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AHT > SEC Filings for AHT > Form 10-Q on 7-Nov-2012All Recent SEC Filings




Quarterly Report



The following discussion should be read in conjunction with the unaudited financial statements and notes thereto appearing elsewhere herein. This report contains forward-looking statements within the meaning of the federal securities laws. Ashford Hospitality Trust, Inc. (the "Company" or "we" or "our" or "us") cautions investors that any forward-looking statements presented herein, or which management may express orally or in writing from time to time, are based on management's beliefs and assumptions at that time. Throughout this report, words such as "anticipate," "believe," "expect," "intend," "may," "might," "plan," "estimate," "project," "should," "will," "result," and other similar expressions, which do not relate solely to historical matters, are intended to identify forward-looking statements. Such statements are subject to risks, uncertainties, and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties, and factors beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. We caution investors that while forward-looking statements reflect our good-faith beliefs at the time such statements are made, said statements are not guarantees of future performance and are affected by actual events that occur after such statements are made. We expressly disclaim any responsibility to update forward-looking statements, whether as a result of new information, future events, or otherwise. Accordingly, investors should use caution in relying on past forward-looking statements, which were based on results and trends at the time those statements were made, to anticipate future results or trends.

Some risks and uncertainties that may cause our actual results, performance, or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, those discussed in our Form 10- K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission on February 28, 2012. These risks and uncertainties continue to be relevant to our performance and financial condition. Moreover, we operate in a very competitive and rapidly changing environment where new risk factors emerge from time to time. It is not possible for management to predict all such risk factors, nor can management assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as indicators of actual results.


Following the recession that commenced in 2008, the lodging industry has experienced improvement in fundamentals, which has continued into 2012. Room rates, measured by the average daily rate, or ADR, which typically lags occupancy growth in the early stage of a recovery, have shown upward growth. We believe improvements in the economy will continue to positively impact the lodging industry and hotel operating results for several quarters to come, and we will continue to seek ways to benefit from the cyclical nature of the hotel industry. We believe that in the prior cycle, hotel values and cash flows, for the most part, peaked in 2007, and we believe the hotel industry may meet or exceed these cash flows and values during the next cyclical peak. Industry experts have suggested that cash flows within our industry may achieve these previous highs again in 2014 through 2016.

Based on our primary business objectives and forecasted operating conditions, our current key priorities and financial strategies include, among other things:

acquisition of hotel properties;

disposition of hotel properties;

investing in securities;

pursuing capital market activities to enhance long-term shareholder value;

preserving capital, enhancing liquidity, and continuing current cost-saving measures;

implementing selective capital improvements designed to increase profitability;

implementing effective asset management strategies to minimize operating costs and increase revenues;

financing or refinancing hotels on competitive terms;

utilizing hedges and derivatives to mitigate risks; and

making other investments or divestitures that our Board of Directors deems appropriate.

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Our investment strategies continue to focus on the upscale and upper-upscale segments within the lodging industry. We believe that as supply, demand, and capital-market cycles change, we will be able to shift our investment strategies to take advantage of new lodging-related investment opportunities as they develop. Our Board of Directors may change our investment strategies at any time without shareholder approval or notice.


Our cash position from operations is affected primarily by macro industry movements in occupancy and rate as well as our ability to control costs. Further, interest rates greatly affect the cost of our debt service as well as the financial hedges we put in place. We monitor industry fundamentals and interest rates very closely. Capital expenditures above our reserves will affect cash flow as well.

On February 21, 2012, we expanded our borrowing capacity under our $105.0 million senior credit facility to an aggregate $145.0 million and on September 24, 2012, we further expanded our borrowing capacity to an aggregate $165.0 million. We have an option, subject to lender approval, to further expand the facility to an aggregate size of $225.0 million. As part of the expansion an additional bank has been added to the bank line up in the senior credit facility. We may use up to $10.0 million for standby letters of credit.

On March 2, 2012, we commenced issuances of preferred stock under our at-the-market ("ATM") program with an investment banking firm pursuant to which we may issue up to 700,000 shares of 8.55% Series A Cumulative Preferred Stock and up to 700,000 shares of 8.45% Series D Cumulative Preferred Stock at market prices up to $30.0 million in total proceeds. There were no issuances during the third quarter of 2012. During the nine months ended September 30, 2012, we issued 169,306 shares of 8.55% Series A Cumulative Preferred Stock for gross proceeds of $4.2 million and 501,909 shares of 8.45% Series D Cumulative Preferred Stock for gross proceeds of $12.3 million. The aggregate proceeds, net of commissions and other expenses, were $16.0 million for the nine months ended September 30, 2012.

