Ashford Hospitality Trust (NYSE:AHT) is a real estate income trust (REIT) that invests in full-service upscale and upper-upscale hotels in the U.S. The company owns 199 hotel properties containing 25,087 rooms, 90 hotel condominium units at WorldQuest Resort in Orlando, and minority interests in hospitality asset management company Ashford (NYSEMKT:AINC) and hospitality mobile app OpenKey. Most of Ashford's properties operate under the Hilton (NYSE:HLT), Hyatt (NYSE:H), Marriott (NASDAQ:MAR), and InterContinental Hotel Group (NYSE:IHG) brands.
Shares of the REIT plunged from $5.60 in May 2019 to as low as $2.40 by July, primarily because the company slashed its quarterly dividend from $0.12 to $0.06 per share. Ashford's management indicated that the dividend reduction was implemented to strengthen the balance sheet and position the company to acquire assets strategically.
Ashford pays an exceptionally high dividend yield
REITs must pass substantial amounts of profits to shareholders to remain in compliance with its tax status, so these securities generally pay higher dividends than stocks from other groups. The average dividend yield among REITs is currently between 5-6%, whereas the total market average yield is 2%. Ashford Hospitality Trust pays an 8.7% dividend yield, which is high even compared to other REITs. While the cash dividend was cut in half earlier this year, the price adjustment kept the yield high.
Ashford's adjusted funds from operations (AFFO) for the trailing 12 months were $140.6 million, meaning the price-to-AFFO ratio was 2.45. The corresponding ratio is 21.27 for diversified REITs and 8.75 for the hotel sector. Through the third quarter, the company sold off several properties that were below the portfolio average on Revenue Per Available Room (RevPAR) and used the proceeds of these sales to pay down debt. These transactions should result in lower revenue and FFO moving forward, but the portfolio is now generating higher returns per unit as a result.
Ashford Hospitality's balance sheet is a concern for many investors
Ashford's debt likely explains the large gap in dividend ratio and price-to-AFFO. The company's debt-to-equity ratio is 13.4, compared to the 0.81 average among REITs. Its 11.47 debt-to-EBITDA is nearly double the industry average. This relatively debt-heavy balance sheet could inhibit the company's ability to meet obligations or maintain dividends if operational performance deteriorates in a weaker economy. Additionally, making opportunistic property acquisitions could be impossible without an accommodating capital structure.
Ashford's management has noted this and is taking steps to improve its overall standing. The company is reducing debt with cash from operations and is right-sizing capital expenditures as a percentage of revenues to reflect industry averages more closely. Management has a target range for net debt to gross assets of 55% to 60%, which it intends to achieve over time. If executed successfully, these measures will bridge the financial risk gap with other REITs that are currently delivering much lower income yields.
Ashford Hospitality Trust represents an interesting alternative for investors who are seeking exposure to hospitality companies. The major hotel chains, such as Marriott, Hilton, Hyatt, and InterContinental, cannot be considered growth stories, and they certainly exhibit cyclicality. As a result, investors seeking exposure to this group are likely to find value in dividend income that can generate returns in the absence of growth or during cyclical downturns. Among these stocks, InterContinental leads the way with a 1.81% dividend yield.
REITs follow a different model than hotel operators, as they are formally real estate investment companies with different tax treatment and cash flow obligations. However, Ashford is likely to benefit from the same long-term operational drivers, and the company's management is actively taking steps to address the financial leverage and capital spending issues that are creating risk in the story. Investors who are bullish about the lodging and accommodations industry in general should consider Ashford Hospitality Trust. Assuming that management's stewardship is sound, this will deliver nearly quadruple the dividend income of hotel operators with many of the same operational drivers.