Ashford Hospitality Trust, Inc. — Q3 2017 Form 10-Q
Business context and period. The filing covers the quarter and nine months ended September 30, 2017. Ashford Trust is a lodging REIT; at quarter-end it owned interests in 120 consolidated hotels with 25,055 rooms, plus 87 WorldQuest condominium units. It reported one hotel-investment segment.
Financial performance and position
- Revenue: Q3 revenue was $353.3 million, down 5.0% from $371.9 million. Nine-month revenue was $1.098 billion, down 4.6% from $1.150 billion.
- Profitability: Q3 operating income was $29.6 million versus $41.1 million; operating margin was approximately 8.4% versus 11.0%. Net loss was $28.7 million, and loss attributable to common stockholders was $37.8 million, or $0.40 per diluted share. For nine months, operating income was $116.4 million versus $151.9 million; net loss was $50.2 million, and common-stockholder loss was $74.9 million, or $0.80 per diluted share.
- Hotel performance: Comparable-property Q3 RevPAR was $124.33, essentially flat versus $124.42; occupancy was 79.60% versus 79.65%, and ADR was $156.19 versus $156.22. For nine months, comparable RevPAR rose to $125.81 from $124.30.
- Cash flow: Nine-month operating cash flow was $178.5 million, down from $191.0 million. Investing used $6.8 million, including $164.1 million of hotel improvements, partly offset by asset-sale proceeds and liquidation of the AQUA U.S. Fund. Financing used $137.5 million. Cash and cash equivalents were $393.5 million; restricted cash was $133.1 million.
- Debt and liquidity: Net indebtedness was $3.699 billion, compared with $3.724 billion at year-end 2016. Approximately $3.3 billion was variable-rate debt and $449.7 million fixed-rate. Management said cash balances and operating cash flow should meet anticipated needs over the next 12 months, while noting future financing is not assured. The company reported compliance in all material respects with debt covenants.
- Distributions and non-GAAP measures: Common dividends declared were $0.12 per share for Q3 and $0.36 per share for nine months. Nine-month Adjusted EBITDA was $326.8 million versus $347.2 million; Adjusted FFO was $128.6 million versus $153.5 million. These are non-GAAP measures and are not substitutes for operating cash flow or funds available for distributions.
Material changes versus the prior comparable period
- Q3 revenue fell mainly because of hotel dispositions and lower food-and-beverage revenue; comparable-property RevPAR was nearly unchanged. Nine-month revenue also reflected dispositions, although comparable rooms revenue increased.
- Q3 operating income declined, while the net loss attributable to the company widened by $1.7 million. Nine-month results shifted from $0.6 million of income attributable to the company to a $37.0 million loss, reflecting lower operating income and reduced gains on hotel sales, among other items.
- Advisory-services fees rose 22.3% in Q3 to $14.6 million, including higher equity-based compensation. Nine-month corporate general and administrative expense increased 68.6% to $10.8 million, partly due to transaction, acquisition, and management-conversion costs.
- The company sold three hotels in 2017, generating $105.3 million in net sale proceeds; the Crowne Plaza Ravinia sale contributed a $14.1 million gain. It also issued Series H preferred shares and redeemed all Series A shares and a portion of Series D shares.
Outlook, risks, contingencies, and unusual items
- Management expected industry fundamentals to support RevPAR growth through 2017, but at a slower pace. It cited asset sales, selective capital investment, refinancing, liquidity maintenance, cost control, and hedging as priorities. The filing provides no specific numerical earnings or RevPAR guidance.
- Hurricanes Harvey and Irma affected 24 hotels in Texas and Florida. The company recorded $1.8 million of impairment charges and $3.7 million of remediation and other costs, net of anticipated insurance recoveries. A $1.4 million insurance receivable was recorded; business-interruption recoveries were not recognized because amounts were not yet known and realizable.
- Interest-rate exposure is material: a 25-basis-point change on variable-rate debt would affect annual results by approximately $8.1 million, based on quarter-end balances. The company used interest-rate caps and floors and held $212.5 million of credit-default swaps; estimated exposure on those swaps was $8.4 million.
- A landlord-tenant judgment was final by quarter-end. The company estimated total loss, including interest and plaintiff legal fees, at approximately $17.3 million and had recorded $4.1 million of related expense for the nine months. A negotiated $100,000 attorney-fee settlement with RLI was filed for dismissal on November 2, 2017.
- After quarter-end, the company refinanced the Hilton Boston Back Bay loan with a $97.0 million, five-year floating-rate loan and refinanced a $412.5 million loan on 17 hotels with a $427.0 million floating-rate loan. These transactions address maturities but retain exposure to floating rates and future refinancing conditions.
- Other risks include seasonal hotel demand, competition, possible lender cash traps, debt-covenant requirements, franchise and management-contract terms, REIT qualification, and related-party conflicts. Remington Lodging, beneficially owned by the chairman and chairman emeritus, managed 82 of 120 hotels. The company also has customary nonrecourse carve-out guarantees and an indemnity related to potential pension liabilities.
Important facts for investors to verify
- Whether the post-quarter refinancing transactions closed as described and their effect on maturities, borrowing costs, and covenant headroom.
- How much cash is unrestricted and available for debt service, capital spending, and dividends; restricted cash is not freely available.
- Actual hurricane-related insurance proceeds, business-interruption recoveries, and any additional hotel operating impacts.
- Whether recurring operating performance supports the common and preferred dividends, considering the decline in Adjusted FFO and the distinction between non-GAAP measures and cash available.
- Future advisory and other related-party costs, and the financial effects of the final Nantucket litigation settlement and any remaining legal matters.