In September 2010, we entered into an ATM program with an investment banking firm to offer for sale from time to time up to $50.0 million of our common stock at market prices. No shares have been sold under this ATM program since its inception.
On May 9, 2012, we refinanced our $167.2 million mortgage loan, due May 2012, and having an interest rate of LIBOR plus 1.65%, with a $135.0 million mortgage loan, due May 2014, and having an interest rate of LIBOR plus 6.50%. As a result, our Doubletree Guest Suites hotel property in Columbus, Ohio, which was one of 10 hotels securing our $167.2 million mortgage loan, is no longer encumbered as 9 hotels secure our $135.0 million mortgage loan.

In February 2010, we executed a Standby Equity Distribution Agreement (the "SEDA") with YA Global Master SPV Ltd. ("YA Global"), which terminates in February 2013, that is available to provide us additional liquidity if needed. Pursuant to the SEDA, YA Global agreed to purchase up to $50.0 million (which may be increased to $65.0 million pursuant to the SEDA) of newly issued shares of our common stock if notified to do so by us in accordance with the SEDA. No shares have been sold under the SEDA since its inception.

Our principal sources of funds to meet our cash requirements include: positive cash flow from operations, capital market activities, property refinancing proceeds, asset sales, and net cash derived from interest-rate derivatives. Additionally, our principal uses of funds are expected to include possible operating shortfalls, owner-funded capital expenditures, new investments, and debt interest and principal payments. Items that impacted our cash flow and liquidity during the periods indicated are summarized as follows:

Net Cash Flows Provided by Operating Activities. Net cash flows provided by operating activities, pursuant to our Consolidated Statement of Cash Flows which includes changes in balance sheet items, were $106.8 million and $64.4 million for the nine months ended September 30, 2012 and 2011, respectively. The increase in cash flows from operating activities was primarily due to a decrease in restricted cash due to the release of cash deposits for certain loans and capital expenditures, the timing of collecting receivables from hotel guests, paying vendors, and settling with hotel managers and increased hotel EBITDA.

Net Cash Flows Used in Investing Activities. For the nine months ended September 30, 2012, investing activities used net cash flows of $57.4 million, which primarily consisted of $62.6 million of capital improvements made to various hotel properties offset by cash inflows of $5.2 million, primarily attributable to cash payments received on previously impaired mezzanine loans. For the nine months ended September 30, 2011, investing activities used net cash flows of $25.9 million. Cash outlays consisted of $145.3 million for the acquisition of a 71.74% interest in PIM Highland JV, $12.0 million for the acquisition of hotel condominiums, and $45.9 million for capital improvements made to various hotel properties. Cash inflows consisted of $154.0 million from the sale of four hotel properties and two condominium properties, $22.6 million from repayment of mezzanine loans,

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and $748,000 of insurance proceeds from settlement of insurance claims.

Net Cash Flows Used in Financing Activities. For the nine months ended September 30, 2012, net cash flows used in financing activities were $70.6 million. Cash outlays primarily consisted of $53.3 million for dividend payments to common and preferred stockholders and unit holders, $188.9 million for repayments of indebtedness, and $3.7 million for payments of deferred loan costs. These cash outlays were partially offset by cash inflows of $16.0 million from issuances of our Series A and Series E preferred stock under our ATM program, $24.1 million in proceeds from the counterparties of our interest rate derivatives, and $135.0 million in borrowings on indebtedness. For the nine months ended September 30, 2011, net cash flows used in financing activities were $75.3 million. Cash outlays consisted of $73.0 million for the repurchase of our Series B-1 preferred stock, $37.1 million for dividend payments to common and preferred stockholders and unit holders, $3.6 million for loan modification and extension fees, $206.0 million for repayments of indebtedness and capital leases, and $3.0 million for distributions to noncontrolling interests in joint ventures. These cash outlays were partially offset by cash inflows of $80.8 million from issuance of Series E preferred stock, $25.0 million in borrowings from our senior credit facility, $86.1 million from issuance of 7.3 million shares of common stock, $54.6 million from the counterparties of our interest rate derivatives, and $970,000 from a) recovery of a short-swing profit from a large shareholder (greater than 10% of a class of equity securities) and b) buy-in payments from executives in connection with the issuance of operating partnership units.

