Ashford Hospitality Trust, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Unaudited consolidated results; amounts below are in millions unless noted. Ashford is a self-advised REIT focused on hospitality. At quarter-end it reported 96 hotel properties and 20,656 total rooms, including joint-venture rooms.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $214.6 | $202.2 | $656.5 | $618.3 |
| Operating income | $17.7 | $13.5 | $71.3 | $53.0 |
| Net income (loss) | $(25.0) | $47.7 | $11.6 | $60.4 |
| Net income (loss) attributable to common shareholders | $(28.6) | $36.3 | $(26.4) | $38.6 |
| Basic and diluted EPS | $(0.43) | $0.71 | $(0.44) | $0.73 |
| Cash from operating activities | — | — | $64.4 | $78.4 |
- Comparable-hotel RevPAR increased 5.7% in Q3 and 6.7% for the nine months. Q3 occupancy rose 2.22 percentage points to 74.85%, while ADR increased 2.6% to $125.98. Nine-month occupancy rose 2.07 points and ADR increased 3.7%.
- Operating margin, calculated as operating income divided by total revenue, was approximately 8.2% in Q3 2011 versus 6.7% in Q3 2010; for nine months it was 10.9% versus 8.6%.
- Q3’s common-shareholder loss reflected, among other items, an $18.3 million unrealized derivatives loss and a $6.2 million equity loss from unconsolidated joint ventures. The comparable 2010 quarter benefited from a $55.9 million property-disposal gain, principally from the Westin O’Hare transfer. Nine-month 2011 results included a $45.8 million Ashford share of the PIM Highland JV’s preliminary acquisition gain.
- Adjusted EBITDA was $67.2 million in Q3 and $212.0 million for nine months, compared with $48.0 million and $155.6 million, respectively. Adjusted FFO available to common shareholders was $32.2 million and $116.2 million, versus $23.5 million and $81.0 million. These are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
Financial position, liquidity and capital
- At September 30, 2011, total assets were $3.63 billion, cash and cash equivalents $180.9 million, and restricted cash $78.5 million. Cash declined $36.8 million from year-end 2010.
- Continuing-operations indebtedness was $2.39 billion, down from $2.52 billion at December 31, 2010. Nine-month interest expense and loan-cost amortization was $103.9 million; interest paid was $102.3 million.
- Of total debt, $543.7 million was variable-rate and approximately $1.8 billion fixed-rate. Management estimated that a 25-basis-point rate change on variable-rate debt would affect annual results by about $1.3 million.
- A new $105 million revolving credit facility matures in September 2014; it was undrawn at quarter-end, with the full $105 million available. Management reported fixed-charge coverage of 1.72x against a 1.35x minimum and leverage of 59.4% against a 65% maximum.
- Management said cash, operating cash flow and available credit should meet anticipated debt service, working capital and capital spending needs for the next 12 months. It cautioned that refinancing availability and terms are not assured and said it would address 2011–2012 maturities proactively.
- Common dividends resumed in 2011, with a stated annualized target of $0.40 per share; $0.30 per share was declared through Q3. Future payments are reviewed quarterly. The company also issued $80.8 million net from Series E preferred stock, used $73.0 million to redeem Series B-1 preferred stock, and reissued 7.0 million treasury common shares for $83.3 million net.
Changes, outlook and risks
- Hotel revenue increased with improved occupancy and room rates. Higher hotel operating costs partly offset revenue growth; corporate G&A also rose, including equity compensation and $6.9 million of legal costs related to the Wells Fargo settlement.
- During the first nine months, Ashford sold four hotels for approximately $153.7 million, repaid related mortgage debt of $50.2 million, and recorded a net disposal gain of about $2.6 million. The Jacksonville Hampton Inn had a $6.2 million impairment before sale.
- In March, Ashford invested $150 million in the PIM Highland JV, which acquired 28 hotels. Ashford holds 71.74% but accounts for the investment under the equity method because key decisions require joint approval. The JV’s purchase-price allocation and acquisition gain remain preliminary and may be revised.
- The Board reinstated and increased authorization for a repurchase program to $200 million, permitting stock repurchases or discounted debt purchases; none had occurred by September 30. A preferred-stock ATM program of up to $30 million had also produced no sales by the report date.
- Management described lodging fundamentals as improving, with occupancy gains followed by rising room rates, and expected the recovery to support 2011 hotel results. It also noted that prior peak cash flows and values were not expected in the immediate future. The filing gives no specific earnings or operating forecast; hotel seasonality makes interim results non-indicative of full-year results.
- Derivatives create material earnings volatility: nine-month unrealized derivative losses were $52.8 million, while management estimated those instruments would generate approximately $16.3 million of income for the remainder of 2011 based on September 30 LIBOR rates. That estimate is market-dependent, and derivative counterparties may fail to perform.
- A $167.2 million mortgage loan covering ten hotels was subject to a cash trap; approximately $9.4 million of excess cash had not yet been remitted by hotel managers. The company reported material covenant compliance otherwise. Hotel debt covenants, refinancing risk, competition, seasonal operations, franchise and management agreements, and REIT qualification are additional risks.
- An IRS dispute concerning rent charged between the REIT and a taxable REIT subsidiary remained unresolved. The potential federal exposure was approximately $5.1 million under the REIT excise-tax position or $1.1 million plus possible state tax under the alternative TRS adjustment; the company disputed the IRS position. Management believed resolution would not materially harm financial condition or results.
- Other unusual items include a $30 million Wells Fargo settlement recorded in other income and $6.9 million of related legal costs. In October 2011, after quarter-end, Ashford issued 1.3 million Series E preferred shares and received $29.1 million net.
Most important facts for investors to verify
- Whether comparable-hotel RevPAR and operating improvements persist, and whether cost growth remains contained.
- The status and terms of upcoming 2011–2012 debt maturities, cash-trap remittances, covenant headroom and refinancing options.
- The final PIM Highland JV purchase-price allocation, subsequent operating performance and effect of any revisions to its preliminary gain.
- Actual cash generation and dividend coverage, including the sustainability of common and preferred distributions.
- Mark-to-market exposure, collateral and counterparty risk in interest-rate and credit-default swaps and securities investments.
- Resolution of the IRS tax dispute and the final impact of property sales and other discontinued operations.