What happened

Shares of real estate investment trust (REIT) Ashford Hospitality Trust (AHT -0.76%) dropped 17% in early trading on July 19. Roughly an hour into the trading day the stock was still down around 12%. There are two big factors here; one remains out of the hotel landlord's control and the other was well within it.

So what

First the easy news to digest. After the close on July 16, the end of the prior week, Ashford announced that its 1-for-10 reverse stock split had been completed. Technically speaking, a stock split doesn't change an investors ownership of a company, so all that happens is the stock price changes. A reverse split results in fewer shares outstanding and, thus, increases the share price. This is a desirable outcome because Ashford's stock price had been lingering at a very low level, which can dissuade investors from buying shares. The low level of the stock price, meanwhile, has been driven by the financial headwinds the REIT has been facing during the coronavirus pandemic (first quarter revenue was lower by nearly 60%). So, all in, this reverse stock split is really a net negative and investors, not surprisingly, aren't pleased.

A person talking on the phone in a hotel room.

Image source: Getty Images.

However, there's a second issue to look at. New variants of the coronavirus have resulted in an increasing incidence of COVID-19. That, in turn, appears to have some investors worried that a return to pre-pandemic normality will be slow and arduous. If that's the case, then Ashford's business-level recovery may not be as strong as some had been hoping. So, the very issue that led to the need for a reverse stock split is, at the very least, lingering. No wonder investors soured on the hotel owner today.

Now what

Ashford Hospitality Trust is not a good choice for risk averse investors. It is, without question, a turnaround situation, which is an area of investing that only aggressive types should roam. While things are getting better, the REIT's recovery still faces headwinds and, frankly, the fact that a reverse stock split was needed at all is not a good sign.