ASHFORD HOSPITALITY TRUST INC quarterly report, Q1 FY2017

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Ashford Hospitality Trust, Inc. — Q1 2017 Form 10-Q

Reporting period: Three months ended March 31, 2017. Ashford Trust is a hotel-focused REIT. At quarter-end it owned interests in 121 consolidated hotel properties, with 25,553 rooms, and 86 hotel condominium units. Results are affected by hotel seasonality and by property sales during 2016 and Q1 2017.

Financial performance and position

  • Revenue: $353.7 million, down 3.8% from $367.8 million. Hotel revenue was $353.3 million. Lower revenue from disposed properties more than offset growth at comparable hotels.
  • Comparable hotel trends: RevPAR rose 3.4% to $119.23; occupancy increased to 74.75% from 73.99%, and ADR rose to $159.50 from $155.82.
  • Profitability: Operating income fell to $28.3 million from $41.4 million. Net loss attributable to the Company was $25.4 million versus $10.0 million; net loss attributable to common stockholders was $36.4 million, or $0.39 per share, versus $18.5 million, or $0.20 per share. The larger common-stockholder loss also reflects higher preferred dividends.
  • REIT operating measures: EBITDA available to the Company and OP unitholders was $87.3 million versus $107.1 million; Adjusted EBITDA was $100.8 million versus $105.0 million. FFO available to common stockholders and OP unitholders was $21.8 million versus $42.0 million; Adjusted FFO was $35.7 million versus $40.2 million. These non-GAAP measures are not substitutes for GAAP earnings or cash flow.
  • Cash flow and capital spending: Operating cash flow was $39.5 million, down from $50.0 million. Investing activities provided $8.4 million, including $48.4 million from liquidation of the AQUA U.S. Fund and $17.3 million in net property-sale proceeds, partly offset by $56.8 million of hotel improvements. Financing activities used $68.5 million, including $43.4 million of debt repayments and $24.2 million of dividends and distributions. Cash, cash equivalents and restricted cash totaled $471.9 million at quarter-end, down $20.5 million during the quarter; unrestricted cash and cash equivalents were $306.7 million.
  • Debt and equity: Net indebtedness was $3.72 billion, compared with $3.72 billion at year-end 2016. About $3.2 billion was variable-rate debt; management estimated a 25-basis-point rate change would affect annual results by approximately $7.9 million. Total equity was $755.9 million.
  • Dividends: The quarterly common dividend was $0.12 per share. The board’s 2017 policy anticipated that rate for the remainder of the year, but does not commit the board to future declarations.

Material changes and notable items

  • Two hotels were sold during the quarter: Renaissance Portsmouth for approximately $9.2 million and Embassy Suites Syracuse for approximately $8.8 million. Associated debt repayments were $20.2 million and $20.6 million, respectively.
  • Comparable-hotel operating performance improved, but total revenue declined as a result of dispositions. Depreciation and amortization increased to $64.7 million, and corporate, general and administrative expense rose to $5.2 million, including $2.6 million of transaction, acquisition and management-conversion costs.
  • Net results included a $3.3 million unrealized loss on marketable securities, a $1.4 million unrealized gain on derivatives, and $3.0 million of realized losses related to termination of a CMBX tranche. Derivative and securities valuation changes contributed to period-to-period earnings volatility.
  • After the May 5, 2017 appellate mandate in the Nantucket litigation, the Company increased its Q1 accrual by approximately $3.8 million. It reported an estimated total recorded loss of approximately $17.0 million as of March 31, including estimated judgment, interest and legal fees. The matter remained under appeal, and the ultimate outcome could differ.
  • Douglas Kessler became CEO effective February 21, 2017, replacing Monty Bennett, who remained Chairman. The Company’s proposed FelCor acquisition was abandoned on May 3, 2017.
  • Ashford Trust liquidated its investment in the AQUA U.S. Fund, subject to a 5% audit holdback; $2.6 million was receivable at quarter-end. It also invested an additional $650,000 in OpenKey, bringing its ownership to 15.35%.

Outlook, risks and contingencies

  • Management said it expected industry RevPAR to continue growing through 2017, but at a slower pace. It cited priorities including selective hotel acquisitions and dispositions, capital improvements, cost and revenue management, refinancing, liquidity management, and use of hedges.
  • Management believed operating cash flow and existing cash would cover anticipated interest and principal, working capital and capital expenditures for the next 12 months. It was proactively addressing 2017 and 2018 debt maturities; refinancing availability and terms were not assured. The Company reported material compliance with debt covenants at March 31.
  • Most debt is variable-rate and secured by hotel assets. Cash-trap provisions could redirect hotel cash to lenders if property performance declines, potentially reducing liquidity and distributions. Management also disclosed customary non-recourse carve-out guarantees and ongoing joint-and-several obligations on certain Ashford Prime-related guarantees, with Ashford Prime indemnification.
  • The Company identified hotel competition, economic and lodging-market conditions, interest rates, capital availability, REIT qualification requirements, and potential conflicts involving its external advisor and related parties as risks. Ashford LLC advises the Company; Remington, beneficially owned by the Chairman and Chairman Emeritus, managed 82 of 121 hotels.
  • The Nantucket case is the principal highlighted litigation contingency. Other legal proceedings were disclosed; management did not expect them, individually or in aggregate, to materially affect results, but noted outcomes are uncertain. The Company also indemnified Remington for a potential multi-employer pension withdrawal liability described in the filing.
  • Management stated disclosure controls were effective as of March 31, 2017. No material changes to the previously reported risk factors were identified.

Important facts for investors to verify

  • Current status and final amount of the Nantucket judgment, interest and legal-fee exposure, and the effect of any further appeal.
  • Refinancing, extension or repayment plans and covenant headroom for the sizable 2017–2018 maturities; the filing does not provide one consolidated amount for all near-term maturities.
  • Whether comparable-hotel RevPAR growth can persist and offset the revenue effect of dispositions and operating-cost pressures.
  • Cash availability after restricted reserves, capital spending, dividends and debt service, and whether the stated 12-month liquidity expectation remains valid.
  • How variable interest rates, marketable-security values and derivatives affect earnings and cash needs, and the Company’s related-party arrangements and associated costs.