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Ashford Hospitality Trust, Inc. (NYSE:AHT) was nearly killed by COVID. Massive equity dilution was used to keep the company alive. AHT lost 99% of its value over the last 5 years as the shares were diluted and reverse split. The negative impact of Covid on travel has faded. U.S. airline travel records were set over the Thanksgiving Holiday. AHT Q3 RevPAR has now surpassed pre-COVID levels. The hotel sector is recovering, but AHT still faces some major challenges due to high interest rates, an expensive 14% loan from Oaktree and the capital spending required to modernize hotel properties.
At a recent price of $11.82, AHT.PD is now trading for just 47 cents on the dollar. This article make the bullish case to speculate on AHT.PD. AHT.PD is compared to the other publicly traded and non-traded preferred stock issues. Some of the major challenges and risks facing AHT are also discussed.
What is AHT.PD?
AHT.PD is a par $25 cumulative preferred convertible issue with an 8.45% coupon. Dividends are paid quarterly, and AHT.PD now yields 17.6% at a recent price of $11.82. AHT.PD is a perpetual issue, which means that the company is not required to call it. The company has the option to call AHT.PD anytime at par. See prospectus for additional details. Average daily trading volume is typically around 40K shares. AHT.PD dividends were return of capital for tax purposes in 2021 and 2022. Return of capital dividends may not be taxed as income when received, but reduce the tax basis. AHT.PD holders will NOT acquire a K-1.
There is currently only $29 million par value of AHT.PD outstanding. Use limit order and patience when trading it. Most of the publicly traded preferred stock was exchanged for common stock through a series of public and private exchange offers. Preferred stock dividends (including all publicly traded and non-traded issues) totaled just $10.6 million for the first nine months of 2023 as compared to $68.1 million (all preferred and common stock dividends) for the first nine months of 2019. The small current size of the preferred stock dividend obligation should help to make a dividend deferral less likely.
Comparing AHT.PD to the other publicly traded preferred issues
All of the AHT preferred issues are equal in seniority with comparable covenants. It’s best to check all of the issues for the highest yield when trading.
Issue Coupon Par Value Outstanding
AHT.PD 8.45% $29 million Prospectus
AHT.PF 7.375%. $31 million. Prospectus
AHT.PG 7.375%. $38 million Prospectus
AHT.PH 7.5% $33 million Prospectus
AHT.PI 7.5%. $31 million Prospectus
Comparing AHT.PD to the non-traded preferred issues
The non-traded issues are being sold at par through a network of financial advisors. They are equal in seniority to the publicly traded preferred issues, but have a few unique features. They may be redeemed after 2 years with a 5% redemption fee. There is no fee for redemption after 3 years, but other limitations apply. In order to conserve cash, AHT has the option to redeem the non-traded preferred stock in either cash or shares of common stock (see Prospectus page 33). Furthermore, the maximum redemptions are limited as follows:
“In addition, aggregate optional redemptions by holders of the Preferred Stock will be subject to the following redemption limits: (i) no more than 2% of the outstanding Preferred Stock will be redeemed per calendar month; (ii) no more than 5% of the outstanding Preferred Stock will be redeemed per fiscal quarter; and (iii) no more than 20% of the outstanding Preferred Stock will be redeemed per fiscal year.”
*Non-traded issues Coupon Par Value Outstanding
Series J Preferred. 8.0% $66 million Prospectus
Series K Preferred **8.2% $4 million Prospectus
How is AHT able to sell the non-traded preferred stock issues at par when the publicly traded preferred stock issues have equal seniority and are trading for only 47 cents on the dollar? Financial advisors are well paid (see page #1 of the prospectus) to sell the non-traded issues. Each par $25 issue of series J Preferred sold has a selling commission of $1.75 and a dealer manager fee of $0.75.
* Non-traded preferred stock issued was $70 million as of 9/30/2023. Issuance continues and as of 11/7/2023 the company has issued approximately $77 million of its non-traded preferred stock
** The series K Preferred pays an initial dividend of 8.2% for the first year. The dividend increases by 0.1% per year up to a maximum rate of 8.7%.
RevPAR is increasing
Revenue per available room (RevPAR) is a key metric for the hotel sector. As noted in the Q3 earnings report:
“Comparable RevPAR for all hotels increased 4.0% to $131.67 during the quarter on a 2.2% boost in Comparable ADR and a 1.7% boost in Comparable Occupancy.”
Strong balance sheet liquidity
Balance sheet liquidity is always an important consideration when evaluating high yield preferred stocks. AHT ended Q3 with cash and cash equivalents of $184.7 million and restricted cash of $157.9 million.
More cash is still needed
Despite the strong balance sheet liquidity detailed above, more cash is still needed to fund three key areas. Capital expenditures exceed AFFO and are necessary to keep hotels modern and competitive. Higher interest rates have reduced hotel valuations. As a result of this, some hotel mortgage balances must be reduced as properties are refinanced. AHT is also focused on repaying their 14% loan from Oaktree.
Repaying the Oaktree loan
The Oaktree term loan provided rescue financing on 12/28/202 when AHT was struggling to survive Covid. However, there was a high price to pay. $200 million was loaned at 16%. As of 9/30/2023, AHT still owes $183 million at a slightly amended and reduced 14% interest rate. The loan matures in January 2024, but AHT has two 1 year extension options that could extend the final maturity until January 2026 (see footnote (12) on page #19 of the 10Q earnings report). The Oaktree loan is recourse debt. It is guaranteed by AHT at the holding company level. Other AHT mortgage debt is backed only by specific hotels without recourse to AHT at the holding company level. The high interest rate, costly loan fees and recourse nature of the loan make repayment a top priority for AHT.
