By Lawrence MeyersYou can read the pre-earnings analysis of Ashford here, along with an interview with its CEO:  Part 1, Part 2, Part 3, Part 4, Part 5, Part 6Ashford’s second quarter earnings were released last week.  Despite the state of the economy and concerns over travel, they posted impressive numbers.  Yes, they reported a  net loss, but investors should remember that for REITs, net income is not nearly as important as 1) Operating Profit, 2) the ability to service debt, and 3) paying the intended dividend.

Here are some salient numbers:Total revenue increased 8.2% to $318.4 million from $294.3 million.CAD per diluted share was $0.33CAD dividend coverage was 156%Proforma RevPAR increased 2.0% for hotels not under renovation on a 2.3% increase in ADR to $142.16 and a 18-basis point decline in occupancyProforma Hotel Operating Profit for hotels not under renovation improved 4.8%Proforma Hotel Operating Profit margin for hotels not under renovation improved 95 basis points Capex invested in the second quarter totaled $44 million

Three hotels sold in the second quarter for $208 million in proceedsTwo additional hotels sold in third quarter for $21 million in proceeds Investors should first note that, despite a tiny decline in occupancy, Ashford retained pricing power.  They were easily able to meet debt service payments.  But the big story is that their CAD coverage was 156%.  That means, when coupled with Q1’s 106%, that they already have their dividend 61% covered for next quarter, or 30% for each of the year’s remaining quarters.

That’s a good thing, because as CEO Monty Bennett informed us, the second half of this year will be “difficult”.  With the dividend already partially covered, Ashford’s “strategy to enhance cash flow with property and enterprise-level contingency plans and aggressive management of fixed costs” should further protect them from the worst of any RevPAR decline.Much of my initial analysis on Ashford remains unchanged. The balance sheet remains healthy, debt service and dividends are easily handled by operations, there is no significant maturity of debt in the next several years, and management remains committed to its focused and well-articulated strategy.

That strategy has them recycling capital from continuing asset sales into mezzanine loans. The most recent one involved an investment in Extended Stay America at a discount to par, with interest payments that will yield them an IRR of 23.9%.   That’s a great use of capital.  And in the unlikely event of a default, we learned from our interviews that Ashford has many different ways to take advantage of that situation.The other great thing is that Ashford has $112 million of cash.  With 119 million share of stock outstanding, and that stock paying a 21% dividend as of Friday’s closing price, you can bet Ashford will be buying back stock with both hands. 

This would also be a great return on capital as well as a hedge against further RevPAR decline.  If they were, for example, to buy back 15 million shares of stock for $60 million, that would provide them with an annual savings of $12.6 million in dividend payments.  That gives them another 1.25% hedge against RevPAR declines.

Finally, in my last analysis, I discussed the potential impact of decreasing airline capacity.  That is of great concern, but it is also tied to oil prices.  The airlines managed to make their announcements of capacity cutbacks right as oil hit its high of $147.  Oil is now at $114, and I expect it to settle around $80.  Those airline cutbacks will be short-lived, I think.All in all, Ashford remains solid.  So why is the market continuing to price it at 44% of the NAV of its properties?  Fear, of course.  The market likes clarity.  In the meantime, I’m adding to my position, seeing an easy double from here…and earning 21% while I wait.

Lawrence Meyers is a former writer for the Motley Fool, and is President of PDLCapital, a private equity firm (www.pdlcapital.com). He currently owns shares of Ashford Hospitality Trust. This article is only an expression of the author’s opinion, may contain inaccuracies, and is not a solicitation to buy or sell any security. All readers are advised to consult with a financial advisor prior to making any investment. The author may be contacted at pdlcapital@earthlink.net  

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