Benzinga | Jul 14, 2021 10:40AM EDT

The Best Case Scenario For Ashford Hospitality Trust

Ashford Hospitality Trust (NYSE:AHT) is a hotel REIT that has struggled along with the rest of the hospitality industry since early 2020.

As leisure travel continues to pick up, many investors are hopeful that Ashford's share price will follow suit.

Recent Updates

Ashford has done a good job at being transparent with its investors over the last few months by providing regular business updates through monthly company presentations.

Earlier this month, the company announced its revenue per available room (RevPAR) of $91.27 for June, which is a significant month-over-month improvement compared to $75.66 for May. It's still down 37% compared to the same period in 2019.

The REIT also announced a 1-for-10 reverse stock split, which will be effective at the market close on July 16.

The company stated in the press release that it believes the higher share price from the reverse split will attract more investors by increasing the stock price above the $5 threshold required by many institutional investors; increase margin availability; make option trades more attractive; and reduce transaction costs as a percentage of the share price.

Best Case Scenario Moving Forward

When looking at the value of a REIT's shares, you have to carefully consider the value of the company's real estate portfolio.

Hotels, like most other income-producing properties, are valued based on the income they generate.

Based on Ashflord's revenue, the estimated value of its portfolio is less than the company's total liabilities.

Yet basing a hotel's value on its revenue over the last 18 months isn't quite fair. Instead, we'll look at the best-case scenario, assuming Ashford is able to reach a RevPAR in 2022 that's comparable to 2019.

Based on Ashford's 2019 revenue and net operating income, I estimate the REIT would have a net asset value of around $950 million. This is after adjusting for the properties the company has disposed of since the end of 2019 and its debt.

So what does this mean?

Based on the shares outstanding (before the reverse split), the REIT would be valued at about $4.15 per share, or close to double its price as of today. As the company reduces its total debt over the next few years, this value could continue increasing.

Other Considerations

It's important to understand the NAV estimate is just that, an estimate. If the company were to sell its properties, they would all be given full appraisals and the values would most likely vary from this NAV estimate. You should also consider that this is assuming the company doesn't continue to pile on more debt.

Another important point to understand is that a REIT's share price doesn't always line up with its NAV. While REIT shares do tend to move toward the NAV per share, some remain at a discount while others trade at a premium.

A lot has to go right for Ashford to see any significant growth in its share price over the next couple of years, but overall there's enough upside potential to make this REIT worth looking at.