Ashford Hospitality Trust, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing was signed March 3, 2014. This is an annual report, not a standalone fourth-quarter filing.
Business context
Ashford is a self-administered REIT focused on U.S. hospitality investments, principally upscale and upper-upscale hotels. At year-end it had 87 consolidated legacy hotels with 17,030 rooms, interests in a 28-hotel unconsolidated joint venture, 90 WorldQuest condominium units, and one mezzanine loan. Hotels are operated by third-party or affiliated managers; affiliate Remington Lodging managed 54 of the 87 consolidated hotels.
In November 2013, Ashford distributed an 80% interest in an eight-hotel portfolio to shareholders through the spin-off of Ashford Hospitality Prime (Ashford Prime), retaining a 20% interest in its operating partnership and an advisory relationship. Results for the spun-off hotels remain included in 2013 and comparative periods through the applicable reporting dates, so year-over-year comparisons reflect both operating changes and portfolio changes.
Financial and operating performance
| Metric | 2013 | 2012 | Change / context |
|---|---|---|---|
| Total revenue | $942.3 million | $922.6 million | Up 2.1% |
| Operating income | $117.4 million | $114.8 million | Up 2.3%; operating margin approximately 12.5%, versus 12.4% |
| Net loss attributable to the Company | $41.3 million | $53.8 million | Loss narrowed |
| Net loss attributable to common shareholders | $75.2 million; $1.00 per share | $87.6 million; $1.30 per share | Loss per share improved |
| EBITDA (non-GAAP) | $314.5 million | $317.0 million | Down 0.8% |
| FFO available to common shareholders (non-GAAP) | $95.5 million | $84.2 million | Up 13.4% |
| Adjusted FFO available to common shareholders (non-GAAP) | $116.2 million | $126.6 million | Down 8.2% |
| Cash and cash equivalents at year-end | $128.8 million | $185.9 million | Down $57.2 million; restricted cash was $61.5 million |
| Indebtedness | $1,818.9 million | $2,339.4 million | Down $520.5 million, substantially reflecting the Ashford Prime spin-off |
| Common dividends declared per share | $0.48 | $0.44 | 2014 policy anticipates $0.12 quarterly, subject to Board declaration |
Hotel operating indicators improved: RevPAR was $102.84, up from $98.80; occupancy was 74.27%, versus 73.80%; and ADR was $138.48, versus $133.87. Rooms revenue increased 3.0% to $749.3 million. Food and beverage revenue declined 4.3% to $153.6 million.
The cash flow statement reports $145.5 million provided by operating activities, compared with $130.6 million in 2012. Investing activities used $354.0 million, including $162.8 million contributed to Ashford Prime OP, $88.2 million for the Pier House acquisition, and $96.3 million of hotel improvements. Financing activities provided $151.4 million, including common-stock offering proceeds and borrowings. The selected financial data elsewhere in the filing reports 2013 operating cash flow of $130.9 million and investing cash use of $340.4 million; these figures do not match the cash flow statement and MD&A, so the filing text does not provide a clear reconciliation.
At year-end, $579.4 million of debt was variable-rate. Management estimated that a 25-basis-point rate increase would add approximately $1.4 million of annual interest expense. The $165 million senior credit facility had no amount outstanding and was available through September 2014, subject to its terms. Its fixed-charge coverage covenant was 1.25x (reported ratio: 1.29x), and its maximum leverage covenant was 65% (reported ratio: 58.57%).
Material changes and unusual items
- The Ashford Prime spin-off materially reduced the consolidated hotel asset base and transferred properties and associated debt. The eight hotels contributed $214.6 million of revenue for 2013, including the period before the November distribution; their operating cash flows were approximately $52.8 million through November 18.
- Ashford raised approximately $140.1 million net through a June/July common-stock offering. It acquired the Pier House Resort for $90 million in May and placed $69 million of floating-rate financing on it in September.
