Ashford Hospitality Trust, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Amounts are in U.S. dollars; financial figures are generally in millions unless noted. Ashford is a self-advised hotel REIT. At quarter-end it reported 95 consolidated hotel properties and an interest in a 28-hotel unconsolidated joint venture.
Financial performance and position
- Revenue: Q3 revenue was $242.0 million, up 8.0% from $224.2 million. Nine-month revenue was $732.5 million, up 7.4% from $682.0 million.
- Operating income and margins: Q3 operating income was $28.2 million versus $30.2 million; operating margin was approximately 11.6% versus 13.5%. Nine-month operating income rose to $95.0 million from $87.6 million; margin was approximately 13.0% versus 12.8%.
- Net loss: Q3 net loss was $19.4 million versus $18.0 million; loss attributable to common shareholders was $24.8 million, or $0.31 per share, versus $23.6 million, or $0.35 per share. Nine-month net loss was $30.0 million versus $48.5 million; common-shareholder loss was $49.4 million, or $0.69 per share, versus $66.5 million, or $0.99 per share.
- Cash flow: Nine-month operating cash flow was $108.7 million versus $106.8 million. Investing used $156.7 million, including $88.2 million for the Pier House acquisition and $69.0 million for hotel improvements. Financing provided $172.4 million, including borrowing and common-stock offering proceeds. Cash and cash equivalents ended at $310.4 million, versus $185.9 million at year-end 2012.
- Debt and liquidity: Indebtedness was $2.44 billion, up from $2.34 billion at December 31, 2012. Restricted cash was $84.2 million. The undrawn senior credit facility had $165 million of capacity; no amount was outstanding. Management reported compliance in all material respects with debt covenants and said available cash, operating cash flow, and facility availability should cover anticipated needs for the next 12 months.
- Hotel indicators: Q3 RevPAR was $105.55 versus $102.08; occupancy was 76.17% versus 76.48%; ADR was $138.56 versus $133.48. Nine-month RevPAR was $105.59 versus $101.74.
- Non-GAAP measures: Nine-month Adjusted EBITDA was $276.6 million versus $253.6 million, and Adjusted FFO available to common shareholders was $102.0 million versus $93.4 million. Q3 Adjusted FFO was $24.3 million versus $26.0 million. The filing cautions these measures are not substitutes for GAAP results or operating cash flow.
Changes versus the prior comparable period
- Reported revenue benefited from Marriott’s changed fiscal calendar: Marriott-managed hotels had eight more operating days in Q3 2013 and 24 more days in the first nine months than in the corresponding 2012 periods. The filing did not adjust prior results, limiting direct comparability.
- Higher ADR and the May acquisition of the 142-room Pier House Resort also contributed to revenue growth. Pier House generated $4.0 million of Q3 revenue and $0.7 million of net income after acquisition.
- Q3 operating income declined despite higher revenue, reflecting higher operating costs, property taxes and corporate expenses. Nine-month operating income increased.
- Q3 results included only $0.3 million of other income, versus $8.7 million a year earlier, primarily because non-hedge interest-rate swaps that had contributed income expired. Conversely, derivative losses fell to $0.8 million from $9.4 million in Q3 2012. Nine-month derivative losses also declined, to $7.2 million from $26.8 million.
- Corporate, general and administrative expense rose to $13.5 million for Q3 and $42.7 million for nine months, partly due to costs for the proposed spin-off. Nine-month 2013 results also included $1.3 million of transaction costs and $2.0 million of loan-cost and exit-fee write-offs.
Outlook, transactions and risks
- Ashford Prime spin-off: The company planned a taxable pro rata distribution of one Ashford Prime share for every five Ashford common shares, with a November 19, 2013 distribution date and November 8 record date. The planned transaction involved an eight-hotel portfolio and an expected contribution of approximately $139 million in cash. Ashford said associated debt would be assumed by Ashford Prime, but cautioned that the spin-off could reduce Ashford’s hotel cash flows and affect revenue, earnings, liquidity and future distributions. Completion depended on required consents and approvals; the filing gives no assurance it would occur as planned.
- Dividend: The company reported a 2013 common dividend target of $0.12 quarterly ($0.48 annualized). The board reviews dividends quarterly; the policy is not a commitment to pay future dividends. The planned spin-off could affect future cash available for distributions.
- Debt and interest-rate exposure: The company had $787.4 million of variable-rate debt; a 25-basis-point rate change was estimated to affect annual results by approximately $2.0 million. Management identified 2014 maturities as an area to address proactively. Cash-trap provisions, covenant breaches, refinancing availability and non-recourse carve-out guarantees could affect liquidity.
- Other risks and contingencies: The filing describes franchise and management contract obligations, litigation, a potential pension indemnity related to Remington Lodging, and IRS disputes concerning 2008 tax years. The IRS issued no-change letters for the 2007 examinations, but retained the right to reopen them through March 31, 2014; the 2008 matters remained under appeal. Management did not expect the matters discussed to have a material adverse effect, while noting outcomes cannot be assured.
- Management believed economic improvement could continue to benefit hotel operations, but provided no specific earnings or RevPAR guidance. It emphasized seasonality, competition, capital availability and general lodging-market conditions as uncertainties. Q3 and nine-month results may not indicate full-year performance.
Important facts for investors to verify
- Whether the Ashford Prime distribution closed on the stated terms, including the cash and hotel assets transferred, assumed debt, tax treatment and effect on Ashford’s ongoing cash flows.
- Comparable hotel operating trends after adjusting for Marriott’s extra reporting days and the Pier House acquisition, including RevPAR, occupancy, ADR and operating margins.
- Debt maturities and refinancing plans, covenant headroom, available credit capacity, and exposure to variable rates and cash-trap provisions.
- Whether operating cash flow supports the common and preferred dividends after the spin-off and planned capital expenditures.
- Resolution of the 2008 IRS appeals and any developments in the litigation, pension-indemnity exposure or other guarantees.