Ashford Hospitality Trust, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Dollar amounts are in millions unless stated otherwise. Ashford is a lodging-focused REIT; it reported interests in 96 consolidated hotels and four hotels held through consolidated joint ventures, plus a 71.74% common equity interest in the unconsolidated 28-hotel PIM Highland JV.
Key financial results
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Total revenue | $225.9 | $211.8 |
| Operating income | $22.3 | $17.9 |
| Operating margin | 9.9% | 8.5% |
| Net income (loss) | ($24.6) | $43.9 |
| Net income (loss) attributable to common shareholders | ($29.5); ($0.44) per share | $31.3; $0.53 per share |
| Cash flow from operations | $12.3 | $15.9 |
| Adjusted EBITDA (non-GAAP) | $70.8 | $58.3 |
| FFO available to common shareholders (non-GAAP) | $13.6 | $26.3 |
| Adjusted FFO available to common shareholders (non-GAAP) | $23.2 | $32.4 |
Revenue increased 6.7%. Comparable-hotel RevPAR rose 3.6% to $95.61, with occupancy up to 70.97% from 69.87% and average daily rate up to $134.72 from $132.14. Cash used in investing was $23.2, mainly for $23.3 of hotel improvements; cash used in financing was $6.3. Cash and cash equivalents were $150.4 at quarter-end, in addition to $96.2 of restricted cash.
Debt, liquidity and capital
- Indebtedness was $2,357.4, down modestly from $2,362.5 at year-end 2011. Of this, $515.4 was variable-rate debt; management estimated that a 25-basis-point rate change would affect annual results by approximately $1.2.
- The company had no outstanding borrowings on its expanded $145.0 senior credit facility at March 31, 2012. The facility matures in September 2014; further expansion to $225.0 is subject to lender approval. Ashford reported compliance with material debt covenants.
- A $167.2 mortgage loan secured by 10 hotels matures in May 2012. Management said it was proactively addressing 2012 and 2013 maturities and believed available cash, operating cash flow and credit capacity would meet anticipated needs over the next 12 months; refinancing terms and availability were not assured.
- The company issued preferred shares through an at-the-market program, receiving $8.7 net proceeds in the quarter. The program permits up to $30.0 in total proceeds. Common dividends declared were $0.11 per share; management expected quarterly dividends at that level for the remainder of 2012, subject to board review.
Material changes and unusual items
- Operating income improved by $4.4, reflecting stronger hotel revenue and lower corporate, general and administrative expenses. Hotel operating costs also rose with occupancy and revenue.
- The swing from 2011 net income to a 2012 loss principally reflects the absence of significant prior-year items: the 2011 PIM Highland JV acquisition-related gain, a $30.0 litigation settlement, and gains on hotel sales. Q1 2012 also included a $10.3 equity loss from unconsolidated joint ventures, including PIM Highland JV, and a $9.9 unrealized derivative loss. These comparisons make reported GAAP earnings highly period-sensitive.
- Q1 2012 included $1.8 of unrealized gains on investments. Prior-year discontinued hotel operations contributed $2.2 of income; there were no discontinued operations in Q1 2012.
- PIM Highland JV had $1,391.1 of assets and $1,137.6 of liabilities at quarter-end and reported a $13.7 net loss for the quarter. Ashford’s share of its results was a $10.3 loss.
Outlook, commentary and risks
Management said lodging fundamentals—occupancy and room rates—had continued to improve and expected the improvement to support hotel results through the remainder of 2012. It also cautioned that it did not expect industry cash flows and hotel values to return to prior 2007 peaks in the immediate future; industry estimates cited by management suggested a possible recovery in 2014–2016. No specific earnings or operating guidance was provided. The company identified priorities including preserving liquidity, controlling costs, selective capital improvements, refinancing, and opportunistic investment or disposition activity.
- Hotel results are seasonal and the quarter is not necessarily indicative of full-year results. Marriott-managed hotels also use a different fiscal-quarter ending calendar.
- Interest-rate changes affect variable-rate debt and derivative values; derivative fair-value changes can cause material earnings volatility. Management estimated $24.1 of income from certain non-hedge interest-rate derivatives for the remainder of 2012 based on March 31 LIBOR rates; this is an estimate, not a guarantee.
- IRS disputes concern transfer-pricing rent charges for a taxable REIT subsidiary. Potential outcomes described were approximately $1.1 of federal tax plus $0.2 of state tax, or alternatively $5.1 of federal excise tax if the IRS pursued the REIT adjustment; management said the alternatives were in lieu of one another, disputed the IRS position, and expected an appeals review.
- Other exposures include debt covenant and refinancing risk, competition, franchise and management agreement terms, customary non-recourse loan carve-out guarantees relating to PIM Highland JV, and a potential pension indemnity. Management did not believe ordinary-course litigation was likely to have a material adverse effect.
Important facts for investors to verify
- Status and terms of the May 2012 $167.2 mortgage maturity and other 2012–2013 refinancing needs.
- Whether improving occupancy, ADR and RevPAR translate into sustainable cash flow after operating costs, interest and capital spending.
- Cash available for distributions, given $12.3 operating cash flow, preferred dividends, common dividends and the stated quarterly dividend expectation.
- Underlying performance of PIM Highland JV and the reasons for its Q1 loss, separately from prior-year acquisition accounting effects.
- Developments in the IRS appeals process and the potential tax exposure; assess the outcome independently of management’s stated expectation.