Ashford Hospitality Trust, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Ashford Trust is a lodging REIT; at quarter-end it owned interests in 120 consolidated hotels with 25,055 rooms, plus 87 WorldQuest condominium units. The filing is unaudited.
Key financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $390.7 million | $410.7 million | $744.4 million | $778.4 million |
| Operating income | $58.5 million | $69.5 million | $86.7 million | $110.9 million |
| Net income (loss) attributable to Ashford Trust | $10.2 million | $30.8 million | $(15.2) million | $20.8 million |
| Net income (loss) attributable to common stockholders | $(0.8) million | $22.3 million | $(37.1) million | $3.8 million |
| Basic and diluted earnings (loss) per common share | $(0.01) | $0.23 | $(0.40) | $0.04 |
- Hotel performance: Comparable-property RevPAR rose 0.5% in Q2 to $133.63 and 1.9% for the six months to $126.56. Comparable occupancy eased to 81.54% in Q2 from 82.16%; ADR increased to $163.88 from $161.80. For the six months, occupancy was 78.21% versus 78.11% and ADR was $161.82 versus $159.05.
- Non-GAAP measures: Adjusted EBITDA available to the Company and operating partnership unitholders was $125.5 million in Q2 versus $132.8 million, and $226.3 million for six months versus $237.8 million. Adjusted FFO available to common stockholders and OP unitholders was $58.8 million versus $68.0 million in Q2, and $94.4 million versus $108.3 million for six months. These are company-defined measures, not substitutes for GAAP income or cash flow.
- Cash flow: Six-month operating cash flow was $135.2 million, compared with $122.6 million. Investing activities provided $47.4 million, including property-sale proceeds and liquidation proceeds from the AQUA U.S. Fund, partly offset by $110.1 million of hotel improvements. Financing activities used $120.1 million. Cash, cash equivalents and restricted cash increased $62.5 million to $554.9 million; unrestricted cash was $404.4 million.
- Debt and equity: Net indebtedness was $3.70 billion, down from $3.72 billion at year-end 2016. Approximately $3.3 billion was variable-rate debt; management estimated that a 25-basis-point rate increase would add about $8.1 million to annual expense. Stockholders’ equity was $747.6 million. Common dividends declared remained $0.12 per share per quarter.
Changes and significant transactions
- Revenue declined 4.9% in Q2 and 4.4% for the six-month period, principally because of hotel dispositions. The company sold Renaissance Portsmouth, Embassy Suites Syracuse and Crowne Plaza Ravinia during 2017; the latter sale generated a $14.1 million gain. Comparable room revenue improved, but was not enough to offset disposed-property revenue.
- Six-month common-stockholder results swung to a loss from a small prior-year profit. Factors included lower operating income, a $3.9 million unrealized loss on marketable securities, and weaker derivative results compared with a prior-year unrealized gain. Preferred dividends were $21.9 million for the six months.
- Interest expense declined modestly year over year, partly reflecting dispositions, but higher LIBOR and refinancing-related costs partly offset the benefit. The company refinanced loans secured by the Renaissance Nashville/Westin Princeton and Hotel Indigo Atlanta; the former has a June 2022 stated maturity and floating LIBOR + 3.00% rate.
- Capital improvements and additions to hotel properties were $110.1 million for the six months, versus $88.2 million in the prior-year period.
Outlook, risks and unusual items
- Management said industry fundamentals were expected to support RevPAR growth through 2017, but at a slower pace. It cited priorities including selective acquisitions and dispositions, capital improvements, cost and revenue management, refinancing, liquidity preservation and hedging. The filing provides no numerical full-year earnings or RevPAR guidance.
- Management believed operating cash flow and existing cash would be sufficient for anticipated interest, principal, working-capital and capital-expenditure needs over the next 12 months. It said it would proactively address 2018 maturities, while cautioning that future financing terms and availability are not assured. Numerous loans have 2017–2018 stated maturities, although certain loans have extension options.
- Major litigation: A final judgment in the Nantucket landlord-tenant case resulted in an estimated total loss of approximately $17.3 million at June 30, including interest and estimated legal-fee reimbursement. The company recorded $4.1 million of expense for the six months. RLI, which paid approximately $10.0 million under a supersedeas bond, sued for reimbursement; Ashford paid RLI approximately $10.0 million on July 19, 2017. The reimbursement suit remained pending.
- Interest-rate exposure: Variable-rate borrowing, rising LIBOR and refinancing needs may pressure interest costs and liquidity. Interest-rate caps covered loans with $3.2 billion of principal at quarter-end. Debt covenant breaches could accelerate repayment; the company reported material compliance with covenants at June 30.
- Other risks and governance: Hotel results are seasonal and exposed to lodging-market competition, local economic conditions and capital-market volatility. Ashford LLC advises the company, and affiliated Remington Lodging managed 82 hotels; the filing identifies potential conflicts of interest. The company also cautions that cash-trap provisions and guarantees may constrain liquidity. Management reported no material change in previously disclosed risk factors.
- Douglas Kessler became CEO effective February 21, 2017; Monty Bennett remained board chair. The company continued to anticipate quarterly common dividends of $0.12 for the remainder of 2017, but the board reviews distributions quarterly and made no binding commitment to future dividends.
Important facts for investors to verify
- Near-term debt maturities, extension-option conditions, refinancing progress and the effect of further LIBOR increases.
- Whether comparable RevPAR and hotel operating trends can offset the revenue base lost through dispositions.
- Final legal-fee exposure and the outcome of RLI’s reimbursement lawsuit, including any additional cash effects.
- Cash available for distribution after restricted cash, capital expenditures, debt service, preferred dividends and common dividends.
- Adjusted EBITDA and Adjusted FFO reconciliations and exclusions, and the costs and governance implications of the advisory relationship with Ashford Inc.