Ashford Hospitality Trust, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Ashford is a hotel REIT; at quarter-end it owned interests in 126 consolidated hotels and 86 hotel condominium units. Its strategy emphasized upscale and upper-upscale hotels and selling non-core select-service properties.
Financial performance and key metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $371.9 million | $364.5 million | $1,150.4 million | $984.1 million |
| Operating income | $41.1 million | $40.9 million | $151.9 million | $108.2 million |
| Net income (loss) attributable to Company | $(20.1) million | $(16.3) million | $0.6 million | $292.9 million |
| Net income (loss) attributable to common stockholders | $(35.1) million | $(24.8) million | $(31.4) million | $267.5 million |
| Basic and diluted EPS | $(0.37) | $(0.26) | $(0.34) | $2.72 basic; $2.63 diluted |
| Cash provided by operating activities | Not reported as a quarterly figure | Not reported as a quarterly figure | $178.0 million | $133.3 million |
- Hotel operating indicators: Comparable-property RevPAR increased 3.4% in Q3 to $121.40, as occupancy rose to 79.36% from 78.89% and ADR increased to $152.97 from $148.79. For the nine-month period, comparable RevPAR rose to $121.01 from $115.34.
- Non-GAAP measures: Adjusted EBITDA was $109.5 million for Q3 (versus $104.0 million) and $347.2 million for nine months (versus $313.3 million). FFO was $23.5 million for Q3 (versus $31.0 million) and $129.1 million for nine months (versus $106.5 million). AFFO was $45.3 million for Q3 (versus $40.7 million) and $153.5 million for nine months (versus $135.0 million). The company cautions these measures are not GAAP income or cash flow and may not be comparable across issuers.
- Balance sheet at September 30: Total assets were $4.84 billion; reported indebtedness, net, was $3.73 billion; cash and cash equivalents were $256.4 million, with restricted cash of $149.9 million. Stockholders’ equity was $744.2 million. Common dividends declared were $0.12 per share for the quarter.
- Capital spending and cash flows: Nine-month hotel improvements and additions were $137.9 million. Investing activities provided $43.0 million, primarily reflecting asset-sale proceeds; financing activities used $179.2 million, including debt repayments and preferred-stock redemption.
Material changes versus prior comparable periods
- Q3 revenue increased 2.0%; nine-month revenue increased 16.9%. Management attributed growth mainly to acquired hotels and improved comparable-hotel room rates and occupancy, partly offset by hotel sales.
- Nine-month operating income improved to $151.9 million from $108.2 million. However, nine-month Company-attributable income fell sharply from $292.9 million to $0.6 million, principally because 2015 included a $380.7 million gain associated primarily with acquiring the remaining interest in the PIM Highland JV. The 2016 period included $24.4 million of gains from hotel dispositions and related transactions.
- Q3 Company-attributable loss widened to $20.1 million from $16.3 million. Higher interest expense, impairment charges and derivative losses offset revenue and operating-income gains.
- Interest expense and loan-cost amortization rose to $168.2 million for nine months from $134.0 million, reflecting acquisitions, refinancing and higher average LIBOR.
- Hotel dispositions included the Noble Five Hotels for approximately $142 million and Hampton Inn Gainesville for approximately $26.5 million. Three additional hotels were classified as held for sale at quarter-end.
Liquidity, debt, outlook and risks
- Most debt was secured by hotel properties. Approximately $2.8 billion of the $3.8 billion total indebtedness was variable-rate; management estimated that a 25-basis-point rate increase would add about $7.0 million to annual costs, before considering changes in hedging or capital structure.
- Numerous mortgage loans had 2017 maturities, generally with extension options subject to conditions. In October 2016, the company refinanced four loans totaling approximately $415 million with a $450 million interest-only, floating-rate loan at LIBOR plus 4.55%, initially due in two years and carrying four one-year extension options.
- The secured revolving credit facility expired in October 2016; it was undrawn. Management said operating cash flow, capital-market activity and property refinancing proceeds had provided sufficient liquidity and expected the facility’s expiration not to have a significant liquidity impact. Management believed cash on hand and operating cash flow would cover anticipated needs for the next 12 months, while warning that future financing terms and availability were not assured.
- After quarter-end, the company issued 6.2 million Series G preferred shares, yielding approximately $149.8 million net proceeds. The 7.375% preferred stock ranks senior to common stock for dividends and liquidation distributions, but junior to debt.
- Management continued to target accretive acquisitions, non-core asset sales, capital preservation, selective property improvements and refinancing. No quantified earnings or operating guidance was provided. Results are seasonal and the filing cautions that interim results are not necessarily indicative of full-year performance.
- Risks include interest-rate and refinancing exposure, hotel-industry competition and economic conditions, potential cash-trap provisions, covenant compliance, and restrictions on liquidity or distributions. The company reported compliance with material debt covenants at September 30.
- A Florida landlord-tenant case had a $10.8 million jury award against a subsidiary; approximately $12.1 million, including accrued interest and estimated legal costs, had been recorded through September 30. The appeal decision was pending. The company also indemnified its hotel manager for potential pension withdrawal liability under a settlement arrangement.
- Related-party arrangements are material: Ashford LLC, an Ashford Inc. subsidiary, advises the company; Remington, beneficially owned by the company’s chairman and chairman emeritus, managed 86 of 126 hotels. Advisory fees were $34.9 million for nine months, including equity-based compensation and reimbursable expenses.
Important facts for investors to verify
- Timing, extension conditions and financing terms for the 2017–2018 debt maturities, including the October 2016 refinancing and the absence of a revolving credit facility.
- Whether operating cash flow and asset-sale/refinancing proceeds can sustain capital expenditures, debt service and declared distributions; common dividends remain subject to board review.
- Comparable-hotel operating trends and the impact of further select-service dispositions on revenue, operating income and portfolio mix.
- Resolution of the pending Florida appeal and any additional exposure from other legal proceedings or pension-related indemnities.
- Effects of variable-rate debt, derivative valuation changes and preferred dividends on common-stockholder cash flows and earnings.
- Results of the post-quarter sales of the Gaithersburg and Palm Desert hotels and use of proceeds from the Series G preferred offering.