We are required to maintain certain financial ratios under various debt and derivative agreements. If we violate covenants in any debt or derivative agreement, we could be required to repay all or a portion of our indebtedness before maturity at a time when we might be unable to arrange financing for such repayment on attractive terms, if at all. Violations of certain debt covenants may result in us being unable to borrow unused amounts under a line of credit, even if repayment of some or all borrowings is not required. In any event, financial covenants under our current or future debt obligations could impair our planned business strategies by limiting our ability to borrow (i) beyond certain amounts or (ii) for certain purposes. Presently, our existing financial debt covenants primarily relate to maintaining minimum debt coverage ratios, maintaining an overall minimum net worth, maintaining a maximum loan-to-value ratio, and maintaining an overall minimum total assets. As of September 30, 2012, we were in compliance in all material respects with all covenants or other requirements set forth in our debt and related agreements as amended, except that as of September 30, 2012, we were in default on a non-recourse loan collaterlized by the Hilton hotel in Tucson, Arizona, as a result of ceasing to make debt service payments beginning in August 2012.

Mortgage and mezzanine loans securing PIM Highland JV are nonrecourse to the borrowers, except for customary exceptions or carve-outs that trigger recourse liability to the borrowers in certain limited instances. Recourse obligations typically include only the payment of costs and liabilities suffered by lenders as a result of the occurrence of certain bad acts on the part of the borrower. However, in certain cases, carve-outs could trigger recourse obligations on the part of the borrower with respect to repayment of all or a portion of the outstanding principal amount of the loans. We have entered into customary guaranty agreements pursuant to which we guaranty payment of any recourse liabilities of the borrowers that result from non-recourse carve-outs (which include, but are not limited to, fraud, misrepresentation, willful conduct resulting in waste, misappropriations of rents following an event of default, voluntary bankruptcy filings, unpermitted transfers of collateral, and certain environmental liabilities). In the opinion of management, none of these guaranty agreements, either individually or in the aggregate, are likely to have a material adverse effect on our business, results of operations, or financial condition.

At September 30, 2012, our only recourse obligation is our $165.0 million senior credit facility held by six banks, which expires in September 2014. Currently, there is no outstanding balance on this credit facility. The primary covenants of this senior credit facility include (i) the minimum fixed charge coverage ratio, as defined, of 1.35x through expiration (ours was 1.41x at September 30, 2012); and (ii) the maximum leverage ratio, as defined, of 65% (ours was 57.95% at September 30, 2012). In the event we borrow on this credit facility, we may be unable to refinance a portion or all of this senior credit facility before maturity. However, if it becomes necessary to pay down the principal balance, if any, at maturity, we believe we will be able to accomplish that with cash on hand, cash flows from operations, equity raises, or, to the extent necessary, asset sales.

Based on our current level of operations, management believes that our cash flow from operations, our existing cash balances, and availability under our senior credit facility ($165.0 million at September 30, 2012) will be adequate to meet upcoming anticipated requirements for interest and principal payments on debt, working capital, and capital expenditures for the next 12 months. With respect to upcoming maturities, we will continue to proactively address our 2013 maturities. No assurances can be given that we will obtain additional financings or, if we do, what the amount and terms will be. Our failure to obtain future financing under favorable terms could adversely impact our ability to execute our business strategy. In addition, we may selectively pursue debt financing on individual properties.

We are committed to an investment strategy where we will opportunistically pursue hotel-related investments as suitable situations arise. Funds for future hotel-related investments are expected to be derived, in whole or in part, from cash on hand,

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future borrowings under a credit facility or other loans, or proceeds from additional issuances of common stock, preferred stock, or other securities, asset sales, and joint ventures. However, we have no formal commitment or understanding to invest in additional assets, and there can be no assurance that we will successfully make additional investments. We may, when conditions are suitable, consider additional capital raising opportunities.

Our existing hotels are mostly located in developed areas with competing hotel properties. Future occupancy, ADR, and RevPAR of any individual hotel could be materially and adversely affected by an increase in the number or quality of competitive hotel properties in its market area. Competition could also affect the quality and quantity of future investment opportunities.

