Perhaps my favorite hotel real estate investment trust is Ashford Hospitality Trust (AHT).
For around 10 years, this public REIT has been repeatedly knocking the cover off the ball, but the market has rarely gotten around to valuing AHT stock properly. I’m not sure what the deficiency is, other than that Ashford Hospitality may not have some big, flashy name.
Yet when you examine all the metrics and note that Ashford’s management has been in the hotel business for 25 years, through all the booms and busts, there is simply no reason for AHT stock to be trading at its current bargain price.
So I suggest jumping into Ashford shares and collecting the 6% yield while the stock catches up to fair value.
Ashford makes a good number of deals in the hotel business. Because of management’s acumen, AHT is able to manage operations that align with market conditions and maximize its margins. Management was particularly adept at handling the financial crisis in 2008 and beyond by proactively drawing down lines of credit and using interest rate hedges to generate additional income during a period when the hotel industry saw revenue declines of more than 15%.
Ashford Hospitality also has found creative ways to utilize its capital structure in both good times and bad — something that’s still the case today. AHT rarely locks itself into either fixed or floating rate. Currently, its mix is about 65% variable-rate debt and 35% fixed-rate debt.
AHT Keeps Looking Ahead
Ashford Hospitality has shifted its focus as part of its dynamic market strategy, as it seeks to sell 23 select-service hotels and focus on accretive hotel acquisitions in upper-upscale, full-service hotels. AHT also aims to continue holding cash and equivalents of 25%-35% of total market capitalization so it can remain nimble during this part of the hotel cycle.
Ashford feels acquisitions are presently a better use of capital than buybacks — a pretty extraordinary statement considering how cheap AHT stock is. That management feels it can get better yield from shareholder assets by investing in growing the business rather than buybacks tells me there’s a lot of room left on the upside in this hotel cycle.
Demand for hotel rooms has grown 3% year-over-year, whereas supply is up around 1%.
Ashford Hospitality has some pretty extraordinary metrics, according to its July investor presentation:
- It has a higher insider ownership, at 15%, than its peers. The average is a mere 2%.
- Its trailing-12-month adjusted funds from operations per share dividend coverage is 2.3x, just below the peer average of 2.6x.
- In fiscal year 2014, it generated revenue per available room growth of 9.9%, fourth among the 12 comparable companies.
- Compared to its peers, its enterprise-value-to-EBITDA ratio is only 8.9, while all the others are higher — some reaching as high as 13.
All in all, this is an extremely well-managed business with great assets. AHT stock trades at less than $8. And what is AHT stock worth? The company’s recent earnings press release says it all:
“The Company’s common stock is currently trading at a trailing 12-month NOI (net operating income) cap rate of approximately 8.4%. Based on deals the Company has seen trade and other market information from industry consultants, the Company believes similar assets to those in its portfolio are trading in the private market at an approximate average trailing 12-month NOI cap rate of 7.0% which would imply a share price for Ashford Trust common stock of $15.85, which is approximately 91% higher than the current trading price of Ashford Trust common stock.”
I find it hard to disagree, which is why I am presently long the stock.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he owns shares of AHT. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
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