Why Ashford Hospitality Trust Stock Rallied as Much as 13% Today

What happened

Shares of real estate investment trust (REIT) Ashford Hospitality Trust (NYSE:AHT) rose roughly 13% in early trading on July 29. At 2 p.m. EDT they were still higher by roughly 10%, so they have managed to hold on to much of their earlier gain. The reason for the advance was most assuredly the company’s earnings release, which came after the market closed on July 28. It was, on the surface, very good reading. But there’s a wrinkle here that can’t be ignored.

So what

The hotel REIT reported revenue of $193.4 million in the second quarter of 2021, up nearly 350% from the $43.1 million it generated in the same stanza of 2020. That’s an incredible improvement, to say the least. Adjusted funds from operations (FFO) came in at $0.04 per share, up from an adjusted FFO loss of $123.22 per share in the second quarter last year. There was a 1-for-10 reverse split enacted on July 16, which makes the per share numbers, perhaps, a little more dramatic than you might expect. However, the reverse split actually hints at the bigger problem, despite the obvious improvement in the REIT’s results.

The hotel sector was hit hard by the coronavirus pandemic in 2020, with the pain lingering through most of the year. Ashford’s stock plunged as its results swooned in the face of the headwinds. In an attempt to raise the stock price, likely to attract more investors to the shares, Ashford enacted this year’s reverse stock split, but it was actually the second such split, the first taking place in July 2020. Generally speaking such actions are not a positive sign, with the 2020 reverse split specifically intended to allow the company’s stock to remain listed on the New York Stock Exchange.

All in, given the unusual nature of the year, looking at 2020 doesn’t actually provide a great comparison point when looking at performance. If you compare the first quarter of 2021 to the first quarter of 2019, however, revenue was down more than 50%. And the $0.04 per share adjusted FFO in the second quarter of 2021 is just a tiny fraction of what the REIT made in the same quarter of 2019 (the two reverse splits make the comparison almost comical). In other words, despite the improving performance compared to 2020, this hotel REIT continues to struggle when compared to pre-coronavirus periods.

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Now what

The hotel sector has a lease length of, effectively, one night. That means that economic downturns hit the sector’s financial results very quickly. The benefits of recoveries, meanwhile, often take longer than you might expect. With new variants of the coronavirus spreading and renewed concern about actions to address rising cases of COVID-19, most investors would probably be better off avoiding Ashford right now. Yes, business is improving. But it still appears that there’s a long way to go before this REIT’s business is anywhere near back to normal.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

View more information: https://www.fool.com/investing/2021/07/29/why-ashford-hospitality-trust-stock-rallied-as-muc/

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