Dividend Policy. During the nine months ended September 30, 2012 and 2011, the Board of Directors declared quarterly dividends of $0.11 and $0.10 per outstanding common share, respectively. In December 2011, the Board of Directors approved our 2012 dividend policy which anticipates a quarterly dividend payment of $0.11 per share for the remainder of 2012. However, the adoption of a dividend policy does not commit our Board of Directors to declare future dividends. The Board of Directors will continue to review our dividend policy on a quarterly basis. We may incur indebtedness to meet distribution requirements imposed on REITs under the Internal Revenue Code to the extent that working capital and cash flow from our investments are insufficient to fund required distributions. Alternatively, we may elect to pay dividends on our common stock in cash or a combination of cash and shares of securities as permitted under federal income tax laws governing REIT distribution requirements. We may pay dividends in excess of our cash flow.

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The following table summarizes changes in key line items from our consolidated
statements of operations (in thousands):

                                     Three Months Ended          Favorable/           Nine Months Ended           Favorable/
                                        September 30,           (Unfavorable)           September 30,           (Unfavorable)
                                                                   Change                                           Change
                                     2012           2011                             2012           2011

Total revenue                    $  230,169     $  214,587     $      15,582     $  705,189     $  656,476     $       48,713
Total hotel operating expenses   $ (150,087 )   $ (141,835 )   $      (8,252 )   $ (454,337 )   $ (424,133 )   $      (30,204 )
Property taxes, insurance, and   $  (11,876 )   $  (12,297 )   $         421     $  (34,556 )   $  (34,953 )   $          397
Depreciation and amortization    $  (34,200 )   $  (33,776 )   $        (424 )   $ (102,739 )   $  (99,580 )   $       (3,159 )
Impairment charges               $    5,066     $       92     $       4,974     $    1,133     $    4,748     $       (3,615 )
Gain on insurance settlements    $        -     $        -     $           -     $        -     $    1,905     $       (1,905 )
Transaction acquisition costs    $        -     $      (27 )   $          27     $        -     $      791     $         (791 )
Corporate, general, and          $  (10,851 )   $   (9,094 )   $      (1,757 )   $  (33,027 )   $  (33,982 )   $          955
Operating income                 $   28,221     $   17,650     $      10,571     $   81,663     $   71,272     $       10,391
Equity in earnings (loss) of     $   (7,373 )   $   (6,228 )   $      (1,145 )   $  (17,654 )   $   19,596     $      (37,250 )
unconsolidated joint ventures
Interest income                  $       30     $       11     $          19     $       84     $       70     $           14
Other income                     $    8,671     $   17,349     $      (8,678 )   $   22,988     $   83,509     $      (60,521 )
Interest expense and             $  (37,540 )   $  (34,530 )   $      (3,010 )   $ (109,334 )   $ (103,916 )   $       (5,418 )
amortization of loan costs
Write-off of deferred loan costs $        -     $     (729 )   $         729     $        -     $     (729 )   $          729
Unrealized gain (loss) on        $      (48 )   $     (352 )   $         304     $    3,365     $     (314 )   $        3,679
Unrealized loss on derivatives   $   (9,353 )   $  (16,727 )   $       7,374     $  (26,753 )   $  (51,276 )   $       24,523
Income tax expense               $     (639 )   $   (1,077 )   $         438     $   (2,884 )   $   (2,407 )   $         (477 )
Income (loss) from continuing    $  (18,031 )   $  (24,633 )   $       6,602     $  (48,525 )   $   15,805     $      (64,330 )
Loss from discontinued           $        -     $     (351 )   $         351     $        -     $   (4,170 )   $        4,170
Net income (loss)                $  (18,031 )   $  (24,984 )   $       6,953     $  (48,525 )   $   11,635     $      (60,160 )
(Income) loss from consolidated
joint ventures
   attributable to               $      219     $      832     $        (613 )   $      444                    $          981
noncontrolling interests                                                                        $     (537 )
Net loss attributable to
redeemable noncontrolling
   interests in operating        $    2,665     $    2,935     $        (270 )   $    6,902     $    1,207     $        5,695
Net income (loss) attributable   $  (15,147 )   $  (21,217 )   $       6,070     $  (41,179 )   $   12,305     $      (53,484 )
to the Company

The following table illustrates key performance indicators for the 96 hotel properties ("comparable hotels") included in continuing operations that we have owned throughout the entire three and nine months ended September 30, 2012 and 2011:

