Ashford Hospitality Trust, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless otherwise stated.
Business context
Ashford Trust is a lodging-focused REIT. At quarter-end, it owned interests in 118 consolidated hotels with 25,044 rooms, plus 90 hotel condominium units at WorldQuest. The company relies on its external advisor, Ashford LLC, and third-party hotel operators; affiliated Remington Lodging managed 80 of the 118 hotels.
Financial highlights
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $374.2 | $355.9 | $1,148.1 | $1,087.3 |
| Operating income | $29.4 | $29.3 | $102.2 | $96.0 |
| Net loss | $(39.1) | $(34.3) | $(107.1) | $(90.3) |
| Net loss attributable to common stockholders | $(41.8) | $(38.2) | $(117.4) | $(104.1) |
| Loss per common share, basic and diluted | $(0.42) | $(0.40) | $(1.19) | $(1.09) |
| Cash provided by operating activities | Not presented quarterly | Not presented quarterly | $149.8 | $137.3 |
Q3 operating margin was approximately 7.9%, compared with 8.2% a year earlier, calculated as operating income divided by revenue. Adjusted EBITDAre, a non-GAAP measure, was $103.1 million for Q3 and $335.7 million for the nine-month period, versus $101.7 million and $321.3 million, respectively. Adjusted FFO available to common stockholders and OP unitholders was $32.9 million for Q3 and $119.5 million year to date, compared with $34.3 million and $123.8 million.
- Hotel performance: Portfolio RevPAR was $128.77 in Q3, up from $124.49; occupancy was 78.25% versus 77.91%, and ADR was $164.57 versus $159.78. For comparable hotels, RevPAR rose to $126.56 from $125.03, while occupancy edged down to 77.87% from 77.94%.
- Expenses and interest: Q3 hotel operating expenses rose 6.2% to $238.9 million, faster than total revenue growth of 5.1%. Interest expense and loan-cost amortization rose 9.3% to $66.4 million. Nine-month interest expense rose 15.4% to $200.5 million.
- Cash and investment: At September 30, cash and cash equivalents were $256.3 million and restricted cash was $148.8 million. Combined cash, cash equivalents and restricted cash were $405.1 million, down from $439.8 million at the start of the year. Nine-month capital improvements were $121.7 million; investing cash outflow was $247.2 million.
- Debt and equity: Net indebtedness was $4.110 billion, up from $3.927 billion at December 31, 2018; total equity was $309.8 million. Approximately $3.8 billion of $4.1 billion total debt was variable-rate. The filing estimates that a 25-basis-point rate change would affect annual results by approximately $9.4 million.
Material changes versus the prior period
- Revenue increased, aided by acquisitions and higher food-and-beverage revenue; comparable Q3 RevPAR increased modestly. Results are not fully comparable because the company acquired two hotels and sold three hotels during 2019, in addition to other portfolio changes.
- Net loss attributable to the company widened by $3.6 million in Q3 and $13.3 million for the nine-month period. Higher interest costs, operating expenses and, year to date, impairment charges contributed; improved operating income partly offset these pressures.
- The company recorded $6.5 million of nine-month impairment charges: $5.1 million at the Courtyard Savannah and $1.4 million at the Hilton Garden Inn Wisconsin Dells. Both properties were sold in August 2019.
- Common dividends declared were reduced from $0.12 per share per quarter in 2018 to $0.06 in Q3 2019. The 2019 policy anticipated $0.06 quarterly dividends for the remainder of the year, subject to board review.
- ASC 842 adoption brought operating lease assets of $40.8 million and lease liabilities of $43.5 million onto the September 30 balance sheet; management said the adoption did not materially affect operations or cash flows.
Outlook, risks and unusual items
- Management said existing cash and operating cash flow should cover anticipated interest and principal payments, working capital, capital expenditures and required REIT distributions for the next 12 months, excluding potential final maturity principal payments. It said it would proactively address 2020 maturities; refinancing availability and terms are not assured.
- A $100 million secured revolving facility expired September 26, 2019, with no balance drawn. Management did not expect its expiration to significantly affect liquidity. The company reported material compliance with debt covenants at quarter-end.
- Debt maturities and extensions remain important: the debt schedule included a $427 million mortgage due November 2019 and substantial 2020 maturities; several loans have extensions subject to conditions. Most debt is floating-rate, exposing results to interest-rate changes. Cash-trap provisions could restrict access to hotel cash if property performance declines.
- Subsequent events included an $11.8 million sale of Ashford Inc. shares to Ashford LLC, distribution of remaining Ashford Inc. shares to Ashford Trust holders, and Ashford Inc.’s November 6 completion of its acquisition of Remington’s hotel management business. Ashford Trust then had no ownership interest in Ashford Inc. The related-party and management arrangements warrant attention.
- Ashford Trust agreed, together with Braemar, to contribute up to $15 million to fund Ashford Securities; $485,000 had been funded by September 30. The filing also disclosed ongoing litigation and a $504,000 accrual for potentially remaining attorney fees in a longstanding landlord-tenant dispute.
- Management cited lodging-market and competition conditions, financing availability and costs, REIT qualification requirements, and potential conflicts involving Ashford Inc., Ashford LLC, Remington and affiliated leadership as risks. The filing reported no material changes to the risk factors in the 2018 Form 10-K.
Important facts for investors to verify
- Near-term maturities, extension conditions and the company’s ability to refinance 2020 debt without relying on asset sales or unfavorable terms.
- Variable-rate exposure, hedge coverage and the stated annual sensitivity to a 25-basis-point interest-rate change.
- Whether hotel revenue and comparable RevPAR gains can outpace operating-cost and interest-expense growth.
- The sustainability of common and preferred distributions relative to operating cash flow, capital needs and REIT distribution requirements.
- Effects of the Remington acquisition and continuing related-party service arrangements, including advisory costs and potential conflicts of interest.
- Realized proceeds and debt reduction from announced asset sales, and any further impairment or litigation developments.