Ashford Hospitality Trust, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2012; filed November 7, 2012. Ashford is a self-advised lodging REIT. At quarter-end it owned 96 consolidated hotels (20,656 rooms), held an interest in a 28-hotel unconsolidated joint venture, and owned 94 hotel condominium units.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $230.2 million | $214.6 million | $705.2 million | $656.5 million |
| Operating income | $28.2 million | $17.7 million | $81.7 million | $71.3 million |
| Operating margin | 12.3% | 8.2% | 11.6% | 10.9% |
| Net income (loss) | $(18.0) million | $(25.0) million | $(48.5) million | $11.6 million |
| Net income (loss) attributable to common shareholders | $(23.6) million | $(28.6) million | $(66.5) million | $(26.4) million |
| FFO available to common shareholders | $15.2 million | $12.2 million | $64.7 million | $51.2 million |
| Adjusted FFO available to common shareholders | $26.0 million | $31.7 million | $93.4 million | $115.3 million |
| Adjusted EBITDA | $80.0 million | $69.9 million | $253.6 million | $219.5 million |
Comparable-hotel RevPAR increased 6.5% in Q3 to $100.78, with occupancy up to 75.83% from 74.94% and ADR up to $132.90 from $126.26. For the nine-month period, RevPAR rose to $100.93 from $95.73. Direct hotel expenses were 29.8% of hotel revenue in Q3 versus 30.3% a year earlier, and 29.6% versus 29.7% for the nine-month periods.
Nine-month operating cash flow was $106.8 million, versus $64.4 million in 2011. Investing activities used $57.4 million, mainly for $62.6 million of hotel improvements; financing activities used $70.6 million. Cash and cash equivalents were $146.4 million at September 30, down from $167.6 million at year-end 2011; restricted cash was $76.9 million.
Total indebtedness was $2.312 billion, down from $2.362 billion at December 31, 2011. Total assets were $3.485 billion and total liabilities were $2.456 billion. The company reported $479 million of variable-rate debt; management estimated a 25-basis-point rate increase would add about $1.1 million in annual interest expense. The $165 million senior credit facility had no outstanding balance.
Material changes versus prior periods
- Revenue growth reflected stronger comparable-hotel occupancy and room rates, as well as the consolidation of a hotel previously operated under a triple-net lease after Ashford acquired the remaining 11% interest.
- Q3 operating income improved, but the company remained loss-making. Nine-month results shifted from income to loss, substantially affected by the prior-year PIM Highland JV acquisition gain and litigation-settlement income, alongside lower derivative-related income and a larger JV loss.
- Equity in unconsolidated JV results was a loss of $17.7 million for the first nine months of 2012, compared with $19.6 million of earnings in 2011; the prior period included a large acquisition-related gain.
- Interest expense rose to $109.3 million for the first nine months from $103.9 million, reflecting higher weighted-average borrowing costs and loan-cost amortization. The May refinancing replaced a $167.2 million loan at LIBOR plus 1.65% with a $135 million loan at LIBOR plus 6.50%.
- Unrealized derivative losses remained significant but declined to $26.8 million for the first nine months from $51.3 million. These noncash fair-value changes can materially affect GAAP earnings.
- The common dividend declared was $0.11 per share quarterly, compared with $0.10 in 2011. Nine-month preferred dividends were $25.3 million.
Outlook, risks and unusual items
- Management said lodging fundamentals had continued to improve and expected the economic recovery to support hotel performance in coming quarters. It cited industry forecasts of a possible recovery to prior cash-flow and valuation peaks in 2014–2016; this is industry commentary, not company earnings guidance.
- Management believed cash on hand, operating cash flow and the undrawn credit facility would cover anticipated debt service, working capital and capital expenditures for the next 12 months. It planned to address 2013 maturities proactively and cautioned that future financing terms and availability were not assured. No formal earnings guidance was provided.
- The Hilton hotel in Tucson was placed in receivership on August 15, 2012, after Ashford stopped debt-service payments beginning in August. The related $19.7 million non-recourse loan was in default, and the property and debt remained consolidated pending sale. A $4.1 million impairment was recognized in Q2; Q3 included results after receivership.
- At September 30, Ashford reported compliance in all material respects with debt covenants except for the Tucson loan default. It reported a 1.41x fixed-charge coverage ratio against a 1.35x minimum and a 57.95% leverage ratio against a 65% maximum under its senior credit facility.
- The IRS was reviewing proposed transfer-pricing adjustments for 2007 and 2008. Potential exposure described in the filing included $4.6 million of federal excise tax for the 2007 REIT case, or approximately $1.1 million of federal tax plus possible state tax for the alternative TRS case; for 2008, $3.3 million of proposed REIT excise tax or approximately $467,000 of TRS federal tax plus possible state tax. Management disputed the adjustments and believed the matters would not materially harm the company, but outcomes were unresolved.
- Other disclosed risks include seasonal hotel results, competition, franchise and management agreement renewals, interest-rate and derivative volatility, and potential recourse under customary non-recourse loan carve-outs. Management reported ordinary-course litigation that it did not expect to have a material adverse effect.
Important facts for investors to verify
- Status, potential sale proceeds and remaining obligations tied to the Tucson receivership and defaulted $19.7 million loan.
- Upcoming 2013 debt maturities, refinancing progress and the cost and availability of replacement financing.
- Cash generation and dividend coverage: GAAP losses persisted, while Adjusted FFO declined year over year for the nine-month period; non-GAAP measures are not substitutes for operating cash flow.
- Performance and debt position of PIM Highland JV, including the effect of its losses on Ashford’s equity-method investment.
- Resolution and final tax exposure from the IRS examinations, and any changes to the company’s assumptions about those contingencies.
- Derivative valuations and cash flows, which contributed substantially to reported earnings and may change with rates and markets.