Ashford Hospitality Trust, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Financial amounts below are in U.S. dollars; financial-statement amounts are converted from thousands to millions unless otherwise noted.
Business context
A lodging REIT focused on upscale and upper-upscale hotels. At September 30, the company reported interests in 103 consolidated hotels with 22,619 rooms, 90 WorldQuest condominium units, and a 17.5% interest in OpenKey. COVID-19 severely reduced travel demand; operations at two hotels remained temporarily suspended at quarter-end.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $93.0m | $374.2m | $418.0m | $1,148.1m |
| Operating income (loss) | $(164.5)m | $29.4m | $(365.7)m | $102.2m |
| Net income (loss) | $(151.6)m | $(39.1)m | $(495.6)m | $(107.1)m |
| Net loss attributable to common stockholders | $(139.9)m | $(41.8)m | $(450.0)m | $(117.4)m |
| Basic and diluted loss per share | $(11.89) | $(4.21) | $(41.92) | $(11.87) |
- Hotel demand: Portfolio RevPAR was $35.72 in Q3, down from $128.77; occupancy was 30.81%, versus 78.25%, and ADR was $115.96, versus $164.57. Comparable-hotel Q3 RevPAR was $37.90, down from $143.64.
- Cash flows: For the nine months, operating cash flow was $(98.9)m, investing cash flow $(3.9)m, and financing cash flow $(85.0)m. Cash, cash equivalents and restricted cash declined $187.8m to $210.4m, comprising $120.9m cash and $89.5m restricted cash.
- Debt and equity: Indebtedness, net was $3,739.7m, compared with $4,106.5m at December 31, 2019. Total liabilities were $3,990.4m and total assets $3,844.3m; total equity was a deficit of $166.7m. The company reported $91.3m of accrued interest payable.
- Margins and expenses: Q3 hotel operating expenses were $83.2m against $92.7m hotel revenue. Depreciation and amortization was $62.9m and impairment charges were $29.9m in the quarter. Nine-month impairment charges totaled $85.1m.
- Non-GAAP measures: Adjusted EBITDAre was $(22.7)m for Q3 and $(31.9)m for the first nine months, compared with $103.1m and $335.7m in the respective 2019 periods. Adjusted FFO available to common stockholders and OP unitholders was $(98.3)m for Q3 and $(261.9)m year to date.
Material changes and unusual items
- Revenue fell 75% year over year in Q3, chiefly due to pandemic-related declines at comparable hotels; room revenue decreased 73.6% and food-and-beverage revenue decreased 90.7%. Hotel expense reductions did not offset the revenue collapse.
- Q3 included a $90.3m gain on extinguishment of debt associated with hotel transfers and dispositions, alongside a $40.4m loss on sale of Embassy Suites New York Manhattan Times Square. The company also recorded $29.9m of impairment related to the W Minneapolis disposition.
- The company corrected its previously announced Q3 results after identifying an accounting error in its treatment of default interest and late charges under troubled debt restructurings. The corrected accounting capitalized $35.9m of accrued default interest and late charges into loan balances and increased interest expense for both Q3 and the nine-month period by $35.9m. The correction made Q3 and year-to-date FFO and Adjusted FFO $35.9m more negative.
- The board suspended common dividends for the first three quarters and preferred dividends for the second and third quarters. Preferred dividends in arrears totaled approximately $21.3m at September 30.
- The company completed a 1-for-10 reverse stock split effective July 15. Common shares outstanding were 14.6m at September 30; 4.1m shares were issued through the ATM program for $11.9m net proceeds during the first nine months. The ATM program expired September 28.
Outlook, liquidity and key risks
- Management expected COVID-19 to materially hurt results, financial position and cash flow through at least the remainder of 2020 and into 2021. It could not reasonably estimate the pandemic’s full impact.
- The company stopped making principal or interest payments on nearly all loans beginning April 1, constituting events of default and triggering default-rate interest. Forbearance and other agreements conditionally covered approximately $2.6bn of $3.7bn in property-level debt at September 30; not all loans were covered. Lenders may accelerate debt or foreclose. Several hotel portfolios were transferred or foreclosed on during Q3, and a lender had accelerated the $24.8m Hilton Scotts Valley loan.
- Management concluded there was substantial doubt about the company’s ability to continue as a going concern within one year after issuance of the financial statements. Without additional capital, management estimated existing resources might fund operations only into early 2021; under Q3 cash usage, cash and restricted cash could be exhausted within 12 months. Alternatives included raising capital, restructuring or refinancing debt, further forbearances, asset transfers, and possible Chapter 11 proceedings.
- The company reduced planned 2020 capital spending to approximately $50m, cut hotel and corporate costs, and sought to use lender- and manager-held reserves. Potential new financing could be senior to existing securities or dilute existing holders. The filing provides no firm earnings or RevPAR guidance.
- After quarter-end, the NYSE notified the company of noncompliance with market-capitalization and stockholders’ equity standards. The company said it would submit a compliance plan. It also extended and amended its preferred-stock exchange offer; as of the filing, the offer was extended to November 20, 2020 and the cash election had been eliminated.
- The SEC subpoenaed the company and related Ashford entities in June concerning related-party transactions, accounting policies and controls; the chairman received a similar subpoena in October. The company reported a material weakness in review controls over troubled-debt-restructuring accounting and said disclosure controls were not effective. It engaged a third-party accounting expert as a remediation measure.
- Other risks include possible defaults on ground leases, variable-rate exposure (approximately $3.5bn of variable-rate debt; a 25-basis-point rate change was estimated to affect annual results by about $8.7m), related-party fees and obligations, and pending litigation. A New York service-charge class action had estimated potential damages of $5.8m–$11.9m plus legal fees if liability is upheld; no amount was accrued.
Important facts for investors to verify
- Whether the company secured additional liquidity and continued operations beyond management’s early-2021 estimate, and whether going-concern uncertainty changed.
- Current status and terms of lender forbearances, defaults, accelerated loans, property transfers and any remaining foreclosure exposure.
- Outcome of the preferred-stock exchange offer and the effects on dilution, preferred claims and dividend arrears.
- NYSE compliance-plan progress and the status of the SEC investigation and material-weakness remediation.
- How subsequent hotel demand, cash use, capital spending and required debt service compare with the filing’s assumptions.