- Corporate general and administrative expense rose $8.8 million to $52.8 million, primarily due to non-cash equity compensation, including accelerated vesting and deferred-compensation changes associated with the spin-off.
- Other income fell to $5.7 million from $31.7 million, principally because income from non-hedge interest-rate derivatives declined as transactions expired. The company recorded an $8.3 million unrealized derivative loss in 2013, versus $35.7 million in 2012.
- Operating cash flow and non-GAAP metrics should be considered alongside GAAP results. In particular, EBITDA and FFO are company-presented non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
Outlook, risks and contingencies
Management said lodging fundamentals improved through 2013 and expected economic improvement to support hotel performance in coming years. It provided no quantitative earnings or operating guidance. Priorities include acquisitions and selective dispositions, capital improvements, cost and liquidity management, and financing or refinancing hotels on competitive terms.
- Debt and refinancing: Contractual debt principal and estimated interest obligations totaled approximately $2.08 billion. The filing showed $638.2 million of principal due within one year at December 31, 2013. After year-end, Ashford refinanced a $164.4 million loan due in March 2014 with a $200 million loan due February 2016, generating approximately $30 million of excess proceeds. Management said it believed available cash, operating cash flow, and credit-facility capacity would cover anticipated needs for the next 12 months, but gave no assurance of future financing.
- Liquidity and capital needs: Capital improvement commitments were $41.4 million, expected to be paid in the next 12 months. Loan cash-trap provisions could restrict access to hotel cash if performance weakens. Guarantees for customary non-recourse carve-outs, including certain guarantees still shared with Ashford Prime, may also create liquidity exposure.
- REIT and tax exposure: Ashford recognized an approximately $145.7 million tax gain related to the Ashford Prime spin-off. If Ashford Prime did not qualify as a REIT for 2013, Ashford warned that its own REIT status could be jeopardized. A 2008 IRS audit remained under appeal, with proposed adjustments including $3.3 million of REIT excise tax and additional TRS tax; the company disputed the adjustments and said it expected no material adverse effect. The 2007 audit resulted in no-change letters, though the IRS could reopen it through March 31, 2014.
- Related-party governance: Remington Lodging is owned by the Chairman/CEO and Chairman Emeritus, and managed 54 consolidated hotels. Ashford reported $28.0 million of related-party fees and reimbursements in 2013. Management agreements include exclusivity provisions and can constrain management changes, asset sales, or financing.
- Industry and portfolio risks: The company is concentrated in hotels and exposed to economic downturns, competition, labor and operating-cost inflation, seasonality, required renovations, franchise requirements, interest-rate changes, and natural disasters or terrorism. Approximately 16.7% of 2013 hotel revenue came from 11 hotels in the Washington, D.C. and Baltimore areas.
- Other contingencies and transactions: Management did not expect pending legal proceedings to materially affect the company, but noted outcomes are uncertain. A proposed spin-off of the asset-management business into Ashford Inc. was announced for an expected third-quarter 2014 distribution, subject to approvals and other conditions. Ashford sold the Pier House to Ashford Prime on March 1, 2014 for $92.7 million; Ashford Prime assumed its $69 million mortgage.
Important facts for investors to verify
- Reconcile the conflicting 2013 cash flow figures in the selected financial data versus the cash flow statement and MD&A.
- Assess 2014 debt maturities, the January 2014 refinancing, remaining refinancing needs, and the September 2014 credit-facility expiration.
- Confirm Ashford Prime’s 2013 REIT qualification and the eventual resolution of the IRS 2008 tax examination.
- Evaluate the post-spin-off impact on recurring cash flow, including Ashford’s retained 20% Ashford Prime OP interest and advisory fees, against the cash flows transferred with the hotel portfolio.
- Assess whether the anticipated $0.12 quarterly common dividend is supported by ongoing cash generation, capital spending, debt service, and preferred distributions; the 2013 common distribution was characterized for tax purposes as capital gain and return of capital, not ordinary income.
- Review related-party management economics and governance, variable-rate exposure, and the company’s substantial hotel renovation commitments.