REIT Focus On Ashford Hospitality Trust

| About: Ashford Hospitality (AHT)
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This REIT focus is on Ashford Hospitality Trust (NYSE:AHT). AHT is a self-administered and self managed Maryland equity real estate investment trust that invests in the hospitality industry across all segments including direct real estate, securities, equity and debt. AHT owns its lodging investments and conducts its operations in an UpReit structure through Ashford Hospitality Limited Partnership.

A wholly owned subsidiary of AHT is the general partner of the UpReit limited partnership. AHT directly owns 91 hotel properties and five hotel properties through majority owned joint ventures which represent 20,656 rooms all of which are located in the U.S. AHT owns a number of different hotel franchises including Embassy Suites, Hilton, Hampton, Marriott Courtyard, Sheraton and others. AHT commenced operations in 2003 and is headquartered in Dallas, Texas.

For the nine months ended 9/30/11, the RevPAR, average occupancy and average daily rate were $95.30, 73.62% and $129.44, respectively. As of 11/14/11, AHT had 68 million shares outstanding, a stock price of $7.45/sh and a market capitalization of approximately $507 million.

Select financial data for AHT as of the 9/30/11 10Q for the period 1/1-9/30/11 are as follows:

Real Estate Assets


Total Assets


Mortgages and Other Debt


Shareholders’ Equity




Net Loss


Earnings Per Share


Cash Flow from Operations


Senior Credit Facility


Market Capitalization


Debt to:

Market Capitalization




Real Estate Assets Per Room


Dividend Yield ($.40/sh)


NOI and Value Calculation:

Revenues Per above Annualized


Rental, G&A & Other Expenses


Projected NOI


Projected Cap Rate


Projected Value of Portfolio


Less: Total Debt


Value of Company Equity


Shares Outstanding


Projected Value Per Share


Market Price Per Share (11/14/11)


As shown above, our value for AHT is $3.86 per share versus a market price of $7.45 per share. The value difference can be attributed to the use of a higher cap rate of 9.5%, which is the average cap rate for full service lodging properties across the U.S. per the August 2011, CBRE Cap Rate Survey. Some of the value difference may also be due to annualizing the September 30 income and expenses and no incremental value given for goodwill and management. The market, however, is valuing the company at a cap rate of approximately 8.6%, which we believe is too low of a return, given the risks inherent in lodging investments.

Lodging properties are 60% business investments and 40% real estate investments. This is due to the fact that lodging properties have more operating business than real estate characteristics like large staffs, 24/7 operations, ancillary services like shops and restaurants, one night leases and are very sensitive to economic activity. With more business characteristics, lodging properties are subject to more business and financial risk and therefore should be valued at higher cap rates as compared to traditional commercial real estate assets. The other issue with AHT is its high level of debt at 471% of its market cap and 67% of the cost of its properties.

In reviewing the third quarter 10Q, we noticed that AHT created and invested $20 million in a subsidiary that invests in public securities including taking long and short positions in stocks, bonds and options. AHT also purchased a credit default swap derivative for a notional amount of $100 million and a premium of $8.2 million.

It appears that AHT is speculating in the stock, option and credit default swap markets and this seems very strange for a hotel investment and management company. There is no fundamental business reason for AHT to acquire a credit default swap or stock/bond investments other than for speculative investment purposes. It should raise shareholder concerns as to why a hotel REIT, that must distribute 90% of its taxable income as dividends, is using company cash funds to speculate in the stock market. I guess no one remembers the $157 million that Procter & Gamble and the $19.7 million that Gibson Greeting Cards lost in ill conceived derivative investments in the 1990s.

We believe that companies should stick to the core business and invest capital in that business to increase the value of the stock and company. AHT has an attractive dividend at 5.20% but we would not recommend purchasing the stock due to its high price, high level of mortgage debt and stock and derivative speculation activities in the market.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.