Ashford Hospitality Trust, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. Although the request references 2011 Q4, this filing reports full-year results and includes selected quarterly data. Ashford is a U.S. hotel-focused REIT; at year-end it had 96 consolidated hotels with 20,656 rooms (20,395 net rooms), plus an equity-method investment in a 28-hotel joint venture.
Financial performance and position
| Metric | 2011 | 2010 |
|---|---|---|
| Total revenue | $889.8 million | $838.6 million |
| Operating income | $91.4 million | $17.9 million |
| Net income (loss) attributable to Ashford | $2.1 million | ($51.7 million) |
| Net income (loss) attributable to common shareholders | ($44.8 million); loss per share $0.73 | ($72.9 million); loss per share $1.43 |
| Cash from operating activities | $74.6 million | $82.6 million |
| EBITDA (company-defined, unaudited) | $361.0 million | $331.9 million |
| FFO available to common shareholders (unaudited) | $74.2 million | $107.7 million |
| Adjusted FFO available to common shareholders (unaudited) | $150.2 million | $110.4 million |
- Comparable-hotel RevPAR rose 6.3% to $92.68; occupancy increased to 72.02% from 70.19%, and ADR increased to $128.68 from $124.22. Hotel revenue grew 6.3% on the comparable portfolio.
- Operating margin was approximately 10.3%, versus 2.1% in 2010. However, reported results included sizable derivative fair-value swings and other nonrecurring items; common shareholders still reported a loss.
- At December 31, cash and cash equivalents were $167.6 million and restricted cash was $84.1 million. Total assets were $3.59 billion, and continuing-operations debt was $2.36 billion, down from $2.52 billion. Variable-rate debt was $517.7 million.
- Investing activities used $47.8 million; financing activities used $76.9 million. Capital improvements were $67.8 million. The filing states that the $105 million senior credit facility had no outstanding balance at year-end.
Material changes and notable items
- Comparable hotel conditions improved: occupancy and ADR rose, supporting higher revenue. Total revenue increased 6.1% year over year.
- Operating income improved substantially as impairment charges shifted from $46.4 million in 2010 to a $4.8 million credit in 2011. The improvement also reflects a $46.3 million share of the PIM Highland JV’s bargain-purchase and settlement gain.
- Derivative results moved adversely: Ashford recorded a $70.3 million unrealized loss in 2011, versus a $12.3 million gain in 2010. “Other income” included $70.6 million of income from non-hedge interest-rate derivatives, $30 million from a litigation settlement, and $9.7 million from acquiring an additional joint-venture interest at no cost.
- Ashford invested $150 million in the PIM Highland JV, which acquired a 28-hotel portfolio; its year-end carrying value was $179.5 million. Ashford also acquired WorldQuest condominium properties for $12 million.
- Four hotels were sold for total proceeds of $153.7 million; related mortgage debt of $50.2 million was repaid. The Jacksonville Hampton Inn sale was preceded by a $6.2 million impairment charge.
- Ashford issued Series E preferred stock, raising $109.8 million net across two offerings, and used $73 million to redeem Series B-1 preferred shares. It also reissued 7 million treasury shares for $83.2 million net. These capital actions and preferred dividends affect common-shareholder returns and potential dilution.
Outlook, liquidity, and risks
- Management expected improving economic and lodging fundamentals to benefit 2012 hotel results, while cautioning that hotel cash flows and values were not expected to regain 2007 peaks in the immediate future; industry experts cited 2014–2016 as a possible recovery window.
- The company expected to pay a 2012 common dividend of $0.11 per share quarterly, subject to board review and discretion. It declared $0.40 per common share for 2011. The filing notes dividends may exceed cash flow and may require use of cash or borrowing.
- A $203.4 million mortgage was restructured and paid down by $25 million, leaving $178.4 million due March 2014 at LIBOR plus 4.5%, with a conditional one-year extension. The $167.2 million non-recourse portfolio mortgage due May 2012 remained under restructuring and refinancing discussions.
- Management said available cash, operating cash flow, and the credit facility were expected to cover anticipated needs for the next 12 months, but gave no assurance that future financing would be available on favorable terms. The facility’s capacity was increased to $145 million on February 21, 2012.
- Key risks include leverage and refinancing exposure, debt-covenant restrictions, hotel-market and interest-rate sensitivity, substantial capital needs, and concentrated U.S. lodging exposure. About 18.5% of 2011 hotel revenue came from 11 hotels in the Washington, D.C. and Baltimore areas.
- Remington Lodging, beneficially owned by Ashford’s chairman and CEO, managed 45 of the 96 legacy hotels and 19 PIM Highland JV hotels. Related-party fees for continuing operations totaled $23.9 million in 2011; the relationship and exclusivity terms present conflicts-of-interest risks.
- The IRS was challenging the arm’s-length rent charged to a taxable REIT subsidiary. Depending on the IRS’s position, potential exposure described in the filing included approximately $1.1 million of federal taxes plus possible state taxes, or approximately $5.1 million of federal excise taxes; Ashford disputed the adjustments.
- The filing reports an unqualified audit opinion and effective disclosure controls and internal control over financial reporting. Management considered ordinary-course litigation unlikely to have a material adverse effect.
Key investor verification points
- Check progress and final terms for the $167.2 million May 2012 mortgage maturity, and confirm subsequent refinancing, repayments, and credit-facility availability.
- Assess recurring cash generation and dividend coverage against the common and preferred distributions; distinguish GAAP earnings from company-defined EBITDA, FFO, and Adjusted FFO.
- Review derivative exposures, the basis for the $70.3 million unrealized loss, and the filing’s estimated $31.5 million of 2012 derivative income, which depends on market conditions.
- Evaluate the PIM Highland JV’s operating performance, debt, preferred-equity return accrual, and the extent of Ashford’s guarantees and other potential support obligations.
- Monitor the IRS tax dispute, REIT qualification and distribution requirements, and any consequences for cash availability or shareholder distributions.
- Consider related-party management arrangements and fees, capital-expenditure commitments of $36.9 million, and the effect of preferred-stock obligations and share issuance on common shareholders.