Ashford Hospitality Trust, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. The company is a hotel-focused REIT; at quarter-end it owned interests in 130 consolidated hotels and 86 hotel condominium units. Results include substantial portfolio changes from acquisitions during 2015, including the consolidation of the PIM Highland JV beginning March 6.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $364.5 million | $201.5 million | $984.1 million | $604.5 million |
| Operating income | $40.9 million | $19.3 million | $108.2 million | $63.1 million |
| Net income (loss) attributable to common stockholders | ($24.8 million) | ($22.0 million) | $267.5 million | ($42.9 million) |
| Basic EPS | ($0.26) | ($0.24) | $2.72 | ($0.50) |
| Adjusted EBITDA | $104.0 million | $82.4 million | $313.4 million | $258.4 million |
| Adjusted FFO | $40.2 million | $27.2 million | $132.7 million | $94.2 million |
- Nine-month 2015 net income included a $381.8 million gain from acquiring the remaining PIM Highland JV interest; without this major transaction-related gain, the reported year-to-date profit would not reflect recurring hotel operations. The company’s pro forma presentation, adjusting for acquisitions and specified items, showed nine-month revenue of $1.116 billion and a net loss of $61.8 million.
- Reported revenue growth largely reflects acquired hotels and the change from equity accounting to consolidating PIM Highland. For 85 hotels held throughout both comparison periods, Q3 RevPAR increased to $110.41 from $104.10, with occupancy of 79.27% versus 78.23% and ADR of $139.29 versus $133.07.
- Q3 common-stock dividends were $0.12 per share; the board’s stated 2015 target was $0.48 per share annualized, subject to quarterly review and declaration.
Cash flow, debt and liquidity
- Nine-month cash from operating activities was $133.3 million, compared with $92.9 million in 2014. Investing activities used $737.4 million, principally for hotel acquisitions and $114.9 million of property improvements. Financing activities provided $575.0 million. Cash and cash equivalents ended the period at $186.0 million, down from $215.1 million at year-end 2014; restricted cash was $146.2 million.
- Debt was $3.698 billion at September 30, up from $1.954 billion at December 31, 2014. The company reported $2.4 billion of variable-rate debt; management estimated that a 25-basis-point rate increase would raise annual interest cost by approximately $6.0 million, before considering changes in hedges or capital structure. Nine-month interest expense was $134.0 million.
- Management said it was in material compliance with debt covenants and believed operating cash flow and cash balances would cover anticipated requirements for the next 12 months. It also cautioned that future financing is not assured and said it would proactively address 2015 and 2016 maturities. On October 30, 2015, after quarter-end, the company obtained a $100 million revolving credit facility maturing in October 2016.
Material changes, outlook and risks
- The company acquired the remaining 28.26% of PIM Highland JV for $250.1 million cash, taking ownership to 100%, and refinanced substantial JV debt. It also acquired multiple hotels and a nine-hotel portfolio during the period, contributing to higher revenue, debt, depreciation and interest costs.
- In June, the board shifted the investment strategy toward upscale and upper-upscale full-service hotels and announced plans to sell a portfolio of approximately 23 select-service hotels. The filing does not provide a numerical earnings or operating forecast.
- Year-to-date impairment charges were $19.9 million for two hotels, following the company’s assessment that the properties were not to be held long-term. The company also recognized $5.9 million of transaction costs for the nine months.
- Interest-rate exposure, refinancing needs, hotel competition, seasonality, possible lender cash traps, franchise and management agreement terms, and access to capital are key risks. Restricted cash and lender controls may limit funds available for distributions. The company uses interest-rate caps and other derivatives; these instruments can also produce noncash fair-value losses.
- A landlord-tenant case resulted in a jury award against a subsidiary; the company had recorded approximately $12.0 million of total expense through September 30, 2015 and had appealed. Management stated that other pending proceedings were not expected to have a material adverse effect, while noting outcomes remain uncertain.
- Ashford LLC, an Ashford Inc. subsidiary, provides advisory services under a related-party agreement. Q3 advisory fees and related amounts were $10.8 million, including an $8.7 million base fee; the company reported $9.9 million payable to Ashford Inc. at quarter-end. Remington, beneficially owned by the company’s chairman and CEO and chairman emeritus, managed 88 of the hotels.
- In July, Ashford Trust distributed its remaining Ashford Prime interests and no longer held an ownership interest. The filing also describes a proposed Ashford Inc. acquisition of interests in Remington, subject to conditions including Ashford Inc. stockholder approval.
Most important facts for investors to verify
- How much of reported revenue and adjusted operating growth is attributable to acquired properties versus performance of the continuing comparable portfolio.
- The expected timing, proceeds and use of funds from the planned select-service hotel sales, and whether the portfolio strategy materially changes.
- Debt maturities, refinancing terms and covenant headroom, including exposure to floating interest rates and the terms and availability of the post-quarter-end credit facility.
- Whether recurring cash generation supports the common and preferred dividends after capital expenditures, debt service and restricted-cash requirements.
- Final exposure and appeal status in the Palm Beach litigation, and any material updates to other legal or contingent obligations.
- The economic terms, governance safeguards and potential conflicts associated with the advisory agreement and related-party hotel management arrangements.