Meme traders got burned buying Ashford Hospitality Trust (NYSE: AHT)

Various photographs/iStock Editorial via Getty Images

While the same speculators who drove this stock soaring last summer have been badly burned, longtime holders of hotel REIT Ashford Hospitality Trust (AHT) have suffered even more. The current stock price is not $8.30, it is actually only $0.083 per share for long-time AHT shareholders due to two reverse stock splits. On the bright side, at least they didn’t file for Ch. 11 bankruptcy. Ashford’s problems grew before the pandemic and became more acute when business travelers stayed home. Most of their hotels are upscale and cater to business travelers in major metropolitan areas. If business travel doesn’t improve soon, this REIT could remain in “financial purgatory.”

AHT share price over one year

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Data by Y-Charts

Five-year AHT stock price

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Data by Y-Charts

Latest measurement results

3rd quarter 2021 4th quarter 2021

Revenues $247.4 million $195.9 million

Profit/Loss ($44.0) million ($56.0) million

Adj. EBITDA of $46.8 million $40.7 million

FPE $5.0 million (7.2) million $

Afj. FPE $3.2 million (3.1) million $

RevPAR $97.59 $94.87

Occupancy 62.8% 60.3%

ADR $155.39 $157.29

(Revenue RevPAR per available room)

(ADR average daily rate)

Massive dilution

To avoid bankruptcy, Ashford had to issue a lot of new shares. Effective July 15, 2020, they conducted a 1-10 reverse stock split, then effective July 16, 2021, they conducted another 1-10 reverse stock split. As of February 24, 2022, the company had 34,493,429 shares outstanding, so if they did not have the reverse splits, the current total number of AHT shares outstanding would be 3,449,342,900. As of December 31, 2019, there had 102,103,602 AHT shares outstanding. That’s a lot of dilution over the past few years.

If an investor had 1,000 AHT shares a few years ago, they would only have 10 AHT shares today. It also shows the difference in risk between common stock and preferred stock, which has not been diluted. AHT’s common stockholders were killed, but the preferred stockholders who held fared well.

Total net capital per room Currently v 2019

I decided to compare the total capital per room for the year ending in 2019 to that ending in 2021. This valuation approach does not take into account the valuations of other hotel facilities, such as banquet halls, but it’s still an interesting comparison. In 2019, they had 24,916 rooms. Total net capital per room: debt of $164,800; preferred shares of $22.7,000; Common $11.4,000 using common year-end AHT market capitalization = $198.9,000 minus $16.0,000 total cash per room = $182.9,000 per room in 2019. In 2021, they had 22,313 rooms. Total capital per chamber: debt of $174,200; preferred shares of $7.3,000; $12.8,000 pooled using current AHT price of $8.30 = $194.3,000 minus $31,000 cash per room = $163.3,000 per room currently.

It seems that one of the main reasons why the value per room is currently lower than in 2019 is that the total cash is higher, but if they continue to burn cash, the results per room will come closer. Comparing some metrics between 2019 and 2021, the total value per room in 2021 should actually be even lower compared to 2019, in my opinion. The market appears to ignore 2021 results and AHT pricing based on a much more optimistic outlook for 2022 and beyond.

2021 2019

Revenue $0.655 billion $1.185 billion

Adj. EBITDA $113.6 million $425.0 million

FFO ($53.6) million $89.0 million

Adj. FFO ($28.9) million $145.5 million

RevPAR $79.67 $125.70

Occupancy 55.6% 75.9%

Cash flow problems

Their total cash at the end of 2021 was $691.6 million, including $99.5 million of restricted cash. This total includes cash tied up at the property level. While the number of properties with money trapped improved to 93% from 97% in the prior quarter, it appears the majority of their “loans” may continue to be in money traps over the next 12-24 next few months or more” according to management during their conference call. This money trapped at the property level means that the money cannot be used at the business level and must remain at the property level until certain metrics are met for a loan to that specific property.

This cash issue could partly explain their filing on March 7 SEC Forms S-3 with the SEC to issue up to $500 million in new preferred stock. This is interesting given that they had exchange offers last year to reduce the number of preferred shares outstanding and they could now issue more preferred shares. The money may be used “for general corporate purposes, including, but not limited to, the payment of dividends from our outstanding share capital, the repayment of debt or other obligations coming due, the financing of future hotel-related investments, redemption of outstanding shares of our preferred stock, capital expenditures and working capital” according to the prospectus.

