Ashford Hospitality Trust, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Amounts are in millions except per-share amounts and hotel operating statistics. Financial statements are unaudited.
Business context and reporting period
Ashford is a U.S. hotel-focused REIT. At quarter-end, it owned interests in 88 consolidated legacy hotels (17,291 rooms), had interests in a 28-hotel joint venture and Ashford Prime OP, and owned 88 WorldQuest condominium units. It acquired the Ashton in July and Fremont Marriott Silicon Valley in August. Results are affected by the November 2013 Ashford Prime spin-off and the March 2014 sale of Pier House; accordingly, year-over-year reported revenue comparisons are not like-for-like.
Financial and operating performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $202.1 | $242.0 | $606.6 | $732.5 |
| Operating income | $19.4 | $28.2 | $63.5 | $95.0 |
| Net loss attributable to common shareholders | $(22.0) | $(24.8) | $(42.9) | $(49.4) |
| Loss per common share | $(0.24) | $(0.31) | $(0.50) | $(0.69) |
| Operating margin (operating income / revenue) | 9.6% | 11.6% | 10.5% | 13.0% |
| Adjusted EBITDA (non-GAAP) | $82.4 | $85.5 | $258.4 | $276.6 |
| Adjusted FFO available to common shareholders (non-GAAP) | $27.2 | $24.3 | $94.2 | $102.0 |
Hotel RevPAR was $104.15 in Q3, down from $105.55; occupancy rose to 78.31% from 76.17%, while ADR fell to $133.00 from $138.56. For the nine-month period, RevPAR was $104.34 versus $105.59. Management attributed reported revenue declines largely to hotels transferred in the Ashford Prime spin-off and the Pier House disposition; revenue from the remaining portfolio also reflected operating changes and the two acquisitions.
Q3 operating income fell despite lower hotel operating costs, partly because of lower revenue and higher corporate costs. Lower interest expense helped reduce net losses, but 2014 results included substantial refinancing costs and unfavorable marketable-securities marks. Non-GAAP EBITDA and FFO measures are company-defined and should be considered alongside GAAP results, not as substitutes for them.
Cash flow, debt and liquidity
- Cash and cash equivalents were $280.6 at September 30, 2014, versus $128.8 at year-end 2013; marketable securities were $44.3, bringing cash, cash equivalents and securities to $324.8. Restricted cash was an additional $107.4 and is not necessarily available for general use.
- Debt was $1,959.6, up from $1,818.9 at December 31, 2013. Total assets were $2,863.7 and total liabilities were $2,093.4.
- Nine-month operating cash flow was $92.9, compared with $108.7 in 2013. Investing used $150.6, including $91.5 of hotel improvements and acquisition outlays; financing provided $209.5. Cash increased by $151.8 over the period.
- Variable-rate debt was approximately $817.9. The company estimated that a 25-basis-point rate increase would add about $2.0 annually to interest expense, before considering future changes or hedging.
- The $165 million senior credit facility expired in September and management did not plan to replace it, stating it had never been drawn and other sources had provided adequate liquidity. Management believed cash and operating flows were adequate for the next 12 months and said it would proactively address 2015 maturities. All material debt covenants were reported in compliance at quarter-end.
- Common dividends declared were $0.12 per share per quarter; the stated 2014 annualized target was $0.48. The board reviews the policy quarterly and is not committed to future dividends.
Material changes, outlook and unusual items
- Acquired the Ashton for $8.0 and Fremont for $50.0, partly financed with property-level mortgages. The July refinancing of three loans totaled $468.9; two hotels became unencumbered. Refinancing and related exit costs contributed to a $8.3 Q3 and $10.4 nine-month write-off of loan costs and exit fees.
- Management’s strategy includes selective hotel acquisitions and dispositions, capital improvements, cost control, refinancing, and securities investments. It provided no quantitative earnings or hotel-performance guidance. Management cited hotel seasonality and noted quarterly results are not necessarily indicative of full-year results.
- A spin-off of the asset-management business into Ashford Inc. was targeted for Q4 2014, subject to regulatory, listing, third-party and board conditions. The filing cautioned that it might not occur as planned or at all. The proposed distribution was expected to be taxable to shareholders; management expected the operating impact on Ashford Trust’s liquidity to be largely offset by reduced employee costs, but identified execution, cost, tax, advisory dependence and conflict-of-interest risks.
- A jury verdict in a landlord-tenant dispute awarded the tenant $10.8; the company recorded $11.5 of expense for the nine months, including $0.7 of Q3 prejudgment interest. The company planned post-trial motions and an appeal. A court also found the plaintiff entitled to legal fees, but the amount was unknown and no accrual was recorded because a reasonable estimate could not be made.
- The company settled IRS examinations concerning 2008 tax issues; the IRS issued no-change letters indicating no deficiencies. The assessment statute was extended to December 31, 2014, and Ashford Trust indemnified Ashford Prime for potential losses related to the examination.
- In October, the company agreed to sell the Mobile Homewood Suites, with a stated expected closing date of November 12, 2014; its carrying value at September 30 was approximately $7.2.
Most important facts for investors to verify
- How much of the revenue and RevPAR movement reflects the smaller post-spin-off portfolio versus underlying performance at comparable hotels.
- Liquidity available after restricted cash, upcoming debt maturities, refinancing terms, and the effect of interest-rate movements on floating-rate borrowings.
- Whether the Ashford Inc. spin-off closes, its shareholder tax consequences, and the terms and costs of the anticipated advisory arrangement.
- The ultimate judgment and legal-fee exposure in the Palm Beach litigation, including whether the recorded estimate proves sufficient.
- The sustainability of the common dividend relative to operating cash flow, capital spending, debt service and REIT distribution requirements.