Ashford Hospitality Trust, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter report; fourth-quarter results are noted separately below. Amounts are in U.S. dollars.
Business context
Ashford Trust is an externally advised REIT focused primarily on U.S. upscale and upper-upscale hotels. At year-end it held interests in 119 consolidated hotels with 25,087 rooms and 90 WorldQuest condominium units. Remington Lodging, owned by the company’s chairman and chairman emeritus, managed 81 of the hotels. The company has no employees and relies on Ashford LLC and third-party hotel operators.
Financial and operating results
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $1,430.8 million | $1,439.3 million |
| Operating income | $90.4 million | $149.0 million |
| Operating margin | 6.3% | 10.4% |
| Net loss attributable to company | $127.0 million | $67.0 million |
| Net loss attributable to common stockholders | $169.5 million; $1.75 per diluted share | $122.6 million; $1.30 per diluted share |
| Cash from operating activities | $181.6 million | $207.4 million |
| EBITDAre | $366.6 million | $378.3 million |
| FFO available to common stockholders and OP unitholders | $82.4 million | $98.4 million |
| Adjusted FFO | $145.3 million | $168.9 million |
Hotel and WorldQuest operating indicators for 2018 were RevPAR of $123.62, occupancy of 76.32%, and average daily rate (ADR) of $161.99. The comparable-property group reported RevPAR of $123.64 versus $123.56 in 2017; ADR increased to $162.00 from $159.32, while occupancy declined to 76.32% from 77.55%.
At December 31, 2018, total assets were $4.69 billion, hotel investments net of depreciation were $4.11 billion, and indebtedness net was $3.93 billion. The filing describes approximately $4.0 billion of total debt, including $3.6 billion of variable-rate debt. Cash and cash equivalents were $319.2 million; restricted cash was another $120.6 million. Capital improvements used $207.3 million during the year, and capital commitments were $68.6 million, expected to be paid within 12 months.
Common dividends were $0.48 per share for 2018, reported as entirely return of capital for tax purposes. Preferred dividends declared were $42.6 million. The 2019 policy anticipates a $0.12 quarterly common dividend, subject to board review and declaration.
Fourth-quarter snapshot
Fourth-quarter 2018 revenue was $343.5 million, operating loss was $5.6 million, net loss was $66.0 million, and net loss attributable to common stockholders was $65.4 million, or $0.66 per diluted share. Fourth-quarter 2017 revenue was $341.6 million and common-stockholder net loss was $47.7 million, or $0.50 per diluted share.
Material changes versus 2017
- Revenue declined $8.5 million (0.6%). Lower room and food-and-beverage revenue was partly offset by acquisitions and higher other hotel revenue.
- Operating income fell $58.6 million; net loss attributable to the company widened by $60.0 million. Higher depreciation, impairment charges, advisory fees and interest expense contributed.
- Impairment charges rose to $23.4 million from $10.2 million, including charges at the San Antonio Marriott, Annapolis Crowne Plaza, Wisconsin Dells Hilton Garden Inn and SpringHill Suites Centreville.
- Advisory service fees increased to $69.1 million from $53.2 million, including $25.2 million of equity-based compensation; approximately $4.5 million related to accelerated vesting following an executive officer’s death.
- Interest expense and loan-cost amortization increased $14.2 million. The company cited higher LIBOR rates and refinancing activity; average LIBOR was 2.00% versus 1.11% in 2017.
- Operating cash flow decreased $25.8 million. Investing cash outflow increased to $329.6 million, reflecting acquisitions and capital improvements; financing activities provided $115.8 million, largely amid substantial refinancing and borrowing activity.
Outlook, risks and unusual items
- Liquidity and maturities: Management said existing cash and operating cash flow should cover anticipated interest and principal payments, working capital, capital expenditures and REIT distributions for the next 12 months, excluding potential final maturity payments. Contractual debt principal due in 2019 was $669.2 million and in 2020 was $2.71 billion. Management stated it would address refinancing or repayment of 2019 and 2020 maturities; no assurance of financing or favorable terms was given.
- Leverage and rates: Most debt was variable-rate. The filing estimates a 25-basis-point rate increase would raise annual expense by about $9.0 million. Debt covenants, cash-trap provisions and refinancing availability may constrain liquidity or distributions. The company reported compliance with covenants at year-end; its secured credit facility leverage ratio was 8.92 against a maximum of 9.75, and fixed-charge coverage was 1.53 against a 1.25 minimum.
- Acquisitions and funding: The company acquired the Hilton Alexandria Old Town for $111.0 million and La Posada de Santa Fe for $50.0 million in 2018. After year-end it acquired Embassy Suites New York Midtown Manhattan for $195.0 million and Hilton Santa Cruz/Scotts Valley for $50.0 million. Under the Enhanced Return Funding Program, Ashford LLC funded $16.1 million in 2018 in exchange for hotel furniture, fixtures and equipment leased back rent-free; the payment was recorded as a liability, not a sale. Future funding is subject to contractual conditions and may be delayed or unavailable.
- Related-party dependence and conflicts: Ashford LLC advises the company, and Remington manages most hotels. The filing identifies potential conflicts involving shared leadership, related-party service arrangements and the advisor’s responsibilities to other entities. Advisory and related-party fees are not negotiated at arm’s length in the ordinary course, according to the filing.
- Other notable items: Other hotel revenue included $2.6 million of business-interruption income related to the BP Deepwater Horizon settlement and $401,000 related to Hurricane Irma. A Florida landlord-tenant judgment was paid; negotiations over remaining attorney fees continued, with approximately $504,000 accrued at year-end. The company also disclosed a potential indemnity related to a hotel manager’s pension liability; the filing does not state a clear current estimate of the company’s ultimate exposure.
- Key business risks: Hotel demand and operating costs are cyclical and seasonal; competition, labor and insurance costs, property improvement needs, natural disasters, franchise requirements, ground leases, and REIT qualification can affect results. The portfolio is concentrated in lodging, and 10% of 2018 hotel revenue came from nine Washington, D.C.-area hotels.
The company reported an unqualified audit opinion on its financial statements and effective internal control over financial reporting as of December 31, 2018.
Important facts for investors to verify
- Debt maturity and refinancing progress, particularly the $669.2 million due in 2019 and $2.71 billion due in 2020, as well as the share of debt exposed to floating rates.
- Whether operating cash flow and unrestricted liquidity can support capital commitments, debt service and common and preferred distributions.
- Hotel-level operating trends: occupancy weakened despite higher ADR, and reported revenue included business-interruption proceeds.
- Impairment assumptions and the performance of hotels with 2018 impairment charges; compare reported GAAP losses with the company’s non-GAAP FFO and EBITDAre measures.
- Related-party advisory and management fees, governance protections, and the timing and enforceability of future Enhanced Return Funding Program payments.
- Post-year-end acquisition financing, integration and contribution to results, alongside any further common-share or operating-partnership-unit issuance.