Dividends

The unpaid dividends on the preferred shares were paid at the end of last year. This had to be done in order to use the SEC S-3 method of registration to sell new preferred stock, because you cannot use S-3 if there are unpaid preferred dividends. According to Chief Financial Officer Deric Eubanks, “our current plan is to continue to pay our preferred dividends quarterly going forward, while we anticipate that our common dividend will continue to be suspended for the foreseeable future.”

Based on their statement in the recent prospectus, they would be willing to issue new preferred shares to pay dividends on preferred shares already outstanding. They are therefore ready to increase their leverage to pay preferential dividends.

Outlook – Business travel issues remain

While I think tourist travel could return to pre-pandemic levels, I think business travel will not. People have become much more comfortable with meetings over the Internet instead of face-to-face meetings. Even though more people are returning to their offices, I think a lot of business people don’t want to deal with all the hassle and expense of travel. Traveling in many cases is not profitable. Since you save a lot of time and money by not traveling, not getting a sale by not having a face-to-face meeting can be justified if other sales can be made during the time that would have been devoted to travel. Business travel often has a negative impact on families. In order to have a short face-to-face meeting, a businessman may be away from his family for 1-2 days on a trip and spend the night in a hotel.

Most hotels in Ashford are heavily dependent on business travel. Due to their location, many hotels can no longer attract more tourists. Tourists generally want hotels very close to tourist attractions and are unwilling to travel far from a hotel to an attraction unless the hotel is a bargain. Hotels in Ashford are generally not cheap, they are mid to upper range.

It could be a very long road back to recovery and even their recent presentation stated: “Hosting recovery expected over the next 4+ years”. Not a very bright prospect.

Often hotels are a good hedge against inflation because they can quickly increase the price of their rooms, which increases the value of the hotel building itself. If hotel demand is weak, however, inflation becomes a major negative factor as spending increases faster than it can increase rates. Plus, inflation often means higher interest rates. Given that approximately 92% of their $3.888 billion debt is variable rate loans, an increase of just 1.0% in the base rate would increase interest costs by $36 million per year. This could add to their cash flow problems, especially if interest rates continue to rise.

Management

I think their recent investor presentation was very misleading and raises questions about management, especially since they were investigated by the SEC. Finally the SEC Staff decided not to recommend any action against them.

The chart on page 9 of their presentation that showed their reduction in debt and preferred stock didn’t start at $0.00 – it started at $3.0 billion. This gave the appearance a much more pronounced reduction in debt and preferred shares. He also gave the appearance that total debt and preferred stock are relatively low, this is not the case. It’s still very high.

Deleveraging since 2Q 2020-January 2022 Presentation

AHT Debt and Preferred Stock Deleveraging

Deleveraging since 2Q 2020 – Presentation to investors (ahtreit.com)

Another issue with their presentation was their “Reconciliation of Net Income to Hotel EBITDA” on page 23. The figures shown were for 2019 only. They did not show 2020 or even 2021, which were perhaps not not yet be available. The 2019 numbers looked positive. The other years would have looked very negative. In my opinion, this use of a single positive year was very misleading.

2022 Investor Presentation Reconciliation of Hotel Net Income and EBITDA

Reconciliation of hotel net income to EBITDA (ahtreit.com)

Conclusion

This article is a general overview of Ashford Hospitality Trust for meme speculators who traded AHT last summer without even looking at any of the fundamentals and still own this stock. I guess many meme traders have already sold, but I often see articles about not selling and making short sellers suffer. The issues discussed in this article indicate that the short sellers were correct in their negative assessment of the AHT. Because this hotel REIT was able to issue a massive number of new AHT shares, it was able to deleverage enough to avoid Ch.11 going bankrupt. Since their financial situation has improved, I think they may be able to survive, but I expect only modest growth over the next few years.

For investors looking for a REIT as a potential hedge against inflation, hotel REITs are not the right choice. Due to continued weak demand, particularly from business travellers, hotels are unlikely to be able to aggressively increase room rates as inflation continues to impact l ‘economy.

I’m also not comfortable with Ashford’s management. I rate AHT a catch.

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