ASHFORD HOSPITALITY TRUST INC quarterly report, Q2 FY2023

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Ashford Hospitality Trust, Inc. — Q2 2023 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2023. Unless stated otherwise, financial amounts below are in millions of dollars. The company is a U.S. hotel REIT with 100 operating hotels and 22,317 rooms at quarter-end.

Financial performance

  • Revenue: Q2 revenue was $375.7 million, up 7.9% from $348.1 million a year earlier. First-half revenue was $704.6 million, up 18.4% from $595.2 million.
  • Hotel operating indicators: Q2 RevPAR rose to $143.55 from $134.54; occupancy increased to 75.31% from 73.34%, and ADR rose to $190.60 from $183.45. Management attributed gains principally to recovery in hotel demand and pricing.
  • Profit and margins: Q2 net loss was $25.0 million versus $6.2 million; loss attributable to common stockholders was $29.2 million, or $0.85 per share, versus $9.3 million, or $0.27 per share. First-half net loss was $86.5 million versus $62.0 million. Q2 operating income was $52.8 million, approximately 14.1% of revenue, compared with $42.1 million, or approximately 12.1%, in 2022.
  • Non-GAAP measures: Q2 Adjusted EBITDAre was $104.0 million versus $96.4 million; first-half Adjusted EBITDAre was $179.6 million versus $136.6 million. Q2 FFO available to common stockholders and operating partnership unitholders was $16.7 million versus $41.4 million; Adjusted FFO was $28.5 million versus $44.6 million. These measures are not GAAP cash-flow measures.
  • Interest expense: Q2 interest expense and loan-cost amortization increased 85.1% to $89.6 million; first-half expense increased 86.1% to $171.1 million. The company cited higher rates on variable-rate debt. First-half interest paid was $158.9 million versus $93.5 million.
  • Cash flow: First-half operating cash flow was $35.3 million, nearly unchanged from $35.7 million. Investing activities used $49.6 million, including $68.0 million of hotel improvements; financing activities used $123.2 million. Cash, cash equivalents and restricted cash, including amounts held for sale, totaled $421.5 million at June 30, versus $559.0 million at year-end 2022.
  • Debt and liquidity: Indebtedness, net was $3.716 billion, down from $3.839 billion at year-end; total assets were $3.801 billion and total liabilities $3.976 billion, leaving a $235.2 million total equity deficit. Management reported $254.1 million of cash and cash equivalents and $167.5 million of restricted cash; most restricted cash was lender- or manager-held. Net debt to gross assets was 69.5%. Approximately $3.4 billion of $3.7 billion total debt was variable-rate. A 25-basis-point rate increase would add an estimated $8.4 million of annual expense before considering hedges.

Changes, outlook and material risks

  • Revenue and hotel operating metrics improved year over year, but higher operating costs and sharply higher interest expense contributed to larger net losses. Q2 hotel operating expenses rose 8.8% to $240.7 million; first-half hotel operating expenses rose 17.1% to $465.8 million.
  • After quarter-end, the company did not make required paydowns to extend KEYS Pool A, B and F loans and reported defaults on those loans. Their balances were approximately $180.7 million, $174.4 million and $215.1 million, respectively. Management was discussing modifications with lenders and said a consensual transfer of the related hotels appeared the most likely outcome. Pools C, D and E were extended with respective paydowns of about $62.4 million, $25.6 million and $41.0 million.
  • The company refinanced $98.5 million of mortgages in May with an interest-only loan bearing SOFR plus 4.00%, maturing in May 2026, subject to extension conditions. It also amended its Oaktree credit agreement, including provisions for up to $100 million of delayed-draw term loans through July 7, 2024; undrawn amounts are subject to a 9% annual fee. The company reported compliance with Oaktree covenants and with mortgage covenants other than the identified KEYS defaults.
  • Management said current cash, operating cash flow and cash balances should cover anticipated interest and principal payments, working capital, capital expenditures and required REIT distributions for the next 12 months, excluding potential final maturity payments and extension paydowns. It cautioned that refinancing or additional financing is not assured and that unfavorable financing or foreclosure could harm the business.
  • No numerical operating guidance was provided. The company did not anticipate common-stock dividends in 2023 and expected preferred dividends, subject to board review and, among other factors, a determination of positive equity on a fair-value basis. Preferred-stock offerings generated $34.7 million net proceeds in the first half; Series J and K carry cumulative dividend rates initially of 8.0% and 8.2%, respectively.
  • WorldQuest was sold on August 1, 2023 for $14.8 million; its June 30 carrying value was about $8.0 million. The Le Meridien Fort Worth development entity was consolidated in May after the company funded a $3.0 million default loan; lender balancing deposits may total up to $9.5 million. Consolidation produced a reported $1.1 million gain.
  • Other risks include higher rates and inflation, hotel demand and operating-cost uncertainty, cash traps affecting 41% of hotels at quarter-end, and a California employment class action for which the company said a potential loss was not reasonably estimable and no amount was accrued. The filing also notes exposure to financial-institution failures, although the company reported no direct exposure to the named bank failures.

Important facts for investors to verify

  • Current status, lender negotiations and potential hotel transfers involving KEYS Pools A, B and F, and any resulting loss of assets or changes to debt.
  • Upcoming loan maturities, extension tests and required paydowns, and whether the stated liquidity outlook remains achievable after those requirements.
  • Availability of cash: distinguish unrestricted cash from restricted reserves, cash-trapped funds and amounts held by hotel managers.
  • Interest-rate exposure after the LIBOR-to-SOFR transition, effectiveness and cost of interest-rate caps, and the effect of continuing high borrowing costs.
  • Preferred-dividend capacity and terms, including redemption features and the potential effect of further preferred issuance on common-stockholders’ claims.