                                           Three Months Ended September 30,          Nine Months Ended September 30,
                                               2012                 2011                2012                 2011
RevPar (revenue per available room)     $        100.78       $         94.63     $       100.93       $        95.73
Occupancy                                         75.83 %               74.94 %            74.99 %              73.73 %
ADR (average daily rate)                $        132.90       $        126.26     $       134.59       $       129.84

Comparison of the Three Months Ended September 30, 2012 and 2011

Revenue. Rooms revenue for the three months ended September 30, 2012 (the "2012 quarter") increased $15.8 million, or 9.4%, to $185.0 million from $169.1 million for the three months ended September 30, 2011 (the "2011 quarter"). The increase in rooms revenue was due to continued improvements in occupancy coupled with an increase in average daily rate at our comparable hotels. During the 2012 quarter, we experienced an 89 basis point increase in occupancy and a 5.3% increase in room rates as the economy continues to improve. Food and beverage experienced a similar increase of $1.5 million, or 4.6%, due to improved

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occupancy. Other revenue, which consists mainly of telecommunications, parking, spa, and golf fees, experienced a slight decrease of $514,000. In addition, in the 2012 quarter, hotel revenue increased by $15.6 million of which $4.5 million was related to the assignment to us of the remaining 11% ownership interest in a joint venture which previously held a hotel property under a triple-net lease in December 2011. Rental income from the triple-net operating lease decreased $1.3 million for the same reason. Asset management fees and other were $100,000 and $69,000 for the 2012 quarter and the 2011 quarter, respectively.

Hotel Operating Expenses. Hotel operating expenses consist of direct expenses from departments associated with revenue streams and indirect expenses associated with support departments and management fees. We experienced increases of $3.6 million in direct expenses and $4.7 million in indirect expenses and management fees in the 2012 quarter. The increase in these expenses is primarily attributable to higher occupancy and higher management fees resulting from increased hotel revenues. In addition, the consolidation of the previously mentioned triple-net lease hotel property contributed $3.8 million to the increase in total hotel operating expenses during the 2012 quarter. Direct expenses were 29.8% and 30.3% of total hotel revenue for the 2012 quarter and the 2011 quarter, respectively.

Property Taxes, Insurance, and Other. Property taxes, insurance, and other decreased $421,000 for the 2012 quarter to $11.9 million primarily due to lower premiums for insurance policies and a reduction in deductibles for claims offset by increased property value assessments related to certain hotels.

Depreciation and Amortization. Depreciation and amortization increased $424,000 for the 2012 quarter compared to the 2011 quarter primarily due to capital improvements made at certain hotel properties since September 30, 2011.

Impairment Charges. We recorded credits to impairment charges of $5.1 million and $92,000 for the 2012 quarter and 2011 quarter, respectively, for cash received and resulting valuation adjustments on previously impaired mezzanine loans.

Transaction Acquisition Costs. In the 2011 quarter, we incurred transaction acquisition costs of $27,000 relating to the acquisition of real estate and other rights in the WorldQuest Resort condominium project.

Corporate, General, and Administrative. Corporate, general, and administrative expenses increased to $10.9 million for the 2012 quarter compared to $9.1 million for the 2011 quarter. This increase is primarily attributable to a $1.3 million increase in non-cash equity-based compensation due to the higher expense recognized on restricted stock/unit-based awards granted in 2012 at a higher cost per share. Aside from this, corporate, general, and administrative expenses increased $494,000 during the 2012 quarter compared to the 2011 quarter due primarily to approximately $755,000 of legal costs associated with the settlement of notes receivable.

Equity in Loss of Unconsolidated Joint Ventures. We recorded equity in loss of unconsolidated joint ventures of $7.4 million and $6.2 million for the 2012 quarter and the 2011 quarter, respectively.

Interest Income. Interest income was $30,000 and $11,000 for the 2012 quarter and the 2011 quarter, respectively.

Other Income. Other income was $8.7 million and $17.3 million for the 2012 quarter and the 2011 quarter, respectively. Other income primarily represents income from non-hedge interest rate swaps, floors, and flooridors and also includes $591,000 of realized gains and $777,000 of realized losses on investments in securities and other for the 2012 quarter and the 2011 quarter, respectively. The decrease from the 2011 quarter to the 2012 quarter is primarily attributable to derivatives that have expired since September 30, 2011.

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