Ashford Hospitality Trust, Inc. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual filing; quarterly data is included, but the filing’s primary results are for the full year.
Business context
Ashford is a self-administered REIT focused on U.S. hospitality investments. At year-end it reported 90 directly owned hotels and four hotels held through majority-owned joint ventures, totaling 20,034 rooms (19,773 net rooms). It also held an investment in the unconsolidated PIM Highland JV, which owns 28 hotels. Third-party and affiliated managers operate the hotels; affiliated Remington Lodging managed 44 of Ashford’s 94 consolidated hotels.
Key financial and operating results
| Metric | 2012 | 2011 |
|---|---|---|
| Total revenue | $922.6 million | $860.0 million |
| Operating income | $114.8 million | $93.9 million |
| Income (loss) from continuing operations | ($58.6) million | $7.8 million |
| Net income (loss) attributable to the Company | ($53.8) million | $2.1 million |
| Net loss attributable to common shareholders | ($87.6) million | ($44.8) million |
| Diluted loss per common share | ($1.30) | ($0.73) |
| Cash from operating activities | $130.6 million | $74.6 million |
| EBITDA (unaudited, non-GAAP) | $315.8 million | $361.0 million |
| FFO available to common shareholders (unaudited, non-GAAP) | $82.9 million | $74.2 million |
| Adjusted FFO available to common shareholders (unaudited, non-GAAP) | $126.6 million | $150.2 million |
Comparable hotel RevPAR rose 5.2% to $98.80, as occupancy improved to 73.80% from 72.52% and ADR increased to $133.87 from $129.52. Operating income was about 12.4% of revenue, up from about 10.9% in 2011. Operating cash flow less hotel improvements of $81.4 million was approximately $49.2 million; this is a simple calculation, not a company-reported free-cash-flow measure.
Year-end cash and cash equivalents were $185.9 million, with a further $84.8 million of restricted cash. Total assets were $3.46 billion, shareholders’ equity was $831.9 million, and continuing-operation debt was $2.34 billion, compared with $2.36 billion at the end of 2011. Variable-rate debt was $667.4 million; management estimated a 25-basis-point rate increase would add about $1.7 million in annual interest expense. The $165 million senior credit facility had no balance outstanding at year-end.
Material changes versus 2011
- Revenue increased 7.3%, with comparable room revenue up 8.6%, reflecting stronger occupancy and room rates.
- Operating income increased, but continuing operations swung to a loss. Key factors included a $20.8 million equity loss from unconsolidated joint ventures, $144.8 million of interest expense and loan-cost amortization, and a $35.7 million unrealized derivative loss.
- 2011 results benefited from a $46.3 million company share of a PIM Highland JV acquisition gain, $30.0 million from a litigation settlement, and higher derivative income. These items make year-over-year net earnings comparisons less indicative of recurring operations.
- Operating cash flow increased to $130.6 million. Investing activities used $68.4 million, including $81.4 million of hotel improvements; financing activities used $43.9 million.
- Common dividends declared rose to $0.44 per share from $0.40. The filing’s tax characterization reports the 2012 common distribution as return of capital.
Financing, transactions and outlook
- In May 2012, Ashford refinanced a $167.2 million loan with a $135.0 million loan due in May 2014, with extension options. The new floating rate was LIBOR plus 6.50%, versus LIBOR plus 1.65% previously.
- In November, it refinanced a $153.9 million loan with a $211.0 million, interest-only loan initially due November 2014, with extension options and a floating rate of LIBOR plus 6.15% subject to a 0.25% floor. The company reported more than $50 million of excess proceeds for general corporate purposes.
- The senior credit facility was expanded to $165 million and its minimum fixed-charge coverage covenant was reduced from 1.35x to 1.25x through September 2014. Ashford reported compliance with material debt covenants at year-end.
- Ashford recorded a $4.1 million impairment on Hilton El Conquistador in Tucson, stopped making its debt payments after July 31, and transferred the hotel to the lender through consensual foreclosure in December. It sold the Doubletree Guest Suites in Columbus for $7.7 million net proceeds. Both were reported in discontinued operations.
- Management said cash, operating cash flow and available credit were expected to cover anticipated needs for the next 12 months, while noting that 2014 maturities required continued attention and future financing was not assured. Contractual debt principal and estimated interest obligations totaled $2.34 billion and $430.0 million, respectively; scheduled debt maturities include $651.2 million in 2014.
- The board anticipated a 2013 common dividend of $0.12 per share quarterly, subject to quarterly review and board approval. Management’s strategy included acquisitions, selective dispositions and capital improvements, cost control, liquidity preservation and refinancing.
- Subsequent events: Ashford disclosed a February 2013 refinancing of a $141.7 million loan with a $200 million loan due in 2018; its share of excess proceeds was about $40.5 million. In January 2013, Archie Bennett retired as board chair and became Chairman Emeritus; the agreement provides a $700,000 annual lifetime stipend and immediate vesting of his unvested equity awards.
Risks, contingencies and unusual items
- Leverage and refinancing: Significant debt, floating rates, concentrated 2014 maturities, covenant restrictions and lender cash-trap provisions could constrain liquidity, investment or distributions. Foreclosure remains a risk if hotel cash flows do not support debt service or refinancing.
- Derivatives: Derivatives generated substantial historical cash and accrued income, but fair-value changes produced a $35.7 million unrealized loss in 2012. Management estimated about $6.3 million of derivative income for 2013 based on year-end LIBOR; actual results depend on rates and other market factors.
- IRS matters: The company is appealing proposed transfer-pricing adjustments for 2007 and 2008 involving rent charged to taxable REIT subsidiaries. Potential outcomes include alternative 2007 assessments of approximately $1.1 million plus state tax or $4.6 million of excise tax, and 2008 proposed assessments of $3.3 million of excise tax or approximately $467,000 of federal tax plus state tax. The alternatives are not additive as described; Ashford disputes the IRS positions and expects to prevail.
- Related-party arrangements: Remington Lodging is owned by Ashford’s CEO and Chairman and the Chairman Emeritus. It manages Ashford and JV hotels and received $25.6 million in fees and reimbursements from Ashford in 2012; separate fees were paid by PIM Highland JV. The filing identifies potential conflicts of interest and management-agreement restrictions.
- REIT and operating risks: REIT qualification, required distributions, hotel-market cyclicality, seasonal cash flows, capital expenditure needs, franchise requirements, insurance and environmental exposures, and concentration in U.S. hotels may affect results and distributions. Management said ordinary-course litigation was not expected to have a material adverse effect.
Most important facts for investors to verify
- Debt maturity and refinancing plans, particularly the 2014 schedule, extension conditions and effective borrowing costs on refinanced loans.
- Liquidity available after restricted cash, required hotel capital spending, lender cash traps and distributions; compare operating cash flow with ongoing capital needs.
- Recurring hotel performance and margins, separating comparable-property improvement from acquisitions, dispositions and unusual income or expenses.
- The cash and earnings implications of derivative positions, including counterparty exposure and the sensitivity of reported results to fair-value changes.
- Resolution and potential exposure from the IRS audits, and any changes to the company’s tax assumptions or REIT status.
- Related-party management fees, approval safeguards, termination costs and the effect of the Chairman Emeritus agreement.
- Dividend sustainability and the extent to which distributions represent operating cash generation versus return of capital or other funding sources.