Plans to repay the Oaktree term loan were a focus of the Q3 earnings conference call. President and Chief Executive Officer Robison Hays seemed very optimistic that the loan could be repaid in 2024:
“We ended the quarter with approximately $271 million of net working capital, and our non-traded preferred stock offering continues to ramp up nicely; third, we are now focused on paying off our corporate financing and have listed several assets for sale. We believe proceeds from these potential asset sales, along with the capital raise from our non-traded preferred offering may be sufficient to completely pay off our corporate financing during 2024.”
Funding capital expenditures
AHT had adjusted funds from operation of $39.7 million for the 9 months ended on 9/30/2023 (see page 7 of the Q3 earnings press release). Unfortunately this was not enough to cover capital spending. Improvements and additions to hotel properties was $99.5 million during the same period (see page #8 of the 10Q filing).
AHT is being surprisingly aggressive about continued capital spending given that AHT and AHT.PD are trading as if the company could run out of cash. A $35 million upgrade project for the Crowne Plaza La Concha Hotel in Key West, Florida was announced on 8/21/2023. On 10/26/2023 at major conversion project was announced for the Le Pavillon Hotel located in New Orleans. On the Q3 earnings conference call analyst Bryan Maher of B. Riley Securities asked about continued capital spending on these projects. The reply by CEO and President Robison Hays highlighted the importance of planned hotel sales:
“And at the same time, we will be selling assets to raise capital. So I would just say it is a balancing act.”
The challenges of refinancing hotels
AHT has decided to walk away from 19 of its hotels rather than putting up additional cash to refinance them. The actual foreclosure on these properties is expected to happen during Q4. While losing underperforming hotels may be seen as a negative, some metrics for the remaining portfolio of 81 hotels will better. As Chief Financial Officer Deric Eubanks noted on the Q3 conference call:
“In terms of impact on the remaining portfolio, we expect that our net debt to gross assets will decrease about 500 basis points. So we will have a pretty decent decrease in our overall leverage of the portfolio. And from a RevPAR standpoint, we expect the RevPAR of the remaining portfolio to go up by about 3%.”
AHT has had more success in refinancing other hotels. During Q2 the Company extended its KEYS Pool D loan (5 hotels) and its KEYS Pool E loan (5 hotels). 2024 is expected to bring continued increases in RevPAR and lower interest rates. These trends should make it easier to refinance hotels.
Hotel sales are a key to success
Hotel sales are a key part of AHT’s strategize to produce cash and repay the Oaktree loan in 2024. The recent refuse in mortgage rates and strong RevPAR appears to have provided an opportunity for AHT to sell some properties. President and Chief Executive Officer Robison Hays commented on the Q3 earnings conference call:
“During the quarter, we sold a small asset in Orlando for nearly $15 million and have 6 other assets that are currently being marketed for sale. We have also identified several additional assets that we may bring to market for sale if market conditions warrant. We expect any net proceeds from these sales will primarily be used for debt paydowns.”
Sales of non-traded preferred stock are ramping up
AHT has been successfully selling non-traded series J and series K preferred stock through a network of financial advisors. Replacing the 14% interest rate, loan fees and complex covenants of the Oaktree loan with 8% preferred stock is a very desirable outcome. As Robison Hayes noted:
“We continue to build selling syndicate and currently have 40 signed dealer agreements representing over 5,402 reps selling the security. We are still early in the capital raising process and today, have raised approximately $77 million of gross proceeds, including $28 million during the quarter.”
What about the AHT common stock?
AHT is an extremely speculative and risky issue. At a recent price of $2.30, AHT has a market capitalization of only $85 million. That’s less than 1/3 working capital of $271 million. The $232 million par value of preferred stock is roughly offset by the working capital. With balance sheet debt of $3.6 billion the equity is therefore leveraged about 3,600 / 85 = 42X. We could view AHT as an inexpensive option on the value of the 81 hotels owned by AHT exceeding that debt value. That option appears to have significant time value. AHT already has $271 million of working capital and is actively working to boost liquidity by selling hotels and non-traded preferred stock.
The common stock share count has stabilized as the company is now focused on selling hotel properties and non-traded preferred stock to raise cash. As of 9/30/2023 there were 34.513 million shares of AHT outstanding. That’s only a negligible 18K share boost from 34.495 million shares outstanding on 12/31/2022.
What are the major risks?
I’ve briefly highlighted a few of the major risks here. See pages 10 – 41 of the annual report for a detailed discussion of risks. AHT is a very speculative issue as is typically the case for a preferred stock that yields 17.6%. AHT is hugely leveraged with debt of about 42X the market capitalization. RevPAR has been increasing, but AHT would be vulnerable to a recession or economic slowdown that reduced travel. Interest rates appear to be headed lower in 2024, but AHT would be vulnerable if interest rates remain higher for longer. Hotel sales and the continued sale of non-traded preferred stock are a critical part of AHT’s recovery strategize. These could be disrupted by unfavorable market conditions.
Conclusions
AHT.PD is a very speculative issue. The preferred stock is trading at only 47 cents on the dollar and yields 17.6%. The company faces some major challenges as it seeks to refinance hotels, pay off the Oaktree term loan and fund capital expenditures. Despite these challenges, there have been some positive recent developments. RevPAR is increasing as the hotel sector continues to rebound from COVID. The recent dip in interest rates may have created the opportunity for AHT to reduce debt by selling some hotels. Sales of non-traded preferred stock have been surprisingly successful and could help to exchange the higher cost Oaktree term loan.
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
