Ashford Hospitality Trust, Inc. — FY2016 Form 10-K
Reporting period: Year ended December 31, 2016. This is an annual report, not a standalone fourth-quarter filing; selected quarterly results are noted below.
Business context
Ashford is an externally advised lodging REIT focused on upscale and upper-upscale hotels. At year-end it owned interests in 123 consolidated U.S. hotels with 26,013 rooms, plus 86 hotel condominium units. Remington Lodging, an affiliate owned by the company’s chairman and chairman emeritus, managed 84 hotels and WorldQuest. The company said it intended to shift toward full-service hotels and sell most select-service properties over time as market conditions permit.
Financial and operating performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Total revenue | $1,492.0 million | $1,337.0 million |
| Operating income | $155.7 million | $137.9 million |
| Net income (loss) attributable to company | $(46.3) million | $270.9 million |
| Net income (loss) attributable to common stockholders | $(88.7) million | $237.0 million |
| Operating cash flow | $175.1 million | $209.0 million |
| FFO available to common stockholders and OP unitholders | $129.5 million | $132.9 million |
| Adjusted FFO | $171.3 million | $165.9 million |
| Cash and cash equivalents | $347.1 million | $215.1 million |
| Restricted cash | $144.0 million | $153.7 million |
| Indebtedness, net | $3,723.6 million | $3,840.6 million |
Revenue increased 11.6%, while operating income rose 12.9%; operating margin was approximately 10.4%, versus 10.3%. Rooms revenue grew 11.4%. Across properties included in results, RevPAR rose to $118.44 from $114.25, ADR to $153.83 from $147.85, and occupancy edged down to 77.00% from 77.27%. For the 78 properties included for both full years, RevPAR increased to $118.21 from $113.52.
The swing to a net loss principally reflects the prior-year $380.8 million gain associated mainly with acquiring the remaining PIM Highland JV interest. FY2016 also included $17.8 million of impairment charges, $12.7 million of loan-cost write-offs and exit fees, and $2.5 million of unrealized derivative losses. Interest expense and loan-cost amortization rose 19.4% to $224.0 million.
FY2016 investing cash use was $7.9 million, including $204.0 million of hotel improvements, largely offset by property-sale proceeds. Financing activities used $34.2 million. The common dividend remained $0.48 per share for the year; the board anticipated $0.12 quarterly during 2017, subject to future declaration.
Material changes, outlook, and unusual items
- The company sold several select-service hotels in 2016, including the five-hotel Noble portfolio for about $142 million, and recorded gains on multiple dispositions. Two hotels were classified as held for sale at year-end; both were sold in early 2017.
- It issued 4.8 million Series F and 6.2 million Series G preferred shares, raising net proceeds of approximately $115.8 million and $149.8 million, respectively; it redeemed the 9% Series E preferred shares. Series F and G carry a 7.375% annual dividend rate.
- Debt was approximately $3.8 billion gross, including about $3.2 billion variable-rate debt. Contractual debt principal due within one year was $2.76 billion, excluding extension options. Management said it was addressing 2017–2018 maturities and believed cash and operating flows would meet anticipated needs for the next 12 months, but gave no assurance of refinancing on favorable terms.
- A $100 million secured revolving credit facility expired in October 2016 without being drawn. Management expected its expiration not to significantly affect liquidity. A 25-basis-point rate increase on year-end variable debt was estimated to increase annual costs by about $8 million.
- Management expected hotel-industry RevPAR to continue growing through 2017, but at a slower pace. No specific company revenue or earnings guidance was provided. Capital commitments were $83.8 million, expected to be paid within 12 months.
- A Florida landlord-tenant judgment and related interest and estimated legal fees totaled $13.2 million accrued at year-end; the appellate court denied rehearing in March 2017, and the company was evaluating further appeal.
- Management identified a material weakness in controls over assessment of deferred-tax-asset valuation allowances. The related misstatement was corrected before the statements were issued, but management found disclosure controls and internal control over financial reporting ineffective; the auditor gave an adverse opinion on internal controls while expressing an unqualified opinion on the financial statements.
- Other post-year-end developments included appointment of Douglas Kessler as CEO, with Monty Bennett remaining chairman, and a February 2017 proposal to acquire FelCor Lodging Trust. Completion and terms were not assured.
Key risks and contingencies
Risks include substantial leverage and near-term refinancing needs; exposure to rising rates, debt covenants and lender cash traps; hotel-cycle, competition, seasonality and operating-cost pressures; required property investment; REIT qualification and distribution requirements; and reliance on an external advisor and third-party managers. The filing also highlights conflicts of interest involving Ashford Inc. and Remington, including related-party management arrangements and advisory fees. The company reported $54.4 million in FY2016 advisory fees and $55.4 million in fees and reimbursements to Remington-related parties. It also disclosed potential environmental, insurance, franchise, ground-lease, legal and guaranty exposures.
Important facts for investors to verify
- Refinancing progress and extension eligibility for the large 2017–2018 maturities, including the amount of debt actually due after extensions.
- Availability of unrestricted liquidity after accounting for restricted cash, capital commitments, debt service and any lender cash traps.
- Whether comparable-hotel RevPAR and operating cash flow sustain growth as industry growth slows, and whether the 2017 dividend remains covered.
- Remediation and independent auditor follow-up on the deferred-tax valuation-allowance control weakness.
- Final costs or appeals in the Florida judgment, and outcomes of the FelCor proposal and other disclosed transactions.
- Related-party fee terms, preferred-dividend burden, and any further select-service dispositions or impairment charges.