Ashford Hospitality Trust Inc. - 10-Q Summary (Q3 2010)
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2010. Ashford Hospitality Trust, Inc. is a self-advised Real Estate Investment Trust (REIT) owning 94 hotel properties directly and six through majority-owned joint ventures (21,734 total rooms). The company also holds a portfolio of mezzanine and first-mortgage loans. The reporting period reflects a strategy focused on preserving capital, managing debt maturities, and navigating a recovering lodging market.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 |
|---|---|---|
| Total Revenue | $214.4 million | $655.9 million |
| Net Income (Loss) Attributable to Company | $41.3 million | $53.2 million |
| Net Income (Loss) Attributable to Common Shareholders | $36.3 million | $38.6 million |
| Operating Income (Loss) | $11.5 million | $48.3 million |
| Cash Flow from Operating Activities | N/A | $78.4 million |
| Total Indebtedness | $2.49 billion | $2.49 billion |
| Cash and Cash Equivalents | $72.1 million | $72.1 million |
| EBITDA | $120.0 million | $280.4 million |
| Funds From Operations (FFO) | $22.2 million | $97.9 million |
Material Changes vs. Prior Period
- Profitability Turnaround: The Company reported a net income of $41.3 million for the quarter, a significant improvement from a net loss of $28.8 million in the same period in 2009. This was driven primarily by a $56.0 million gain from discontinued operations (consensual transfer of Westin O'Hare) and reduced impairment charges.
- Revenue Growth: Total revenue increased 3.5% quarter-over-quarter to $214.4 million, driven by a 5.4% increase in room revenue due to improved occupancy (72.14% vs. 68.99% in 2009).
- Impairment Charges: Impairment charges dropped significantly to $0.7 million for the quarter compared to $19.8 million in Q3 2009. For the nine months, the Company recorded a net credit to impairment charges of $1.3 million, compared to $149.3 million in 2009.
- Debt Reduction: Total indebtedness decreased to $2.49 billion from $2.77 billion at year-end 2009. The Company reduced its senior revolving credit facility balance to $75.0 million.
- Discontinued Operations: The Company recorded a $56.2 million gain on the consensual transfer of the Westin O'Hare hotel and a $12.1 million impairment charge on the sale of the Hilton Suites in Auburn Hills, both classified as discontinued operations.
Guidance, Outlook, and Risks
- Management Commentary: Management notes that the lodging industry is experiencing improvement in fundamentals, specifically occupancy, while room rates (ADR) have stabilized. The strategy remains focused on preserving capital and addressing value deficits in mortgaged hotels through loan amendments or consensual transfers.
- Dividend Policy: The Board has suspended the common stock dividend for 2010, except to the extent required to maintain REIT status. Preferred dividends continue to be paid.
- Derivatives: In October 2010 (subsequent event), the Company converted a $1.8 billion interest rate swap to a fixed rate of 4.09%, locking in approximately $32 million in annual interest savings through March 2013.
- Risks and Contingencies:
- Debt Covenants: The Company is in compliance with all debt covenants, but violations could trigger early repayment requirements.
- Mezzanine Loans: The borrower of a $15 million mezzanine loan joint venture stopped making payments in August 2010. The Company is pursuing remedies but has not yet recognized an "other than temporary impairment."
- Tax Audit: The IRS has issued a notice of proposed adjustment regarding rent charged to a taxable REIT subsidiary. If the IRS prevails, the subsidiary could owe approximately $1.1 million in additional taxes, or the Company could face a 100% excise tax.
- Voluntary Defaults: The Company has elected to cease payments on certain mortgages (e.g., Manchester, CT) where cash flows are insufficient, transferring them to special servicers.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the extent to which the $56.2 million gain on the Westin O'Hare transfer and the $12.1 million loss on the Auburn Hills sale distort the core operating performance.
- Mezzanine Loan Exposure: Assess the risk of further write-downs on the $69.1 million mezzanine loan portfolio, particularly the $15 million joint venture loan currently in default.
- Debt Maturities: Review the schedule of debt maturities, specifically the $75 million senior credit facility expiring in April 2011, and the Company's ability to refinance or extend.
- Tax Liability: Monitor the outcome of the IRS audit regarding the taxable REIT subsidiary lease rates and potential excise tax implications.
- Derivative Valuation: Confirm the fair value of the $125.3 million interest rate derivative asset and the sustainability of the income generated from these instruments.