Business context and reporting period
Filing identity: The supplied filing is Ashford Hospitality Prime, Inc.’s Form 10-K for the fiscal year ended December 31, 2017, not a Braemar Hotels & Resorts Inc. filing. The filing reports the full year; fourth-quarter data are also included.
Ashford Prime is an externally advised hotel REIT focused on luxury and other high-RevPAR hotels. At year-end it reported interests in 12 hotels, with 3,574 total rooms (3,339 net of its joint-venture partner’s share). It has no employees and relies on Ashford LLC for advisory and asset-management services.
Key financial and operating metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $414.1 million | $405.9 million |
| Operating income | $38.8 million | $47.1 million |
| Net income attributable to the Company | $23.0 million | $19.3 million |
| Diluted income per common share | $0.51 | $0.55 |
| Operating cash flow | $70.6 million | $58.6 million |
| FFO available to common stockholders and OP unitholders | $44.9 million | $34.1 million |
| Adjusted EBITDA | $102.5 million | $101.4 million |
| Hotel EBITDA | $128.3 million | $124.2 million |
Reported net income benefited from a $23.8 million gain on the Plano hotel sale and a $9.7 million unrealized gain on the Ashford Inc. investment. Operating income declined despite higher revenue. Total portfolio occupancy was 81.0% versus 82.9%; ADR rose to $254.92 from $247.83, and RevPAR increased to $206.42 from $205.54. For the ten comparable hotels, occupancy fell to 83.2% from 84.4%, ADR slipped to $254.67 from $256.11, and RevPAR declined to $211.76 from $216.21.
At December 31, cash and cash equivalents were $137.5 million and restricted cash was $47.8 million. Total assets were $1.424 billion and gross debt was $826.2 million (debt carrying value, net of costs, was $821.0 million). Approximately $818.1 million of debt was variable-rate; weighted-average interest was 4.32%. The $100 million secured revolving facility was undrawn. The company reported compliance with debt covenants, a 45.1% consolidated indebtedness-to-asset-value ratio and a 2.14x fixed-charge coverage ratio under that facility.
Cash used in investing was $173.9 million, including $248.2 million for acquisitions and $43.0 million for property improvements, partly offset by sale proceeds and insurance recoveries. Cash provided by financing was $124.0 million. Contractual obligations showed $203.3 million of debt principal due within one year and $532.0 million in years one to three, excluding extension options. Management estimated 2018 capital expenditures of approximately $79.9 million and debt interest and principal payments of approximately $38.6 million.
Material changes versus the prior year
- Revenue rose 2.0%, but operating income fell 17.6%, as hotel operating expenses, depreciation, transaction costs and a one-time $5.0 million advisory-agreement modification payment increased.
- Net income attributable to the Company rose 19.2%, while diluted EPS fell from $0.55 to $0.51, reflecting, among other factors, higher weighted-average diluted shares and preferred dividends.
- Operating cash flow increased by $12.0 million. FFO rose to $44.9 million from $34.1 million; Adjusted EBITDA was broadly flat.
- The company acquired Park Hyatt Beaver Creek for $145.5 million and Hotel Yountville for $96.5 million; it sold Plano Marriott Legacy Town Center for $104.0 million and recorded a $23.8 million gain. It also refinanced debt and issued common and Series B preferred shares.
- Common dividends declared increased to $0.64 per share from $0.46. Management stated an expected 2018 quarterly common dividend of $0.16 per share, subject to board review and approval.
Outlook, risks and unusual items
- Management refined its strategy toward luxury hotels, retained a target of 45% net debt to gross assets, and stated a goal of holding cash equal to 10%–15% of gross debt. No formal earnings or RevPAR guidance is provided.
- Hurricanes Irma and Maria damaged the Ritz-Carlton St. Thomas, Pier House Resort and Tampa Renaissance. St. Thomas was closed to regular guests at year-end, with only 74 rooms available for sale; it had 180 rooms before the hurricanes. The company recorded $1.1 million of impairment charges, $3.8 million of remediation and other costs net of anticipated recoveries, and an $8.8 million insurance receivable net of deductibles. Insurance recoveries and the timing of reopening remain important uncertainties.
- The filing cites renovation and repositioning work, including planned Autograph Collection conversions for the San Francisco and Philadelphia Courtyard hotels, and Tampa Renaissance being listed for sale. Such work may affect near-term occupancy and results.
- Interest-rate exposure is significant: management estimated that a 25-basis-point rate change on variable-rate debt would affect annual results by approximately $2.0 million. Cash-trap provisions can restrict access to property cash if operating tests are breached, and debt maturities, refinancing conditions and extension requirements are material risks.
- The company’s advisory and management arrangements involve related-party and potential conflicts of interest, including Ashford LLC’s advisory agreement and Remington Lodging, which is owned by the Company chairman and his father and manages three hotels. The amended advisory agreement includes a $390 million minimum-net-worth covenant, limits on dividends under certain circumstances, and potential termination-related payments.
- Other risks include hotel-market cyclicality, concentration in luxury lodging and certain markets, capital needs, REIT qualification requirements, and reliance on third-party managers. The company reported that disclosure controls and internal control over financial reporting were effective; its auditor did not audit internal-control effectiveness.
Important facts for investors to verify
- Confirm the issuer: this document is Ashford Hospitality Prime, Inc.’s 2017 Form 10-K, not Braemar Hotels & Resorts Inc.’s filing.
- Review the debt maturity schedule, extension conditions, interest-rate caps and cash-trap tests, particularly the stated 2018–2019 maturities.
- Track St. Thomas restoration, room availability, insurance claims and cash recoveries, and the resulting effect on hotel operations.
- Assess comparable-hotel performance separately from acquisitions and dispositions; portfolio-level results are not directly comparable year to year.
- Evaluate the sustainability of the dividend against REIT distribution requirements, liquidity, capital spending and the advisory agreement’s net-worth covenant.
- Review related-party fees, advisory termination provisions and the Tampa sale and hotel-conversion plans for execution, cost and conflict-of-interest implications.