Ashford Hospitality Trust, Inc. — Q2 2016 Form 10-Q
Business context and period. The filing covers the quarter and six months ended June 30, 2016. Ashford is a hotel REIT; at quarter-end it reported interests in 127 consolidated hotel properties and was shifting its strategy toward full-service upscale and upper-upscale hotels while disposing of select-service properties. Results are affected by seasonality and by hotel acquisitions and dispositions, so reported period comparisons are not wholly like-for-like.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $410.7 million | $369.3 million | $778.4 million | $619.6 million |
| Operating income | $69.5 million | $35.2 million | $110.9 million | $67.3 million |
| Net income (loss) | $35.1 million | $(14.8) million | $23.0 million | $352.1 million |
| Net income (loss) attributable to common stockholders | $22.3 million | $(20.7) million | $3.8 million | $292.3 million |
| Basic earnings (loss) per share | $0.23 | $(0.21) | $0.04 | $2.96 |
| Cash from operating activities | Not presented separately for the quarter | Not presented separately for the quarter | $106.8 million | $80.3 million |
- Q2 revenue increased 11.2%; six-month revenue increased 25.6%. Management attributed growth largely to properties acquired in 2015 and, for the six-month comparison, consolidation of the PIM Highland JV. Comparable-property RevPAR rose 5.4% in Q2 and 5.1% for the first half; Q2 comparable occupancy increased to 82.35% from 81.00%, and average daily rate rose to $160.61 from $154.85.
- Q2 operating income margin was approximately 16.9%, compared with 9.5% a year earlier. Six-month 2015 net income included a $380.7 million gain primarily associated with acquiring the remaining PIM Highland JV interest; this makes the reported year-over-year net-income decline a poor indicator of underlying operating trends.
- Non-GAAP measures: Q2 Adjusted EBITDA was $132.8 million versus $120.0 million; six-month Adjusted EBITDA was $237.8 million versus $209.4 million. Adjusted FFO available to common stockholders and operating partnership unitholders was $68.0 million versus $60.1 million for Q2 and $108.3 million versus $94.2 million for the first half. The company cautions that these measures are not substitutes for GAAP earnings or cash flow.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $261.8 million, restricted cash was $161.9 million, and total assets were $4.90 billion. Net indebtedness on the balance sheet was $3.76 billion; the debt note reports approximately $3.80 billion of debt before deferred loan costs and related adjustments.
- Six-month investing cash flow was positive $59.3 million, including sale proceeds, and financing cash flow was negative $119.1 million, principally from debt repayments and dividends. Cash increased by $46.9 million over the period.
- Interest expense and amortization of premiums and loan costs was $56.5 million in Q2 and $112.4 million for six months, up from $47.5 million and $82.1 million, respectively, in 2015. Management cited acquisition-related and refinancing costs, as well as higher average LIBOR.
- The $100 million secured revolver was undrawn at quarter-end and was scheduled to mature in October 2016. Several mortgage loans totaling approximately $401 million had stated August 2016 maturities, subject to extension options and their conditions. Management said it was proactively addressing 2017 maturities.
- Management reported compliance with debt covenants. The revolver tests included funded debt to EBITDA of no more than 9.0x (reported 8.6x), fixed-charge coverage of at least 1.25x (reported 1.75x), and minimum tangible net worth of approximately $1.17 billion (reported $1.61 billion).
Material changes, outlook and risks
- On June 1, the company sold five select-service hotels for approximately $142 million in cash, recognizing a $23.1 million gain. It had agreements to sell two Palm Desert hotels for approximately $36 million, expected to close in Q3, and subsequently reported a probable sale of the Gainesville hotel for approximately $26.5 million, subject to closing conditions.
- Management stated that existing cash and operating cash flow should be adequate for anticipated interest, principal, working capital and capital expenditure needs over the next 12 months. It gave no quantified earnings or operating guidance and said future financing availability and terms cannot be assured. The company anticipated a $0.12 quarterly common dividend for the remainder of 2016, but the board reviews the policy quarterly and is not committed to future declarations.
- After quarter-end, the company agreed to issue 4.8 million Series F preferred shares with a 7.375% cumulative dividend rate and redeemed its 9.0% Series E preferred shares on August 8. The filing does not state in this text the net proceeds from the Series F issuance.
- Interest-rate exposure is significant: approximately $2.8 billion of debt was variable-rate. The filing estimates that a 25-basis-point rate change would affect annual results by approximately $7.0 million, assuming no change in capital structure. Derivatives also create valuation volatility; six-month 2016 results included a $13.8 million unrealized derivative gain.
- A Florida landlord-tenant case remained on appeal after a jury awarded the tenant $10.8 million. The company had recorded total related expense of approximately $12.1 million through June 30, including interest and estimated legal costs; an appellate decision was expected in late summer or early fall 2016. The company also disclosed indemnification exposure for a potential pension withdrawal liability, subject to the outcome of proceedings involving its affiliated manager.
- Other risks include hotel-market competition, seasonal results, cash-trap provisions in certain loans, refinancing risk, covenant compliance, franchise and management agreement terms, REIT qualification requirements, and potential conflicts involving the external advisor and affiliated hotel manager.
Important facts for investors to verify
- Progress and final terms for the August 2016 and 2017 debt maturities, including any extensions, refinancing costs and covenant headroom.
- Completion and net proceeds of the Series F issuance, and the effects of the Series E redemption on preferred dividends and liquidity.
- Closing and realized proceeds from the Palm Desert and Gainesville hotel sales, and use of asset-sale proceeds.
- Comparable-hotel operating performance and how much reported growth reflects acquisitions rather than same-property trends.
- Resolution of the Florida litigation appeal and any change in the recorded judgment, interest or legal-cost estimates.
- Whether cash flow, restricted cash availability and distributions remain sustainable given capital spending, debt service and hotel seasonality.