AHT

Ashford Hospitality Trust Inc. - 10-Q Summary (Q3 2009)

Business Context and Reporting Period

This report covers the quarterly period ended September 30, 2009. Ashford Hospitality Trust, Inc. is a self-advised Real Estate Investment Trust (REIT) owning 103 hotel properties (97 direct, 6 via joint ventures) totaling 23,255 rooms. The company also maintains a portfolio of mezzanine and first-mortgage loans. The reporting period reflects the severe impact of the 2009 economic recession on lodging demand and significant credit events within the company's loan portfolio.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 20.2% year-over-year for the nine months ended September 30, 2009. Room revenue dropped 19.6% due to a 775 basis point decline in occupancy (65.96% vs. 73.71%) and a $14.33 decrease in Average Daily Rate (ADR).
• Significant Impairments: The company recorded $160.1 million in impairment charges for the nine months ended September 30, 2009, compared to none in the prior year. This includes:
  • $109.4 million valuation allowance on the Extended Stay Hotels (ESH) mezzanine loan following the issuer's Chapter 11 bankruptcy.
  • $39.9 million valuation allowances on four other mezzanine loans.
  • $10.9 million impairment on the Hyatt Regency Dearborn hotel property due to default and foreclosure proceedings.
• Derivative Income: "Other income" increased significantly to $35.1 million (YTD 2009) from $6.2 million (YTD 2008), driven by $33.2 million in income from non-hedge interest rate derivatives (flooridors and swaps) benefiting from declining LIBOR rates.
• Stock Repurchases: The company repurchased 23.8 million shares of common stock and significant amounts of preferred stock for a total of $64.0 million during the first nine months of 2009.

Guidance, Outlook, and Risks

• Outlook: Management expects lodging demand to remain "considerably bearish" for the remainder of 2009. The primary strategy is to preserve capital, enhance liquidity, and implement cost-saving measures. Common stock dividends were suspended effective Q4 2008 and remain suspended; the company expects to pay only the minimum dividend required to maintain REIT status in 2009.
• Loan Portfolio Risk: The remaining mezzanine loan portfolio balance is $86.5 million. Management warns that if the economic downturn continues and underlying properties cannot generate cash flow, the entire remaining portfolio could be written off, potentially impacting operating income by up to $4.9 million annually.
• Covenant Compliance: The company is currently in compliance with all debt covenants. However, the Series B-1 preferred stockholder granted a waiver to exclude Q2 2009 impairment charges from financial ratio calculations. Future impairment charges could trigger covenant violations, leading to restricted operations or increased dividend requirements.
• Liquidity: Management believes cash flow from operations and current cash balances ($197.9 million) are adequate for the next 12 months. The company is actively refinancing maturing debt, including a $75 million loan maturing in March 2010.

Investor Verification Checklist

• Loan Recovery: Verify the status of the $109.4 million ESH loan write-off and the likelihood of recovery in the bankruptcy proceedings.
• Hyatt Dearborn Resolution: Confirm the timeline and terms for the deed-in-lieu of foreclosure or foreclosure of the Hyatt Regency Dearborn property.
• Derivative Exposure: Assess the sustainability of derivative income as LIBOR rates stabilize or rise, and the impact on future earnings.
• Debt Maturities: Review the refinancing status of the $75 million debt maturing in March 2010 and the $65 million maturing in 2011.
• Dividend Policy: Monitor announcements regarding the minimum dividend required to maintain REIT status for the full year 2009.