Ashford Hospitality Trust, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unless noted, financial amounts below are in millions of dollars. Ashford is a hotel-focused REIT; at quarter-end it owned interests in 118 consolidated hotels (24,930 rooms) and 90 WorldQuest condominium units.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $389.2 | $390.7 | $731.4 | $744.4 |
| Operating income | $43.0 | $58.5 | $66.3 | $86.7 |
| Operating margin | 11.1% | 15.0% | 9.1% | 11.6% |
| Net income (loss) | $(23.4) | $10.4 | $(56.0) | $(21.5) |
| Net income (loss) attributable to common stockholders | $(29.0) | $(0.8) | $(65.9) | $(37.1) |
| Loss per common share | $(0.30) | $(0.01) | $(0.69) | $(0.40) |
| Adjusted EBITDAre | $120.7 | $125.6 | $217.7 | $226.4 |
| Adjusted FFO available to common stockholders and OP unitholders | $48.8 | $58.8 | $81.4 | $94.4 |
Q2 hotel revenue was $388.4 million; hotel operating expenses were $235.0 million, implying a hotel operating margin of approximately 39.5%, versus 39.6% a year earlier. Six-month operating cash flow was $99.0 million, down from $135.2 million. Investing activities used $188.7 million, including $117.7 million of hotel improvements and $111.8 million for the Alexandria acquisition. Financing activities provided $170.4 million, reflecting substantial debt refinancing activity.
Balance sheet and liquidity
- At June 30, cash and cash equivalents were $417.4 million and restricted cash was $135.4 million. Total assets were $4.832 billion.
- Indebtedness, net, was $3.948 billion, up from $3.696 billion at year-end 2017. Total liabilities were $4.173 billion; total equity was $512.2 million, down from $633.1 million.
- Approximately $3.7 billion of debt was variable-rate. Management estimated that a 25-basis-point rate change would affect annual results by approximately $9.1 million. LIBOR was 2.09% at quarter-end.
- Management stated existing cash and operating cash flow should cover anticipated interest and principal payments, working capital, capital expenditures, and REIT-required dividends for the next 12 months, excluding potential final-maturity principal payments. It planned to address 2019 and 2020 maturities proactively. No assurance was given that refinancing would be available on favorable terms.
- The company reported material compliance with debt covenants. Common dividends declared were $0.12 per share quarterly; management’s stated 2018 policy anticipated that amount for the rest of the year, subject to quarterly board review.
Changes versus prior comparable periods
- Q2 revenue declined 0.4%; six-month revenue declined 1.7%. Comparable hotels and WorldQuest recorded higher RevPAR, but lower occupancy and food-and-beverage revenue, along with property dispositions, weighed on reported revenue.
- For comparable hotels and WorldQuest, Q2 RevPAR rose to $136.16 from $134.26, as ADR increased to $168.81 from $164.56 while occupancy fell to 80.66% from 81.59%. For the six-month period, comparable RevPAR was $127.99 versus $127.14.
- Q2 operating income fell $15.5 million and the company moved from net income to a net loss. A $14.1 million gain on the 2017 sale of Crowne Plaza Ravinia did not recur; 2018 advisory-services fees rose $8.9 million, interest expense rose $3.3 million, and loan-cost and exit-fee write-offs rose $4.1 million.
- Six-month common-stockholder loss widened by $28.7 million. Advisory-services fees increased $15.3 million, interest expense increased $2.7 million, and debt-related write-offs increased $6.1 million; these were partly offset by lower corporate G&A and less negative results from unconsolidated investments.
- Reported results include portfolio changes: three hotel sales in 2018, the Hilton Alexandria Old Town acquisition on June 29, 2018, and prior-year dispositions. The Alexandria hotel’s quarter contribution was not material.
Outlook, significant events, and risks
- Management priorities include selective acquisitions, dispositions of non-core hotels, capital improvements, cost control, refinancing, liquidity preservation, and use of hedges. The filing provides no quantified earnings or RevPAR guidance.
- During 2018, Ashford refinanced multiple mortgage pools, including $1.270 billion of new loans in June, generally with two-year initial terms, extension options, floating rates, and interest-only payments. The Alexandria acquisition was financed with a $73.5 million floating-rate mortgage. On July 3, the company bought $56.3 million of mezzanine debt connected with the June Pool E refinancing.
- The June 2018 Enhanced Return Funding Program with Ashford Inc. provides for up to $50 million of affiliated investment (potentially increased to $100 million by agreement) to support recommended acquisitions. For Alexandria, Ashford Trust is entitled to $11.1 million of future hotel furniture, fixtures, and equipment purchases, to be leased at no cost. The advisory relationship and affiliate transactions present conflicts for investors to assess.
- Advisory-services fees increased materially, including higher equity compensation and a $3.5 million six-month incentive fee. Approximately $4.5 million of six-month equity-compensation expense related to accelerated vesting following an executive officer’s death.
- Other unusual items include $2.5 million of six-month business-interruption revenue relating to the 2010 BP Deepwater Horizon spill, $0.4 million relating to Hurricane Irma, and a $1.7 million impairment charge, principally for SpringHill Suites Centreville. The three 2018 hotel sales generated an aggregate reported gain of about $0.4 million.
- The company disclosed hotel-industry seasonality, competition, potential cash-trap provisions, floating-rate exposure, refinancing risk, and possible adverse effects from franchise or management agreement issues. Franchise agreements expiring between 2018 and 2047 may not be renewed. Further risks include customary non-recourse carve-out guarantees and related-party conflicts.
- A Palm Beach landlord-tenant dispute remained open only as to attorneys’ fees: approximately $1.1 million was accrued at June 30; $544,000 was paid in a July 26 settlement, with negotiations continuing over remaining fees. Management said other pending matters were not expected to have a material adverse effect, while noting outcomes are uncertain.
Important facts for investors to verify
- How much of the operating and common-stockholder loss reflects recurring hotel economics versus advisory compensation, refinancing costs, and prior-year asset-sale gains?
- Whether occupancy, food-and-beverage performance, and operating costs improve enough to sustain comparable-hotel RevPAR gains.
- Debt maturity, extension, covenant, and refinancing terms—particularly for 2019–2020 maturities—and the company’s sensitivity to further LIBOR increases.
- Cash available for distributions after restricted cash, capital spending, debt service, and required debt reserves; the stated dividend policy is not a commitment to pay future dividends.
- The economics, governance safeguards, and potential conflicts associated with Ashford Inc., Ashford LLC, Remington, and the Enhanced Return Funding Program.
- Resolution and final cost of the remaining Palm Beach legal-fee dispute, and any material changes in other contingencies.