Ashford Hospitality Trust, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparative period is the three months ended March 31, 2012. Amounts are in U.S. dollars. The company is a self-advised lodging REIT. At quarter-end, it had interests in 94 consolidated hotels (20,034 total rooms), a 28-hotel unconsolidated joint venture, and 93 hotel condominium units.
Key financial results
| Metric | Q1 2013 | Q1 2012 | Change / context |
|---|---|---|---|
| Total revenue | $231.9 million | $217.1 million | Up 6.9% |
| Operating income | $25.3 million | $21.9 million | Up $3.4 million; operating margin approximately 10.9% versus 10.1% |
| Net loss | $18.2 million | $24.6 million | Loss narrowed $6.4 million |
| Net loss attributable to common shareholders | $23.2 million | $29.5 million | Loss per share was $0.34 versus $0.44 |
| Operating cash flow | $19.0 million | $12.3 million | Up $6.7 million |
| Investing cash flow | $(19.8) million | $(23.2) million | Primarily hotel capital improvements |
| Financing cash flow | $24.9 million | $(6.3) million | Included refinancing proceeds, debt repayments, dividends, and distributions |
| Cash and cash equivalents | $210.0 million | $185.9 million at Dec. 31, 2012 | Marketable securities were $27.8 million; restricted cash was $78.9 million |
| Indebtedness | $2.391 billion | $2.339 billion at Dec. 31, 2012 | $724.8 million variable-rate debt; remaining debt was fixed-rate |
For the 94 comparable hotels, RevPAR was $99.48 (up from $95.79), occupancy was 71.42% (71.09%), and average daily rate was $139.29 ($134.74). Adjusted EBITDA was $82.3 million versus $75.0 million; adjusted FFO available to common shareholders was $29.6 million versus $23.2 million. These are company-defined non-GAAP measures and are not substitutes for GAAP results or cash flow.
Material changes and drivers
- Room revenue rose $14.0 million, reflecting higher occupancy and room rates. However, Marriott-managed hotels’ reported quarter included nine more operating days in 2013 than in the 2012 comparison (93 days versus 84); prior results were not adjusted, so reported growth is not fully comparable.
- Hotel operating expenses increased $7.8 million, partly reflecting the extra Marriott operating days and higher occupancy. Corporate, general, and administrative expense rose $4.3 million to $14.5 million, mainly due to increased non-cash equity compensation, including accelerated LTIP vesting, and higher salaries and professional fees.
- Equity-method losses from unconsolidated joint ventures improved to $6.9 million from $10.3 million. Interest expense and loan-cost amortization increased modestly to $35.4 million. The company recorded $7.1 million of unrealized derivative losses, versus $9.9 million, and a $2.0 million write-off of loan costs and exit fees related to refinancing.
- Common dividends declared were $0.12 per share, compared with $0.11 a year earlier. The board’s stated 2013 policy anticipated quarterly dividends of $0.12 per share for the remainder of the year, but future declarations remain at the board’s discretion.
Liquidity, debt, outlook, and risks
- In February 2013, Ashford refinanced a $141.0 million loan due August 2013 with a $199.9 million loan due February 2018 at LIBOR plus 3.50%, with no LIBOR floor. The company’s share of excess proceeds, approximately $40.5 million, increased unrestricted cash. The new loan is secured by two hotels in which Ashford owns 75% interests.
- The $165.0 million senior credit facility had no outstanding balance at quarter-end; the company reported $165.0 million of borrowing capacity, subject to its terms. Management said cash, operating cash flow, and facility availability should cover anticipated debt service, working capital, and capital expenditures for the next 12 months. It planned to address 2014 maturities proactively and gave no assurance that future financing would be available on favorable terms.
- A 25-basis-point change in rates on quarter-end variable-rate debt would affect annual results by approximately $1.8 million, assuming no change in capital structure. The company reported compliance in all material respects with debt and derivative covenants; its senior facility fixed-charge coverage ratio was 1.37x against a 1.25x minimum, and leverage was 58.89% against a 65% maximum.
- Management cited continued improvement in lodging fundamentals and expected economic improvement to support industry results, while emphasizing acquisitions and dispositions, capital preservation, cost control, selective improvements, asset management, and competitive financing. Results are seasonal and the quarter is not necessarily indicative of the full year.
- Liquidity risks include cash-trap provisions if hotel performance declines, debt maturities and refinancing needs, interest-rate exposure, and guarantees for certain non-recourse loan carve-outs. Potential distributions may exceed cash flow; the company may use cash or borrowings to meet REIT distribution requirements.
- The IRS was challenging transfer-pricing and related tax positions for 2007 and 2008. Ashford disputed the proposed adjustments; potential amounts described included $4.6 million of 2007 REIT excise tax or, alternatively, $1.1 million of TRS federal tax plus state tax, and 2008 proposed REIT and TRS adjustments. Management believed it would substantially prevail and that settlement would not materially harm financial condition or results.
- Ashford had agreed to indemnify its affiliated hotel manager for a potential pension withdrawal liability, stated at $1.7 million less payments made, subject to final resolution of an NLRB matter. It also disclosed ordinary-course litigation and tax indemnities tied to certain contributed properties. Management did not expect these matters to have a material adverse effect, but outcomes are uncertain.
- After quarter-end, Ashford agreed to acquire the Pier House Resort and Caribbean Spa in Key West for $90.0 million in cash, with closing expected in May 2013.
Important facts for investors to verify
- Assess comparable hotel growth after accounting for Marriott’s nine-day period difference, and distinguish operating performance from reported revenue growth.
- Review debt maturities, refinancing plans, covenant headroom, floating-rate exposure, and the availability and conditions of the undrawn credit facility.
- Evaluate cash generation against capital spending, preferred and common dividends, and distributions to noncontrolling interests; do not treat FFO or adjusted FFO as cash available for distribution.
- Track the IRS audit appeals, potential tax indemnities, pension-related indemnity, and guarantees for non-recourse debt carve-outs.
- Confirm the funding, closing, and subsequent operating results of the proposed $90.0 million Pier House acquisition.