Ashford Hospitality Trust, Inc. — Q2 2013 Form 10-Q
Business context and reporting period
Unaudited results cover the quarter and six months ended June 30, 2013. Ashford is a hospitality-focused REIT. At quarter-end, it held interests in 95 consolidated hotels, a 28-hotel unconsolidated joint venture, 92 hotel condominium units, and hotel-related notes receivable.
Comparisons require caution: Marriott-managed hotels’ Q2 2013 period had 91 days versus 84 days in Q2 2012; the six-month periods were 184 and 168 days, respectively. Prior periods were not adjusted. The company also acquired Pier House Resort on May 14, 2013.
Financial and operating performance
- Revenue: Q2 total revenue was $258.5 million, up 7.4% from $240.8 million. Six-month revenue was $490.5 million, up 7.1% from $457.8 million.
- Hotel performance: Q2 RevPAR was $111.75, up from $107.35; occupancy was 78.7% versus 78.6%, and ADR was $142.07 versus $136.60. Six-month RevPAR was $105.61 versus $101.57. The differing Marriott period lengths and Pier House acquisition affect comparability.
- Operating income and margins: Q2 operating income was $41.5 million versus $35.5 million; operating margin was approximately 16.1% versus 14.7%. Six-month operating income was $66.8 million versus $57.4 million. Hotel revenue less hotel operating expenses was $101.7 million in Q2, approximately 39.4% of hotel revenue, versus $90.9 million, approximately 37.8%.
- Net income/loss: Q2 net income was $7.6 million, compared with a $5.9 million loss; net loss attributable to common shareholders narrowed to $1.4 million from $13.3 million. For six months, net loss was $10.6 million versus $30.5 million, and net loss attributable to common shareholders was $24.6 million versus $42.9 million.
- Cash flow: Six-month operating cash flow was $74.9 million versus $68.2 million. Investing used $132.6 million, including $88.2 million for Pier House and $44.9 million of hotel improvements. Financing provided $122.3 million. Cash and cash equivalents ended at $250.5 million.
- Liquidity and debt: Cash, cash equivalents, and marketable securities totaled $275.0 million. Debt was $2.382 billion, up from $2.339 billion at year-end 2012. The $165 million senior credit facility had no borrowings; availability was $165 million. Management said liquidity sources should cover expected needs for the next 12 months, while noting upcoming 2014 maturities and no assurance of favorable refinancing.
- Capital returns and non-GAAP measures: Common dividends declared were $0.12 per share for Q2, versus $0.11 a year earlier. Q2 Adjusted EBITDA was $108.8 million versus $98.4 million; Adjusted FFO available to common shareholders was $48.1 million versus $44.0 million. These company-defined non-GAAP measures are not substitutes for GAAP earnings or operating cash flow.
Material changes and notable items
- In February, Ashford refinanced a loan with a $141.7 million year-end 2012 balance into a $199.9 million loan due February 2018, at LIBOR plus 3.50%; its share of excess proceeds was about $40.5 million.
- The May Pier House acquisition had a $90 million contractual cash purchase price. Since acquisition, it contributed $2.4 million of revenue and $575,000 of net income.
- In June, Ashford issued 11.0 million common shares at $12 each, generating approximately $125.9 million net proceeds. After quarter-end, underwriters bought a further 1.25 million shares for approximately $14.2 million net.
- Q2 corporate, general, and administrative expense rose to $14.7 million from $11.9 million, primarily reflecting $3.9 million of proposed spin-off costs. Six-month expense also included higher noncash equity compensation, including accelerated LTIP-unit expense.
- Q2 other income fell to $0.3 million from $6.7 million, largely because non-hedge interest-rate swaps that contributed income in 2012 had expired. Derivative and marketable-security fair-value movements remained volatile.
Outlook, risks, and contingencies
- The board planned a taxable, pro rata distribution of an 80% interest in an eight-hotel portfolio through the proposed Ashford Hospitality Prime spin-off, then expected by the end of Q3 2013. Completion depended on registration effectiveness, approvals and consents, financing, and final board action; the company warned it might not occur or deliver anticipated benefits.
- After quarter-end, the board said the common dividend would remain $0.12 per share per quarter for the rest of 2013, including after the proposed spin-off. This is not a commitment to future dividends; the 2014 policy was to be reviewed later.
- Management cited hotel seasonality, competition, economic and lodging-market conditions, interest rates, financing availability, and capital-market volatility as risks. Cash traps could restrict access to hotel cash after performance declines; guarantees tied to non-recourse loan carve-outs could also affect liquidity.
- At June 30, $722.4 million of debt was variable-rate. A 25-basis-point rate change would affect annual results by approximately $1.8 million. The company reported compliance in all material respects with debt covenants; its senior facility fixed-charge coverage ratio was 1.37x against a 1.25x minimum.
- The IRS issued no-change letters in July for the 2007 tax examinations, but retained a right to reopen them through March 31, 2014. Proposed 2008 adjustments remained under appeal, including a $3.3 million REIT excise-tax adjustment and a TRS adjustment estimated at approximately $467,000 of federal tax plus potential state tax. Management expected to substantially prevail.
- The filing also describes a potential pension-related indemnity, tax indemnities tied to certain property dispositions, and ordinary-course litigation. Management did not expect these matters to materially harm results or financial condition, but outcomes are uncertain.
- No formal full-year earnings or operating guidance is provided. Management expressed an expectation that economic improvement could support lodging results, but cautioned that interim and seasonal results are not necessarily indicative of the full year.
Most important facts for investors to verify
- Whether the Ashford Prime spin-off closed as planned, its final portfolio, financing, tax treatment, and effects on Ashford’s cash flows and dividend capacity.
- How much reported revenue and hotel performance growth reflects the longer Marriott comparison period, underlying comparable-hotel trends, and Pier House.
- Refinancing plans and terms for 2014 maturities, covenant headroom, and sensitivity to floating interest rates.
- The sustainability of the $0.12 quarterly dividend relative to operating cash flow, capital spending, debt service, and preferred dividends.
- Resolution of the 2008 IRS appeal and other disclosed guarantees, indemnities, pension exposure, and litigation.