Ashford Hospitality Trust Inc is a US$777.7m 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.
Funds from Operations (FFO) is a higher quality measure of AHT’s earnings compared to net income. This term is very common in the REIT investing world as it provides a cleaner look at its cash flow from daily operations by excluding impact of one-off activities or non-cash items such as depreciation. For AHT, its FFO of US$207.4m makes up 51.0% of its gross profit, which means over a third of its earnings are high-quality and recurring.
Robust financial health can be measured using a common metric in the REIT investing world, FFO-to-debt. The calculation roughly estimates how long it will take for AHT to repay debt on its balance sheet, which gives us insight into how much risk is associated with having that level of debt on its books. 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.
In terms of valuing AHT, FFO can also be used as a form of relative valuation. Instead of the P/E ratio, P/FFO is used instead, which is very common for REIT stocks. In AHT’s case its P/FFO is 3.75x, compared to the long-term industry average of 16.5x, meaning that it is highly undervalued
In this article, I’ve taken a look at Funds from Operations using various metrics, but it is certainly not sufficient to derive an investment decision based on this value alone. Ashford Hospitality Trust can bring about diversification for your portfolio, but before you decide to invest, take a look at the other aspects you must consider before investing:
- 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.