ASHFORD HOSPITALITY TRUST INC annual report, FY2017

Ashford Hospitality Trust, Inc. — 2017 Form 10-K

Reporting period: Fiscal year ended December 31, 2017. This is an annual filing; fourth-quarter figures are separately noted below. The company is an externally advised U.S. hotel REIT. At year-end it owned interests in 120 consolidated hotels with 25,058 rooms and 89 WorldQuest condominium units.

Financial performance and operating metrics

Metric	2017	2016
Total revenue	$1.439 billion	$1.492 billion
Operating income	$135.0 million	$155.7 million
Net loss attributable to the company	$67.0 million	$46.3 million
Net loss attributable to common stockholders	$122.6 million; diluted loss per share $1.30	$88.7 million; diluted loss per share $0.95
Cash from operating activities	$207.4 million	$179.7 million
FFO available to common stockholders and OP unitholders	$98.4 million	$129.5 million
Adjusted FFO	$155.6 million	$171.3 million
Adjusted EBITDA	$419.2 million	$431.1 million

Hotel operating expenses were $907.3 million, down 3.3%; operating income margin was approximately 9.4%, versus 10.4% in 2016.
For hotels included in both years’ operating results, RevPAR rose to $122.48 from $118.44, occupancy was 77.36% versus 77.00%, and ADR was $158.33 versus $153.83.
At December 31, cash and cash equivalents were $354.8 million, restricted cash $116.8 million, total assets $4.670 billion, and company stockholders’ equity $632.5 million.
Net indebtedness was $3.696 billion, including approximately $3.4 billion of variable-rate debt. Interest expense was $222.6 million. Management estimated that a 25-basis-point rate increase would add about $8.4 million of annual interest expense.
Investing activities used $63.9 million, including $222.0 million of hotel capital improvements; financing activities used $163.9 million. Year-end cash, cash equivalents and restricted cash totaled $472.1 million.
Common dividends were $0.48 per share for 2017; the board expected quarterly dividends of $0.12 per share in 2018, subject to review and declaration. The filing reports 2017 common distributions as entirely return of capital for tax purposes.

Material changes and unusual items

Revenue declined 3.5% year over year, largely because of hotel sales. Comparable-property rooms revenue increased, but food and beverage revenue at comparable hotels fell. Operating income decreased 13.3%.
The company sold three hotels in 2017 for approximately $106.7 million in aggregate proceeds: Renaissance Portsmouth, Embassy Suites Syracuse and Crowne Plaza Ravinia. The Ravinia sale generated a $14.1 million gain; the other two sales generated small losses.
Net loss attributable to the company widened by $20.7 million. The year included $10.2 million of impairment charges, including $8.2 million for two SpringHill Suites properties held for sale, and approximately $2.0 million related to hurricane damage.
Hurricanes Harvey and Irma affected 24 Texas and Florida hotels. The company recorded about $2.8 million of net remediation and other costs and reported $4.8 million of insurance deductibles; recovery estimates remained subject to uncertainty.
A long-running landlord-tenant judgment resulted in an estimated total loss of $17.3 million, including interest and legal fees, with $4.1 million of additional expense in 2017. The litigation was concluded after payments and a negotiated attorney-fee settlement.
Preferred-stock financing and redemptions were significant: the company issued 3.8 million Series H and 5.4 million Series I shares at a 7.50% dividend rate, while redeeming all Series A and approximately 7.1 million Series D shares. Preferred dividends and redemptions affect cash available to common holders.
Several debt refinancings took place, including a $427 million floating-rate loan secured by 17 hotels. A $376.8 million loan was refinanced in January 2018 with a $395 million, interest-only floating-rate loan. Two SpringHill Suites were held for sale at year-end; Glen Allen was sold in February 2018, and Centreville was expected to be sold around May 2018.

Liquidity, outlook and principal risks

Management said operating cash flow and existing cash were expected to cover anticipated interest, principal, working capital and capital expenditures for the next 12 months. It also said it would proactively address 2019 and 2020 maturities. The contractual-obligations schedule showed $2.671 billion of debt principal due within one year, although certain loans had extension options and the schedule preceded the January 2018 refinancing.
The company reported compliance in all material respects with debt covenants at year-end. Some loans contain cash-trap provisions that can restrict access to hotel cash if performance weakens. Capital commitments were $44.4 million, expected to be paid within 12 months.
Key exposures include high leverage and floating interest rates, refinancing and maturity risk, hotel-industry cyclicality, competition and operating-cost inflation, and potential cash restrictions under loan agreements. Hotel assets are concentrated in one industry and all were domestic.
Governance and related-party risks warrant attention: Ashford LLC is the external advisor, and Remington Lodging—beneficially owned by the chairman and chairman emeritus—managed 82 of 120 hotels. The company reported $57.6 million in 2017 fees and reimbursements related to Remington, and $53.2 million in advisory fees. The filing describes exclusivity provisions, potential conflicts and termination costs.
REIT qualification, franchise renewals, required property upgrades, seasonal cash flow, weather and uninsured losses, and legal contingencies are additional risks. The company noted no environmental liability believed to be material, while cautioning assessments may not identify all issues.
No earnings or operating guidance was provided. The 2018 common-dividend policy was an expectation, not a commitment. The company’s stated priorities included preserving liquidity, selective capital improvements, hotel dispositions and acquisitions, and refinancing on competitive terms.
BDO issued an unqualified audit opinion on the financial statements and an unqualified opinion on internal control over financial reporting; management also concluded disclosure controls and internal controls were effective.

Fourth-quarter snapshot

Fourth-quarter 2017 revenue was $341.6 million, operating income was $18.6 million, net loss attributable to the company was $30.0 million, and diluted loss per common share was $0.50. In fourth-quarter 2016, revenue was $341.7 million, operating income was $3.8 million, company-attributable net loss was $46.9 million, and diluted loss per share was $0.61.

Most important facts for investors to verify

Debt maturities, extension conditions, refinancing progress and the effect of higher LIBOR on interest expense and covenant headroom.
Whether hotel operating trends and RevPAR gains can offset portfolio-sale impacts, rising costs and weaker food and beverage revenue.
Cash available after debt service, capital spending, preferred dividends and common distributions; also confirm the tax characterization and sustainability of distributions.
Final hurricane insurance recoveries and any remaining costs, sale proceeds and impairment assumptions for held-for-sale properties, and any residual legal exposure.
Related-party fee arrangements, advisor and manager conflicts, and the impact of preferred-stock obligations on common-stockholder economics.