Ashford Hospitality Trust, Inc. — Form 10-Q Summary
Business context and reporting period
Quarter ended June 30, 2011; comparisons are with the same 2010 periods. Ashford is a U.S. lodging REIT. At quarter-end it owned 92 hotels directly and five through majority-owned consolidated joint ventures, totaling 20,774 rooms (20,458 net of partners’ interests). Its 71.74%-owned PIM Highland joint venture, accounted for under the equity method, held 28 additional hotels.
Financial and operating performance
Amounts below are in millions, except per-share data, rates, and where noted.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $230.1 | $217.6 | $441.9 | $416.2 |
| Operating income | $35.7 | $24.5 | $53.6 | $39.5 |
| Net income (loss) | $(7.3) | $7.5 | $36.6 | $12.7 |
| Net income (loss) attributable to common shareholders | $(29.1) | $2.0 | $2.2 | $2.3 |
| Basic EPS attributable to common shareholders | $(0.49) | $0.04 | $0.04 | $0.04 |
| Operating cash flow | Six months: $60.1 | Prior-year six months: $56.8 |
- For the 96 hotels held throughout the comparable periods, Q2 RevPAR increased to $98.96 from $92.97; occupancy rose to 76.20% from 74.13%, and ADR to $129.87 from $125.42. Six-month RevPAR increased to $95.61 from $89.39.
- Reported operating margin was approximately 15.5% in Q2 2011 versus 11.3% in Q2 2010; the six-month comparison was approximately 12.1% versus 9.5%. Hotel direct expenses were 31.5% of hotel revenue in Q2, versus 32.3% a year earlier.
- Cash and cash equivalents were $154.2 at June 30, down from $217.7 at December 31, 2010; restricted cash was $74.3. Six-month investing cash flow was $(18.8), and financing cash flow was $(104.8).
- Continuing-operations debt was $2.445 billion, down from $2.518 billion at year-end. The company reported $594.6 of variable-rate debt; it estimated a 25-basis-point rate change would affect annual results by about $1.4. It was in compliance with debt and derivative covenants at quarter-end.
Material changes versus the prior comparable period
- Revenue growth reflected improving occupancy and room rates. Q2 revenue rose 5.7%; six-month revenue rose 6.2%.
- Operating income improved, but Q2 consolidated net income turned to a loss. The quarter included a $17.7 derivative fair-value loss, compared with a $16.5 gain in Q2 2010. Six-month derivative fair-value loss was $34.5, versus a $30.4 gain.
- Six-month earnings included a $30.0 Wells Fargo settlement recorded in other income, offset in part by $6.9 of related legal costs in general and administrative expense. Other income also included derivative income.
- Six-month equity-method earnings included Ashford’s $43.2 share of a preliminary acquisition gain recognized by PIM Highland JV. Excluding that gain and the JV’s $18.3 acquisition transaction costs, Ashford reported its equity result would have been a $4.3 loss.
- Common shareholders’ Q2 loss was substantially affected by preferred dividends of $24.8, including the accounting treatment of the Series B-1 preferred conversion. In April, Ashford issued $80.8 of Series E preferred stock proceeds, used $73.0 to redeem Series B-1 shares, and converted the remaining 1.4 million Series B-1 shares into common stock.
Outlook, management commentary, risks, and unusual items
- Management described lodging fundamentals as improving and expected continued benefit if the economy improves. It noted industry cash flows and values had peaked in 2007 and might not reach prior highs until 2014–2016, based on industry forecasts. The filing gives no formal earnings or operating guidance.
- The Board resumed common dividends, with a 2011 annualized target of $0.40 per share; $0.20 per share had been declared for the first half. Future quarterly payments remain subject to review.
- Management said cash, operating cash flow, and available credit were expected to cover anticipated requirements for the next 12 months. At June 30, $50.0 was drawn on a $250.0 senior credit facility and $200.0 was available; the drawn balance was repaid in July 2011. Also in July, Ashford reissued 7.0 million treasury shares for net proceeds of about $83.3, and completed the Jacksonville Hampton Inn sale for net proceeds of $9.6.
- Three hotels were sold in the first half, generating $93.9 net proceeds after related mortgage repayments; $70.0 was used to reduce the senior facility. A further hotel sale completed in July. A $6.2 impairment was recorded on the Jacksonville property before its sale.
- The PIM Highland JV acquisition was a major investment: Ashford invested $150.0 in the restructuring and held a $25.0 preferred interest accruing an unpaid 15% annual return. The JV’s purchase-price allocation and acquisition gain were preliminary and could change.
- An IRS dispute concerning rent charged to a taxable REIT subsidiary remained unresolved. The IRS indicated it might seek approximately $5.7 of federal excise tax; Ashford said it intended to contest the position. Management also disclosed ordinary-course litigation, franchise and management agreement risks, refinancing and covenant risks, hotel-market competition, and seasonality.
- Management stated that Remington Lodging, beneficially owned by the Chairman and CEO, managed 46 of Ashford’s 97 legacy hotels and 16 PIM Highland JV hotels.
Important facts for investors to verify
- How much of recurring operating performance and cash generation is attributable to hotel operations versus derivative receipts, fair-value movements, settlements, and the preliminary PIM Highland acquisition gain.
- The final PIM Highland purchase-price allocation, JV debt and operating results, and the performance and priority of Ashford’s $25.0 preferred investment accruing at 15%.
- Debt maturities and refinancing needs, especially the $203.4 mortgage loan maturing in December 2011, and the effect of the July facility repayment and share reissuance on liquidity and dilution.
- The outcome and potential exposure from the IRS rent-transfer-pricing dispute, including the indicated $5.7 excise-tax assessment.
- The sustainability of the $0.40 annualized common-dividend target given preferred distributions, capital needs, debt service, and seasonal cash flows.