Ashford Hospitality: Headed For Bankruptcy

Roberts Berzins, CFA profile picture
Roberts Berzins, CFA


  • AHT operates in a cyclical industry, which is facing major headwinds from the COVID-19.
  • To withstand the crisis, the lodging REITs must have strong balance sheets with large amounts of liquidity on hands.
  • Unfortunately, AHT has neither. It is the most indebted lodging REIT with only $260 million in equity, which would turn negative if COVID-19 lasts for two more quarters.
  • The solvency risk for AHT is very high - stay out of the company.

In my recent article on Host Hotels & Resorts (HST), I argued that despite a heavily depressed sector, there are some hidden gems, which are capable of surviving the crisis and provide exceptional returns once the COVID-19 abates.

However, while screening the lodging REIT sector, I found some very risky companies, which are unlikely to survive the crisis. Ashford Hospitality Trust (NYSE:AHT) is one of them; and, perhaps, the riskiest of them all.

To increase the probability of weathering this storm successfully, companies (REITs) have to possess the following characteristics:

  • Sufficient liquidity on hands
  • Capacity to borrow without breaching any of the set loan covenants
  • Flexible cost base with as minimal fixed costs as possible
  • Lease agreements with embedded minimum guaranteed payments.

AHT has none of the above as elaborated below.

The Thesis

My argument is to sell or at least not to buy AHT in order to avoid permanent capital loses.

Source: Ycharts

As you can see in the graph above, AHT has suffered tremendously. There is about 40% gap between the AHT and HST (i.e. the lodging REIT for which I have a strong buy). Compared to the broader REIT index, Vanguard Real Estate ETF (VNQ), AHT's share price has diverged by 55%.

We all know that the REITs and especially lodging companies have suffered way more than the S&P 500. AHT has considerably underperformed even compared to the VNQ and HST, which are already trading in a depressed territory.

The market seems to be discounting a bankruptcy. It happens rarely, but this time I agree with the market. Have a look below why I think a chapter 11 is the case for AHT.

Extreme Leverage

As alluded to earlier, it is critical to have a sufficient room left to take additional borrowings. For some companies taking more debt

This article was written by

Roberts Berzins, CFA profile picture

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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