A Little Portfolio Hospitality (AHT)

Well I’m finally fully moved into my townhouse, and after finishing some economics homework broke in the new casa by doing some research for any potential plays in the coming weeks. One thing before I get going … I tend to do my best research with the comfort of music in the background. It doesn’t have to be any particular type of music, mainly whatever I’m feeling that moment. For instance, the research I did to find this play came while listening to the Batman & Game of Thrones soundtrack. Not sure if working with music will help, but if you’ve never tried it, give it a test drive and see how it helps (or harms) your productivity. Volume up, let’s get crankin’.

REIT Investment Potential

Like always, the following company description is from Gurufocus.com: Ashford Hospitality Trust (AHT) is a real estate investment trust that invests in full-service upscale and upper-upscale hotel properties in the U.S. The company owns and operates its assets through its operating partnership, Ashford Hospitality Limited Partnership. All of its hotels are located across the U.S. and operate under the Marriott, Hilton, Hyatt, Crowne Plaza, and Sheraton brands. Ashford’s sole segment is Direct Hotel Investments, through which it owns hotels by acquisition or development. Ashford also provides real estate investment services, such as mezzanine financing, first mortgage financing, and sales-leaseback transactions. Its revenue streams include Room revenue, Food and beverage revenue, and Other revenue. Room revenue accounts for the majority of total revenue.

To the standard ‘value investor’, REITs are compelling investment equities given their usually high dividend yield coupled with a normally steady pay-out schedule. Institutional investors and boutique firms alike like to add REITs to clients portfolios as a way of exposing them to the real estate side of investing, without getting their client knee deep in the rabbit hole that is real estate investing. I like to think of REITs as the ETF before the ETF. If you think about it, there are very few differences between REIT equities and a standard ETF. Both claim to offer diversification and predictability, and both offer the investor a way to dip their toes into investment areas they otherwise wouldn’t.

I say that because AHT offers a 7.8% dividend yield, a percentage that is the highest amongst their competition. If you would’ve asked me a year ago what I thought of this company, I would’ve relished in that yield like I relish carbs on my cheat days … But these days not so much. To me, a dividend (if I’m on the long side), is the cherry on top of the trade. Because Rockvue Capital is pinpoint focused on creating positive asymmetry with each and every trade, a dividend for a stock we are long on is basically free money for a trade we would’ve taken otherwise. I hope you can see the difference I am trying to make here. I am not interested in this company because of the dividend, I’m interested in this company notwithstanding the dividend.

The Fundamentals

AHT is trading at a 26% discount to book value, and that is something given the high quality of their brands, and the fact that they are the leader amongst their competition in nearly every major category. With $4.28 cash per share, the current share price of $6.30 isn’t terribly overvalued just on a cash basis alone. Keeping in like with the discounts, AHT is trading a staggering 39% discount to sales, and is trading 3x its operating cash flow. Both of those last two metrics place it better than 99 and 97% of its competitors in its industry.

The Headwinds

AHT isn’t without its flaws, however. Debt levels remain significantly high compared to cash since the start of 2014, net income hasn’t been positive since 2015, and operating loss increased over the last year. Trying to figure out why these numbers are the way they are, I looked to their balance sheets. In terms of operating income losses, AHT didn’t sell as many properties as they did in previous quarters, leaving their Income From Sale of Property much less than when they did. Secondly, AHT reported a loss in their derivatives investments for the most recent quarter of (1,600+) compared to a positive income of near $6,000 (in thousands).

The company is taken measurable efforts in reducing their debt burden, and I’m not worried about the decreased selling of their properties, I’m more concerned with their playing around in derivatives. Although the loss in derivatives was small on the grand scheme of things, I would like to see management more disciplined in how they allocate capital towards derivatives, and save more of that money for the core of their business model.

The Chart

I like the chart set-up for AHT, which made me interested in the fundamentals aspect of the business. On the daily chart, AHT has broken its price resistance from the descending triangle. However, I would like to see price reach around 6.40 before entering on the long side. Let’s take a look at the Weekly Chart:

The weekly chart shows price bouncing off the support end of the descending triangle / wedge.

Entry point will be $6.40 with my stop loss set at $6.10. I would risk between 50 and 75 bps on this trade.

The market seems to be overselling on the decrease in net income, while not looking at the obvious value that is on AHT’s balance sheet, and the value of their properties and their brand. I like how management has handled the company in the past (aggressive buybacks in 08 – 09), and with their determined effort to reduce the overall debt burden, as well as shifting their focus to having their properties be franchise managed instead of individually managed, it creates for a more streamlined, efficient revenue business model.

Will update via email if I have entered into this trade on my paper account. As always, if you are interested in getting my trade alerts, shoot me your email and I will get you signed up.

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