Ashford Hospitality Trust (NYSE: AHT) owns hotels, which was a terrible property segment to be in during the early days of the coronavirus pandemic in 2020. Although the world is starting to get a better handle on COVID-19, there remain major headwinds for hoteliers. The big question, then, is can Ashford Hospitality muddle through this downturn and eventually regain some of its lost glory?
One of the most important defining features of hotels is that they have lease lengths that are, effectively, just one day long. Moreover, reservations can generally be canceled with little notice or cost, so even future bookings aren't that great a predictor in times of distress. This core fact of the hotel industry was on clear display in 2020 as the coronavirus started to spread around the world.
For hotel real estate investment trust (REIT) Ashford Hospitality, the numbers were very troubling. First-quarter 2020 revenues were down 21%, driven lower by only a short period of coronavirus impact. Second-quarter revenues, which felt the full brunt of the economic shutdowns used to slow the spread of the virus, fell around 90%.
Clearly, no company can sustain itself for very long if its revenues fall by 90%. Ashford went into preservation mode, which included eliminating the dividend in the second quarter of 2020 and its preferred dividend in the third quarter of that year. It's worrying when a company stops paying dividends on its preferred stock, which are often seen as bond equivalents by investors. Neither dividend has been reinstated yet, which is important to keep in mind.
So 2020 was a very rough year, which is hardly surprising given the backdrop. So far, 2021 has looked a lot better. For example, the second quarter saw revenues increase by around 350% year over year. That makes complete sense, given that economic activity has started to pick up again now that government-mandated business closures are over. And, despite the need to continue practicing social distancing, people are more confidently moving around following the introduction of effective coronavirus vaccines.
However, it pays to look not at 2020 when considering Ashford's business, but at the pre-pandemic year of 2019. Compared to the second quarter of 2019, the hotel REIT's revenues are still down by over 50%. Yes, business is getting better, but it is still nowhere near as good as it was. And that helps explain why the REIT still hasn't reinstated its dividend or its preferred dividend.
The big question here, though, is whether Ashford can rebound. On a simple level, the answer is yes, so long as the world manages to return to some semblance of normal. However, that's not happening quickly or smoothly, noting that the REIT just provided an update on third-quarter results that was less than pleasing.
The crux of the problem was the summer spike in COVID cases related to the delta variant of the coronavirus. Third-quarter earnings, when they are released, will probably not be good reading when you look back to the pre-pandemic period. In other words, Ashford is still struggling and will continue to struggle until the pandemic is under much better control.
Not worth the risk
For most investors, particularly those looking for dividend income, Ashford Hospitality is not worth the risk. It is a turnaround stock that is both highly dependent on and highly sensitive to economic activity. That means volatility should be the expected norm for now, since the coronavirus continues to impact the world.
If COVID recedes, this REIT will likely rebound. If COVID lingers, it will be tough for Ashford Hospitality to get back on its feet enough to start paying dividends again. In fact, until it manages that, only the most aggressive investors should be looking at it.