Ashford Hospitality Trust, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted. The company is a lodging-focused REIT. At quarter-end it owned 86 consolidated hotels with 16,895 rooms, alongside interests in unconsolidated hotel ventures and other investments.
Financial performance and key metrics
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Total revenue | $195.6 million | $231.9 million |
| Operating income | $26.5 million | $25.3 million |
| Operating margin | 13.6% | 10.9% |
| Net loss attributable to common shareholders | $10.9 million | $23.2 million |
| Loss per diluted share | $0.13 | $0.34 |
| Operating cash flow | $11.1 million | $19.0 million |
| Adjusted EBITDA | $79.5 million | $82.3 million |
| FFO available to common shareholders | $24.0 million | $18.2 million |
| Adjusted FFO available to common shareholders | $24.8 million | $29.6 million |
- Hotel revenue was $192.3 million, including $157.7 million in room revenue. Advisory services generated $2.2 million.
- Hotel operating expenses were $120.6 million; depreciation and amortization was $26.2 million. Interest expense and loan-cost amortization totaled $28.5 million.
- Q1 net loss included a $3.5 million gain on the Pier House Resort sale. The company reported a $6.8 million loss from continuing operations before that gain and related tax effects.
- Hotel operating indicators improved: RevPAR was $102.16 versus $99.48, occupancy was 74.72% versus 71.42%, and ADR was $136.73 versus $139.29.
- Cash, cash equivalents and marketable securities totaled $187.2 million; restricted cash was $62.9 million. Total assets were $2.62 billion and total liabilities were $1.89 billion.
- Debt was $1.78 billion, down from $1.82 billion at year-end 2013. Variable-rate debt was $546 million; a 25-basis-point rate increase was estimated to add about $1.4 million in annual interest expense.
Changes versus the prior period
Reported revenue fell 15.7%, but the comparison is materially affected by the November 2013 Ashford Prime spin-off: Q1 2013 included eight hotels subsequently spun off, while Q1 2014 did not. The Pier House Resort, acquired in 2013, contributed results through February 28, 2014 and was sold to Ashford Prime on March 1. Management attributed a $38.6 million room-revenue decline and substantial expense reductions to the spin-off; revenue at the remaining hotels increased. Improved operating income despite lower reported revenue also reflected lower depreciation, corporate expenses, interest costs and derivative losses. Adjusted EBITDA and Adjusted FFO declined year over year, while FFO increased.
Operating cash flow decreased by $7.9 million. Investing activities provided $9.4 million, including $22.4 million of Pier House sale proceeds and $13.6 million of Ashford Prime reimbursements, partly offset by $27.0 million of hotel improvements. Financing activities provided $4.9 million, including $200 million of borrowings and $169.5 million of debt repayments. The company declared a $0.12 common dividend per share for the quarter.
Outlook, transactions and risks
- Management expected improving economic conditions to continue supporting lodging results and identified acquisitions, selective dispositions, capital preservation, hotel improvements, refinancing and risk management as priorities. The filing gives no specific earnings or RevPAR forecast.
- Management said cash on hand, operating cash flow and the undrawn $165 million senior credit facility were expected to meet anticipated needs for the next 12 months. The facility expires in September 2014 and has a one-year extension option subject to conditions; the company reported no borrowings under it at quarter-end. Management said it would address 2014 maturities proactively and cautioned that future financing terms and availability were not assured.
- In January, the company refinanced a $164.4 million loan with a $200 million loan due February 2016, bearing interest at LIBOR plus 4.75% subject to a 0.20% floor, with three conditional one-year extension options. It received approximately $37.8 million of excess proceeds.
- The proposed spin-off of the asset-management business into Ashford Inc. was targeted for Q3 2014, subject to regulatory, listing and other approvals. The distribution would be taxable to shareholders; completion and anticipated benefits were not assured. Management expected a 20-year advisory agreement with the new entity and did not anticipate a material operating or cash-flow effect from the change.
- After quarter-end, the company raised approximately $76.8 million net from a common-stock offering and approximately $8.7 million net from a partial underwriters’ option exercise. These proceeds were not included in March 31 cash balances.
- Debt covenants were reported in compliance. Liquidity could nevertheless be affected by cash-trap provisions, refinancing needs, interest-rate movements, capital spending, distributions and guarantees related to non-recourse loan carve-outs.
- The company disclosed unresolved 2008 IRS tax adjustments it disputes: $3.3 million of proposed REIT excise tax and additional TRS tax estimated at about $467,000 federal plus $83,000 state. Appeals were ongoing; management believed it would substantially prevail. It also disclosed a potential pension-related indemnity tied to an estimated $1.7 million unfunded liability, reduced by payments made, and various legal proceedings for which management did not expect a material adverse outcome.
- Management stated that hotel operations are seasonal, and quarterly results may not indicate full-year performance. Franchise agreements and hotel management contracts carry renewal, termination and fee risks.
Important facts for investors to verify
- Compare hotel performance on a consistent portfolio basis, separating the Ashford Prime spin-off and Pier House sale effects from performance at continuing hotels.
- Review the maturity schedule and refinancing status of 2014 debt, including the September 2014 credit-facility expiration and any extension or replacement financing.
- Assess the sustainability of operating cash flow, capital spending and the $0.12 quarterly common dividend; FFO and Adjusted FFO are non-GAAP measures and are not cash available for distribution.
- Track completion terms, tax consequences and ongoing advisory arrangements for the proposed Ashford Inc. spin-off, including potential conflicts and changes in fees and expenses.
- Monitor the IRS appeal, pension indemnity exposure, debt covenants, loan cash traps and guarantees, as well as interest-rate exposure and hotel-market competition.