk of insolvency. The fundamentals show a company that is highly levered to the economy, but also one that is coiled to produce some fantastic share price increases if the execution of the business plan within an improving economic environment does indeed take place.

Monty J. Bennett, Chief Executive Officer, commented, "This was a record quarter and year for Ashford in several respects. It represents seven out of eight years of record AFFO per share performance, including our eighth consecutive quarterly year-over-year AFFO per share increase and another record fourth quarter of AFFO per share. We believe significant upside exists given the early stages of the economic recovery, improving macroeconomic fundamentals and the lack of new supply over the next few years. Further, we continue to maintain a conservative approach to capital and liquidity so that we are prepared for economic uncertainties, while positioning ourselves to take advantage of opportunistic investments as they arise. Our strategic approach has served us well during this economic environment, but our focus on improved operating performance and maximizing shareholder returns remains a constant."

It is my view that our economy will improve over the next few years, aided by currently unforeseen events and developments, and that Ashford Hospitality Trust is well positioned to reward shareholders handsomely. I always recommend investors scale into investments using both time and price variables, as well as using stops to narrow risk as much as possible.

For the more conservative or income-oriented investors, please take a look at AHT-A, AHT-C, and AHT-E for yields above 8% with a lower risk profile.

Disclosure: I am long AHT.