Ashford Hospitality Trust, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unaudited consolidated results; dollar amounts below are in millions unless noted.
Business context
Ashford is a lodging REIT focused primarily on U.S. upscale and upper-upscale hotels. At quarter-end it held interests in 121 consolidated hotels with 25,579 rooms, plus 92 WorldQuest condominium units. Remington Lodging, beneficially owned by the company chairman and his father, managed 83 hotels and WorldQuest; Ashford LLC, an Ashford Inc. subsidiary, advises and asset-manages the portfolio.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $415.1 | $389.2 | $773.9 | $731.4 |
| Operating income | $48.8 | $43.4 | $72.8 | $66.7 |
| Net loss | $(21.4) | $(23.4) | $(68.0) | $(56.0) |
| Net loss attributable to common stockholders | $(26.9) | $(29.0) | $(75.6) | $(65.9) |
| Basic and diluted loss per share | $(0.27) | $(0.30) | $(0.77) | $(0.69) |
| Adjusted EBITDAre (non-GAAP) | $132.1 | $124.9 | $232.6 | $222.8 |
| FFO available to common stockholders and OP unitholders (non-GAAP) | $41.7 | $31.4 | $51.6 | $51.6 |
| Adjusted FFO available to common stockholders and OP unitholders (non-GAAP) | $56.3 | $57.5 | $86.7 | $92.7 |
Q2 operating margin was approximately 11.7%, versus 11.2% a year earlier. Comparable hotels and WorldQuest reported Q2 RevPAR of $137.42, up 0.9%; ADR rose 1.3% while occupancy declined 0.44 percentage points. For all properties, Q2 RevPAR was $139.86, up 2.8%.
Six-month operating cash flow was $92.3, down from $99.0. Investing activities used $277.8, including $213.1 for acquisitions and $81.5 for property improvements; financing activities provided $146.2. Cash, cash equivalents and restricted cash totaled $400.4 at June 30, including $235.9 of cash and cash equivalents and $162.7 of restricted cash.
Debt, net, was $4.14 billion at June 30, versus $3.93 billion at year-end 2018. The filing reports $3.8 billion of variable-rate debt and $364.4 million of fixed-rate debt. Interest expense and loan-cost amortization rose 16.8% in Q2 to $68.0 and 18.8% for the six months to $134.2; management attributed the increases to higher LIBOR, refinancing costs and acquisitions. A 25-basis-point rate change on the quarter-end variable debt balance was estimated to affect annual results by about $9.6 million.
Material changes and notable items
- Revenue increased 6.7% in Q2 and 5.8% for the first half. Acquisitions contributed materially; comparable Q2 room-rate growth was partly offset by lower occupancy. Food-and-beverage revenue also increased.
- Q2 net loss attributable to the company improved by $2.0 million year over year, while the six-month loss widened by $9.7 million. Higher interest costs, impairment charges and lower equity earnings from Ashford Inc. weighed on the first-half comparison. Q2 2018 included $1.9 million of business-interruption income not repeated in Q2 2019.
- The company recorded $6.5 million of property impairments in 2019: $5.1 million at Courtyard Savannah Downtown and $1.4 million at Wisconsin Dells Hilton Garden Inn.
- Acquisitions included the 310-room Embassy Suites New York Manhattan Times Square for $195.0 million and the 178-room Hilton Santa Cruz/Scotts Valley for $47.5 million. The company also refinanced a $178.1 million mortgage with a $240.0 million loan.
- Common dividends declared were reduced from $0.12 per share in Q2 2018 to $0.06 in Q2 2019. The revised 2019 policy anticipated $0.06 quarterly dividends for the remainder of the year; future dividends remain subject to board review.
- Adoption of lease accounting on January 1, 2019 resulted in recognition of operating lease liabilities and right-of-use assets; quarter-end balances were $43.8 million and $41.1 million, respectively. The filing says the adoption did not materially affect operating results or cash flows.
Outlook, risks and contingencies
Management stated that operating cash flow and existing cash balances should cover anticipated interest and principal payments, working capital, capital expenditures and REIT-required dividends for the next 12 months, excluding potential final-maturity principal payments. It said it would proactively address 2019 and 2020 maturities, but gave no assurance that refinancing would be available on favorable terms. No full-year earnings guidance was provided.
The $100 million secured revolving facility had no borrowings at June 30 and matured September 26, 2019; its financial covenants were met. Management identified lodging-market conditions, competition, interest rates, capital availability, cash-trap provisions and debt covenant compliance as risks. Debt is predominantly variable-rate, and certain debt maturities were approaching. The company also disclosed related-party relationships and transactions involving Ashford Inc., Ashford LLC and Remington Lodging. Ashford Inc.’s proposed acquisition of Remington’s hotel management business remained subject to conditions, including an IRS ruling and divestiture requirements.
At June 30, the San Antonio Marriott was classified as held for sale. It was sold August 2 for approximately $34.0 million, with approximately $26.8 million of related mortgage principal repaid. The company also reported receiving non-refundable deposits for the potential sale of two hotels, with aggregate expected sale proceeds of approximately $38 million and anticipated closings before September 30, 2019.
For the Nantucket litigation, the principal judgment had been paid; negotiations over remaining attorney fees continued, with approximately $504,000 accrued. Management said other legal proceedings were not expected to have a material adverse effect, while noting outcomes cannot be predicted with certainty. The filing reported no material changes to the risk factors in the 2018 Form 10-K.
Important facts for investors to verify
- Progress and terms of refinancing or repayment for 2019–2020 debt maturities, and covenant headroom.
- How interest-rate exposure and hedges affect debt-service costs; reported derivative gains and losses can be volatile.
- Whether the planned hotel sales close on expected terms and how proceeds are applied to debt or liquidity.
- Comparable-property operating trends, particularly occupancy versus ADR, and the contribution of acquisitions to reported growth.
- Sustainability of the reduced common dividend relative to cash generation, capital needs and REIT distribution requirements.
- Related-party fees, management arrangements and the status and conditions of the Ashford Inc.–Remington transaction.
- Non-GAAP Adjusted EBITDAre, FFO and Adjusted FFO reconciliations and exclusions; these measures are not substitutes for GAAP earnings or operating cash flow.