Ashford Hospitality Trust, Inc. is a US$666m small-cap, real estate investment trust (REIT) based in Dallas, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how AHT’s business operates and also how we should analyse its stock. In this commentary, I’ll take you through some of the things I look at when assessing AHT.
A common financial term REIT investors should know is Funds from Operations, or FFO for short, which is a REIT’s main source of income from its portfolio of property, such as rent. FFO is a cleaner and more representative figure of how much AHT actually makes from its day-to-day operations, compared to net income, which can be affected by one-off activities or non-cash items such as depreciation. For AHT, its FFO of US$207m makes up 51% of its gross profit, which means over a third of its earnings are high-quality and recurring.
In order to understand whether AHT has a healthy balance sheet, we have to look at a metric called FFO-to-total debt. This tells us how long it will take AHT to pay off its debt using its income from its main business activities, and gives us an insight into AHT’s ability to service its borrowings. With a ratio of 5.6%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take AHT 17.82 years to pay off using just operating income, which is a long time, and risk increases with time. But realistically, companies have many levers to pull in order to pay back their debt, beyond operating income alone.
I also look at AHT’s interest coverage ratio, which demonstrates how many times its earnings can cover its yearly interest expense. This is similar to the concept above, but looks at the upcoming obligations. The ratio is typically calculated using EBIT, but for a REIT stock, it’s better to use FFO divided by net interest. With an interest coverage ratio of 0.92x, AHT is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.
I also use FFO to look at AHT’s valuation relative to other REITs in United States by using the price-to-FFO metric. This is conceptually the same as the price-to-earnings (PE) ratio, but as previously mentioned, FFO is more suitable. AHT’s price-to-FFO is 3.14x, compared to the long-term industry average of 16.5x, meaning that it is highly undervalued
As a REIT, Ashford Hospitality Trust offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in AHT, I highly recommend taking a look at other aspects of the stock to consider:
- Future Outlook: What are well-informed industry analysts predicting for AHT’s future growth? Take a look at our free research report of analyst consensus for AHT’s outlook.
- Valuation: What is AHT worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether AHT is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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