AHT

Ashford Hospitality Trust Inc. - 10-Q Summary (Q2 2008)

Business Context and Reporting Period

This report covers the quarterly period ended June 30, 2008. Ashford Hospitality Trust, Inc. is a self-advised Real Estate Investment Trust (REIT) focused on direct hotel investing and hotel financing. As of the reporting date, the company owned interests in 107 hotel properties (101 direct, 6 via joint ventures) totaling approximately 24,400 rooms. The portfolio includes 43 properties acquired in 2007 (the "CNL Portfolio") which are considered non-comparable for year-over-year analysis.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 8.2% ($24.0 million) for the quarter and 40.1% ($176.9 million) for the six months compared to the prior year. This growth is primarily driven by the inclusion of 43 non-comparable hotels acquired in 2007.
• Comparable Hotel Performance: Excluding new acquisitions, comparable hotel revenue was relatively flat. RevPAR for comparable hotels decreased slightly (0.3% for the quarter, 0.9% for six months) due to lower occupancy rates (down 3.0% and 3.5% respectively), partially offset by increases in Average Daily Rate (ADR).
• Derivative Impact: The company reported significant unrealized losses on interest rate derivatives of $55.4 million for the quarter and $51.4 million for the six months. These losses resulted from a change in debt strategy in March 2008 involving a $1.8 billion interest rate swap, floor, and cap transaction that was not designated as a hedge.
• Discontinued Operations: Income from discontinued operations decreased significantly ($16.1 million for the quarter) due to fewer property sales compared to the prior year, which included large portfolio sales.

Guidance, Outlook, and Risks

• Debt Strategy: Management executed a strategy to capitalize on the correlation between LIBOR and RevPAR. This involved swapping $1.8 billion of fixed-rate debt for floating-rate debt (LIBOR + 2.64%) and selling a LIBOR floor. While this enhances dividend coverage if rates fall, it exposes the company to significant mark-to-market volatility in earnings, as seen in the Q2 results.
• Liquidity: The company reported net cash provided by operating activities of $82.2 million for the six months. Management believes cash flows, available credit facilities ($235 million), and working capital are sufficient for foreseeable needs.
• Market Risks: The primary market risk is interest rate fluctuation. A 1% change in interest rates on the variable-rate debt portfolio (including the swap) would impact quarterly results by approximately $5.7 million.
• Seasonality: Operations are seasonal, with higher occupancy typically in summer months. Management anticipates cash flow will be sufficient to maintain REIT distributions.

Investor Verification Checklist

• Derivative Valuation: Verify the fair value assumptions and credit valuation adjustments used for the $57.9 million interest rate swap liability (classified as Level 3).
• Comparable Hotel Metrics: Review the specific occupancy and ADR trends for the 62 comparable hotels to assess organic performance independent of the 2007 acquisitions.
• Debt Covenants: Confirm continued compliance with debt covenants, particularly minimum debt coverage ratios and loan-to-value limits, given the shift to floating-rate debt.
• FFO Reconciliation: Analyze the reconciliation of Net Loss to Funds From Operations (FFO), noting the negative FFO for the quarter driven by derivative losses.
• Asset Sales Pipeline: Monitor the status of the two hotel properties classified as "held for sale" at period end, which were sold in July 2008.