Ashford Hospitality Trust, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Unaudited consolidated results. Ashford Trust is a hospitality REIT; at quarter-end it owned 86 consolidated hotels with 16,895 rooms, plus interests in hotel ventures and a mezzanine loan.
Key financial results
Amounts in millions, except per-share data and operating statistics.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $208.9 | $258.5 | $404.5 | $490.5 |
| Operating income | $17.6 | $41.5 | $44.2 | $66.8 |
| Net income (loss) | $(2.4) | $7.6 | $(5.6) | $(10.6) |
| Net loss attributable to common shareholders | $(10.1) | $(1.4) | $(21.0) | $(24.6) |
| Basic and diluted loss per share | $(0.11) | $(0.02) | $(0.25) | $(0.36) |
| Operating cash flow | Not stated for quarter | $62.4 | $74.9 | |
| Adjusted EBITDA (non-GAAP) | $96.5 | $108.8 | $176.0 | $191.1 |
| Adjusted FFO available to common shareholders (non-GAAP) | $42.3 | $48.1 | $67.1 | $77.7 |
- At June 30, cash and cash equivalents were $212.3 million, marketable securities $34.9 million, and restricted cash $87.7 million. Cash, equivalents and marketable securities totaled $247.2 million.
- Debt was $1.777 billion, compared with $1.819 billion at December 31, 2013. Variable-rate debt was $546 million; the filing estimates that a 25-basis-point rate change would affect annual results by approximately $1.4 million.
- Six-month investing cash outflow was $44.0 million and financing cash inflow was $65.1 million. Capital improvements were $57.6 million. Common dividends declared were $0.12 per share each quarter; management cited a 2014 annualized target of $0.48 per share, subject to board review.
- Quarterly operating margin, calculated as operating income divided by revenue, was approximately 8.4%, versus 16.1% a year earlier. Six-month operating margin was approximately 10.9%, versus 13.6%.
Changes and comparability
- Reported revenue fell 19.2% in Q2 and 17.5% for the first half. The largest driver was the November 2013 Ashford Prime spin-off: the eight spun-off hotels contributed $65.7 million of Q2 2013 revenue and no Q2 2014 revenue. The filing cautions that periods are therefore not directly comparable.
- For continuing hotel operations, Q2 RevPAR was $108.36, down from $111.75; occupancy rose to 80.1% from 78.7%, while ADR declined to $135.35 from $142.07. First-half RevPAR was $105.27 versus $105.61.
- Q2 operating income declined by $23.9 million. Lower portfolio scale and a $10.8 million jury-verdict charge were significant factors; the company also reported higher corporate and administrative costs. Interest expense fell by $8.1 million, primarily reflecting lower debt after the Ashford Prime spin-off.
- The company sold the Pier House Resort to Ashford Prime on March 1, 2014, for $92.7 million, including assumption of $69.0 million of debt, and recorded a $3.5 million gain. Its 2014 results are included through February 28.
- Common shares outstanding increased to 89.3 million at June 30 from 80.6 million at year-end, following an April-May offering that generated approximately $85.5 million in net proceeds.
Outlook, risks and unusual items
- 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. This is management’s assessment, not earnings guidance; the filing provides no quantified full-year earnings outlook.
- The $165 million senior credit facility had no outstanding borrowings, expires in September 2014, and management said it did not plan to extend or replace it. The company reported compliance with debt covenants at June 30. Management continued to identify 2014 maturities for proactive refinancing.
- Subsequent to quarter-end, the company refinanced three mortgage loans with new loans totaling $468.9 million, producing approximately $104 million of excess proceeds after estimated costs and reserves. It also acquired The Ashton hotel for $8.0 million in July and the Fremont Marriott Silicon Valley for $50.0 million in August, financed partly with property mortgages.
- The proposed taxable spin-off of the asset-management business into Ashford Inc. was targeted for Q3 2014 but remained subject to regulatory, exchange-listing and other approvals. The company warned of execution, tax, costs, advisory-dependence and conflict-of-interest risks, including potential implications for REIT qualification.
- The $10.8 million jury verdict was accrued in Q2; post-trial motions and an appeal were anticipated. Other legal matters could also result in losses, though management did not expect them to have a material adverse effect based on current estimates.
- Other exposures include hotel seasonality and competition, refinancing and interest-rate risk, possible cash traps under certain loans, guarantees for non-recourse carve-outs, franchise and management-contract risks, and a potential pension indemnity. The filing also describes an IRS settlement under discussion for prior tax years; management expected the cases to close in Q3 2014 without additional tax assessment based on the stated facts.
Important facts for investors to verify
- How much of the reported revenue and operating-income decline reflects the Ashford Prime portfolio spin-off versus performance of the remaining hotels; review comparable-property trends and RevPAR.
- The status and final economics of the Ashford Inc. spin-off, including tax treatment, advisory agreements, costs and any effect on REIT qualification or distributions.
- Completion terms and ongoing covenant/liquidity effects of the July refinancing, and the plan for the September-expiring credit facility and remaining debt maturities.
- Developments in the $10.8 million jury-verdict case, including final judgment, post-trial motions and appeal.
- Dividend coverage and cash available after capital improvements, debt service, preferred dividends and financing needs; non-GAAP FFO and EBITDA are not substitutes for GAAP cash flow.