Why Is My REIT Not Paying Dividends: The Case of AHT

Real Estate Investment Trusts (REITs) are structured to avoid the double taxation that often comes with corporate entities, by distributing at least 90% of their net earnings to shareholders. However, the decision to pay dividends is not always straightforward, as illustrated by the recent experiences of AHT, a REIT in the lodging industry.

Understanding the Requirements for Dividend Payments in REITs

To maintain its tax-free status, a REIT must comply with certain distribution requirements. Specifically, it must distribute at least 90% of its net income to its shareholders, thereby avoiding double taxation at the entity level. This is a key aspect of why we see REITs generally paying dividends, as any profits are quickly distributed to shareholders.

The Case of AHT: No Net Profits, No Dividends

Examining the situation of AHT, a lodging-focused REIT, provides insight into the complexities of dividend payments in the current economic climate. AHT has not paid dividends in the past three and a half years because there have been no net profits to distribute. This situation can be attributed to several factors.

Economic Impact of the Pandemic on AHT

The lodging industry was heavily impacted by the pandemic, which led to significant revenue declines. AHT, operating in this industry, faced substantial challenges during 2018 to 2021. According to the most recent 10-Q report, AHT reported a net loss of $105 million for the first quarter of 2021. Furthermore, the 10-K report disclosed net losses of $169.5 million, $156.2 million, and $520.5 million for the years 2018, 2019, and 2020, respectively. These losses demonstrate that AHT did not generate any profits during these operating years.

Survival Over Dividends: Strategies for REITs Facing Challenges

For companies like AHT, the focus has shifted from paying dividends to ensuring survival in a challenging market. The lodging industry has faced unprecedented pressures, with revenues cut by more than half. In such a competitive and economically strained environment, the priority is to maintain the financial health of the company.

Industry-Wide Impact

The broader hospitality and lodging sector has been affected by global health and economic conditions. REITs in this sector have faced similar challenges, with many not expecting to pay dividends for the foreseeable future until market conditions improve. This strategy prioritizes the long-term sustainability of the company over immediate financial distributions.

Conclusion: Balancing Distributions and Company Health

While the requirement for REITs to pay dividends primarily comes from net profits, the pandemic has brought to the forefront the need for companies to balance short-term financial needs with long-term viability. For AHT, and many other lodging-focused REITs, the decision not to pay dividends has been a necessary step in surviving the current economic crisis. As the industry recovers, we can expect to see a return to more stable dividend payments.