AHT

Ashford Hospitality Trust Inc. - 10-Q Summary (Q3 2008)

Business Context and Reporting Period

This report covers the quarterly period ended September 30, 2008. Ashford Hospitality Trust, Inc. is a self-advised Real Estate Investment Trust (REIT) owning 98 hotel properties directly and six through joint ventures (104 total properties). The company also engages in hotel financing through mezzanine and first-mortgage loans. As of the reporting date, the company owned $211.5 million in notes receivable and held a 25% interest in a joint venture with Prudential Real Estate Investors (PREI JV) holding $95.5 million in mezzanine loans.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 25.9% year-over-year for the nine months, driven primarily by the inclusion of 43 non-comparable hotels acquired in 2007 (CNL Portfolio) and increased interest income from new mezzanine loans ($209.1 million originated/acquired).
• Comparable Hotel Performance: For comparable hotels, RevPAR decreased slightly (0.4% for nine months) due to lower occupancy (down ~3%) partially offset by higher Average Daily Rates (ADR up ~3.7%).
• Derivative Volatility: The company recorded a significant unrealized loss of $38.9 million on derivatives for the nine months ended September 30, 2008, compared to a loss of only $144,000 in the prior year. This was due to changes in the LIBOR forward curve affecting the fair value of non-hedge interest rate swaps and floors.
• Discontinued Operations: Income from discontinued operations dropped 56.7% year-over-year to $14.7 million, reflecting fewer property sales in the current period compared to the prior year.
• Net Loss: Despite revenue growth, the company reported a net loss of $11.5 million for the nine months, primarily due to the unrealized derivative losses and higher depreciation/amortization expenses.

Outlook, Risks, and Management Commentary

• Debt Strategy: Management executed a strategy to capitalize on the correlation between LIBOR and RevPAR, swapping $1.8 billion of fixed-rate debt for floating rates (LIBOR + 2.64%) and purchasing interest rate caps. This strategy resulted in significant fair value fluctuations in earnings.
• Liquidity: Cash on hand increased to $227.8 million. Subsequent to the quarter-end, the company drew the remaining $105 million on its senior credit facility and invested it in U.S. Treasuries to preserve liquidity.
• Dividend Risk: Management warned that cash available for dividends may decline in the current environment and that a dividend cut could be considered in the future to preserve capital.
• Subsequent Events & Defaults:
  • A $18.2 million junior participation note receivable matured in October 2008 with no payment; the underlying property in Nevis was damaged by Hurricane Omar.
  • The borrower of a $21.5 million mezzanine note held in the PREI JV defaulted on debt service payments.
• Stock Repurchases: The company repurchased 10.6 million shares for $46.0 million during the nine months. An additional $75 million authorization was approved in September, and $40.8 million in shares were purchased subsequent to quarter-end.

Investor Verification Checklist

• Derivative Exposure: Verify the impact of the $38.9 million unrealized derivative loss on future earnings and the effectiveness of the new interest rate caps purchased in September 2008.
• Loan Portfolio Quality: Assess the collectability of the $18.2 million note in Nevis (hurricane damage) and the $21.5 million PREI JV note (defaulted) mentioned in subsequent events.
• Dividend Sustainability: Review the company's cash flow projections given the warning of potential dividend cuts and the shift to floating-rate debt.
• Comparable Hotel Metrics: Monitor occupancy trends and ADR growth to ensure the slight RevPAR decline does not accelerate due to the economic downturn.
• Debt Covenants: Confirm continued compliance with debt covenants, particularly minimum debt coverage ratios, given the increased interest expense volatility.