Business context and reporting period
This is Ashford Hospitality Prime, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2014. The request identifies Braemar Hotels & Resorts Inc.; the filing itself names Ashford Hospitality Prime, Inc. Investors should verify the issuer and filing identity. The company was an externally advised hotel REIT with interests in 10 hotels, totaling 3,707 rooms (3,472 net rooms), at quarter-end.
Comparisons with 2013 require caution: pre-spin-off periods are carve-out financial statements with allocated Ashford Trust costs, and 2014 results include the Sofitel Chicago and Pier House Resort acquisitions.
Financial results and key metrics
Unless noted otherwise, amounts are USD millions. Quarter and six-month comparisons are year over year.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | 84.0 | 63.3 | 145.8 | 117.4 |
| Operating income | 14.8 | 13.3 | 19.6 | 18.5 |
| Net income (loss) attributable to company | 3.5 | 3.8 | 0.6 | (0.8) |
| Basic EPS | $0.14 | $0.24 | $0.03 | $(0.05) |
| Adjusted EBITDA | 26.0 | 19.3 | 40.2 | 31.4 |
| AFFO available to company | 15.5 | 10.8 | 21.0 | 14.9 |
- Q2 hotel operating indicators: occupancy 85.29% versus 83.39%; ADR $216.55 versus $197.09; RevPAR $184.70 versus $164.35. For the six months, occupancy was 80.35% versus 73.39%, ADR $206.71 versus $181.60, and RevPAR $166.09 versus $133.27.
- Q2 operating margin, calculated as operating income divided by revenue, was approximately 17.6%, compared with 21.0% in 2013. Six-month operating margin was approximately 13.4%, compared with 15.7%.
- Cash and cash equivalents were $178.2 million and restricted cash was $26.6 million at June 30, 2014. Debt was $767.1 million, up from $621.9 million at December 31, 2013. Total liabilities were $807.7 million.
- For the six months, cash from operating activities was $22.8 million; investing used $201.0 million and financing provided $212.6 million. The MD&A incorrectly describes operating cash flow as a use of cash; the cash flow statement reports it as a source.
- Interest expense and loan-cost amortization was $10.0 million in Q2 and $19.0 million for the six months. Of total debt, $345.8 million was variable-rate and $421.3 million fixed-rate. The company reported compliance with debt covenants; no borrowings were outstanding on its $150 million revolving facility.
Material changes versus prior comparable periods
- Revenue rose 32.6% in Q2 and 24.1% for the six months. Management attributed much of the increase to the two acquisitions, alongside improved occupancy and room rates at several existing hotels.
- Despite higher Q2 operating income, net income attributable to the company declined 8.7%, to $3.5 million. Advisory fees, higher interest expense, and allocation of $1.2 million of income to redeemable operating-partnership interests affected the comparison. Six-month attributable results improved from a $0.8 million loss to $0.6 million of income.
- The company acquired Sofitel Chicago for $153.0 million in cash and Pier House Resort for $92.7 million in total consideration, assuming its $69.0 million mortgage. It issued 9.2 million shares at $16.50 per share, producing approximately $144.0 million of net proceeds.
- Common dividends declared were $0.05 per share for Q2 and $0.10 per share for the six months; no dividends were declared in the 2013 comparison periods.
Outlook, risks, contingencies and unusual items
- No specific earnings or operating guidance is provided. Management expected the Ashford Advisor spin-off to proceed in Q3 2014 and stated that a successor would continue to advise the company. Hotel seasonality may cause quarterly fluctuations.
- Management cited dependence on debt and equity markets for acquisitions and capital improvements, possible increases in interest rates and financing costs, REIT qualification requirements, lender covenants, hotel performance and potential conflicts of interest involving Ashford Trust, the adviser and related parties. No loan cash-trap provisions were triggered at quarter-end.
- A 25-basis-point change in rates on variable-rate debt was estimated to affect annual results by approximately $864,000. Interest-rate caps were in place for the Chicago and Pier House mortgages.
- Legal proceedings were disclosed; management did not expect their resolution to materially adversely affect results or financial position, but noted outcomes were uncertain. An IRS examination matter involving a taxable REIT subsidiary was subject to an Ashford Trust indemnity; management did not expect a material adverse effect.
- Q2 included $0.2 million of transaction costs. Six-month results included $1.8 million of transaction costs. Adjusted EBITDA and AFFO are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
Important facts for investors to verify
- Confirm whether this Ashford Hospitality Prime filing is the intended filing for Braemar Hotels & Resorts Inc.
- Reconcile the MD&A’s operating-cash-flow description with the cash flow statement, which reports $22.8 million provided.
- Assess acquisition contributions separately from comparable-hotel performance and account for the carve-out nature of 2013 results.
- Review debt maturities, variable-rate exposure, extension conditions, covenant headroom and the company’s reliance on capital markets.
- Examine adviser fees, related-party relationships, dividend sustainability, REIT compliance and the status of disclosed legal and tax matters.