Braemar Hotels & Resorts Inc. quarterly report, Q2 FY2015

Filing identity and reporting period

The supplied filing is Ashford Hospitality Prime, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2015—not a Braemar Hotels & Resorts filing. The figures below summarize the registrant named in the filing. Dollar amounts are in millions unless stated otherwise.

Business context and key financial metrics

Ashford Prime was an externally advised hotel REIT focused on luxury, upper-upscale and upscale properties. At quarter-end it owned interests in 10 hotels with 3,707 total rooms (3,472 net rooms); the July 2015 acquisition of Bardessono brought the portfolio to 11 hotels after quarter-end.

Q2 operating margin was approximately 20.5%, versus 17.6% a year earlier; six-month operating margin was approximately 16.0%, versus 13.4% (calculated as operating income divided by revenue). Q2 occupancy was 86.41% versus 85.29%, ADR was $232.44 versus $216.55, and RevPAR was $200.86 versus $184.70.

At June 30, cash and cash equivalents were $180.5, restricted cash $29.4, indebtedness $762.4, and total assets $1,286.5. Debt was modestly lower than year-end 2014 ($765.2). The $150 million secured revolver was undrawn. The company reported compliance with its debt covenants; its consolidated indebtedness-to-EBITDA ratio was 5.43x and fixed-charge coverage was 1.85x. Reported variable-rate debt was $346.6; management estimated a 25-basis-point rate increase would add about $0.9 million of annual expense.

Material changes versus the prior comparable periods

• Q2 revenue increased 10.6% and six-month revenue increased 17.0%. Management attributed growth to higher occupancy and room rates, stronger food-and-beverage revenue, and—in the six-month comparison—full-period inclusion of the Sofitel Chicago and Pier House Resort, both acquired in 2014.
• Q2 net income attributable to the company rose 92.3%; six-month net income attributable to the company rose to $6.5 million from $0.6 million. Results benefited from stronger hotel operations and lower interest expense, among other items.
• Hotel expenses also increased: Q2 total expenses rose 6.7%, and six-month expenses rose 13.6%. Management cited higher indirect operating costs, incentive management fees, property taxes and, for the six-month comparison, the acquired hotels’ additional operating period.
• Cash flows from operations were negative $20.8 million for the first six months, versus positive $22.8 million in 2014. Management said net purchases of marketable securities reduced operating cash flow by approximately $50 million. Investing cash use was $11.2 million; financing provided $41.0 million, including preferred-stock proceeds.

Outlook, management commentary, risks and unusual items

• No specific earnings or operating guidance was provided. Management expected short-term cash needs to be met through operating cash flow, cash on hand and, if needed, the revolver; longer-term needs may require debt or equity financing. Hotel operations are seasonal, and interim results may not indicate full-year performance.
• The board doubled the quarterly common dividend from $0.05 to $0.10 per share beginning in Q2. The company also issued $62.8 million net of 5.5% convertible preferred stock and raised approximately $3.1 million through a private common-stock placement.
• In July, the company acquired the Bardessono Hotel and Spa for $85 million, funded with preferred-offering proceeds and cash on hand. Ashford Inc. provided $2 million of key-money consideration. This was a subsequent event, not part of Q2 hotel results.
• Ashford Trust distributed its remaining Ashford Prime ownership in July; following the distribution, it had no ownership interest. The amended Ashford LLC advisory agreement includes long terms, termination-related fees and other arrangements. The advisor and certain hotel managers are affiliates, presenting potential conflicts of interest.
• Unusual items included an $875,000 non-cash tax benefit from partially releasing a deferred-tax valuation allowance, a $1.3 million Q2 unrealized loss on marketable securities, and a $1.1 million realized securities gain included in other income. The company invested in the Ashford-managed REHE Fund and recorded an $820,000 equity-method loss for the quarter.
• Risks include variable interest rates, refinancing and capital-market access, hotel demand and operating costs, REIT qualification and distribution requirements, potential dilution, and litigation. Management said pending legal proceedings were not expected to have a material adverse effect based on current estimates, but outcomes remain uncertain.

Important facts for investors to verify

• Confirm the filing identity: this document is for Ashford Hospitality Prime, Inc., notwithstanding the Braemar company metadata.
• Assess recurring hotel performance separately from acquisitions, securities gains and losses, the tax valuation-allowance release, and non-GAAP adjustments.
• Review the sustainability of the increased common dividend against cash generation, REIT distribution requirements, capital spending and debt service.
• Monitor the $762.4 million debt balance, floating-rate exposure, upcoming maturities and covenant headroom, particularly as acquisition financing needs evolve.
• Review the Bardessono acquisition’s final purchase-price allocation and performance, as well as the economic terms and conflicts associated with the Ashford LLC advisory relationship.