Ashford Hospitality Trust, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Unaudited consolidated results. Ashford is a hospitality-focused REIT; at quarter-end it owned 96 consolidated hotels, held an interest in a 28-hotel unconsolidated joint venture, and owned 94 condominium units. Amounts below are in millions unless otherwise stated.
Financial performance
| Metric | Three months 2012 | Three months 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $249.1 | $230.1 | $475.0 | $441.9 |
| Operating income | $31.1 | $35.7 | $53.4 | $53.6 |
| Operating margin | 12.5% | 15.5% | 11.3% | 12.1% |
| Net income (loss) | $(5.9) | $(7.3) | $(30.5) | $36.6 |
| Net income (loss) attributable to common shareholders | $(13.3) | $(29.1) | $(42.9) | $2.2 |
| Adjusted EBITDA (company-defined) | $98.4 | $89.6 | $173.7 | $149.7 |
| Adjusted FFO available to common shareholders (company-defined) | $44.0 | $51.2 | $67.4 | $83.5 |
For comparable hotels, Q2 RevPAR rose 6.2% to $106.40, occupancy increased to 78.16% from 76.34%, and ADR rose to $136.13 from $131.28. Six-month RevPAR increased to $101.01 from $96.23. The company declared common dividends of $0.11 per share for the quarter; its stated 2012 target was $0.44 annually, subject to board review.
Six-month operating cash flow was $68.2, versus $60.1 in 2011. Investing activities used $44.0, principally $44.1 of hotel improvements; financing activities used $52.4, including $35.0 of dividends and $180.9 of debt repayments, partly offset by borrowings and preferred-stock proceeds. Cash and cash equivalents were $139.5 at June 30, down from $167.6 at year-end; restricted cash was $76.6.
Debt totaled $2.319 billion, down from $2.362 billion at December 31, 2011. Total equity was $934.4. Variable-rate debt was $481.4; management estimated that a 25-basis-point rate increase would add about $1.1 annually to interest costs. The $145 million senior credit facility had no borrowings outstanding, and management reported covenant compliance. The filing states that cash, operating cash flow, and facility availability should cover anticipated needs for the next 12 months.
Material changes and drivers
- Quarterly revenue increased 8.3%, reflecting stronger comparable-hotel occupancy and rates, plus revenue from a hotel brought into consolidated operations after Ashford acquired the remaining 11% interest in its ownership entity.
- Despite revenue growth, quarterly operating income fell $4.6 million and operating margin declined, as hotel operating costs, depreciation, and a new $4.1 million impairment more than offset higher revenue. Interest expense also increased.
- The Tucson Hilton was written down by $4.1 million to $19.7 million. Six-month results also included a $10.3 million equity loss from unconsolidated joint ventures, versus $25.8 million of equity earnings in 2011. The 2011 comparison included Ashford’s share of a large PIM Highland JV acquisition gain.
- Six-month 2011 results benefited from a $30 million litigation settlement in other income; 2012 did not. Derivative-related losses remained significant but were smaller than in 2011: $17.4 million versus $34.6 million for the first half.
- On May 9, Ashford refinanced a $167.2 million mortgage with a $135 million loan due May 2014. The new loan carries LIBOR plus 6.50%, compared with LIBOR plus 1.65% on the prior loan.
- The company raised $16.0 million net through its Series A and Series D preferred-stock ATM program during the first half. Preferred dividends reduced income available to common shareholders.
Outlook, risks, and contingencies
- Management said lodging fundamentals had continued to improve and expected that trend to support hotel results for the rest of 2012. It also cautioned that prior peak hotel cash flows and values were not expected in the immediate future; the filing contains no formal earnings guidance.
- Management expected existing cash, operating cash flow, and the undrawn credit facility to meet anticipated requirements for the next 12 months, while noting it was proactively addressing 2013 maturities and could not assure favorable future financing.
- After quarter-end, Ashford did not make the August 1 interest payment of $93,500 on the $19.7 million Tucson loan. The filing said sale or foreclosure was reasonably possible because anticipated hotel cash flows would not cover debt service.
- The IRS had proposed adjustments relating to 2007 and 2008 transfer-pricing and lease matters. Potential stated exposures included approximately $5.1 million of federal excise tax for 2007, $3.3 million for 2008, and additional TRS taxes in lieu of the related REIT excise taxes in some cases. Ashford disputed the positions and intended to seek appeals; management believed it would prevail.
- Other risks include upcoming debt maturities, interest-rate and derivative exposure, seasonal hotel cash flows, competition, franchise and management-contract terms, and possible tax-indemnity and pension-related obligations. Management said ordinary-course litigation was not expected to have a material adverse effect.
Most important facts for investors to verify
- Progress and outcome of the Tucson hotel sale or foreclosure process, including any loan default consequences.
- Debt maturities and refinancing plans, particularly 2013 obligations and the higher-cost May 2014 refinancing.
- Whether comparable-hotel RevPAR gains translate into improved operating income and margins after expenses.
- Cash available for dividends after capital spending, debt service, and preferred distributions; the common dividend target is not a commitment to pay.
- Resolution and potential financial impact of the IRS disputes, and the assumptions supporting management’s liquidity assessment.
- Effects of derivative valuations and the PIM Highland JV’s operating results on reported earnings and company-defined non-GAAP measures.
Comparability note: Marriott-managed hotels use a non-calendar fiscal quarter; their 2012 and 2011 second-quarter periods ended June 15 and June 17, respectively. Hotel seasonality also means interim results may not indicate full-year performance.