ITEM 1. FINANCIAL STATEMENTS (unaudited)
ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
ASSETS
|
|
|
|
|
Investments in hotel properties, gross
|
|
$
|
1,411,428
|
|
|
$
|
1,258,412
|
|
Accumulated depreciation
|
|
(254,168
|
)
|
|
(243,880
|
)
|
Investments in hotel properties, net
|
|
1,157,260
|
|
|
1,014,532
|
|
Cash and cash equivalents
|
|
161,314
|
|
|
126,790
|
|
Restricted cash
|
|
35,779
|
|
|
37,855
|
|
Accounts receivable, net of allowance of $81 and $96, respectively
|
|
24,912
|
|
|
18,194
|
|
Inventories
|
|
1,790
|
|
|
1,479
|
|
Note receivable
|
|
8,098
|
|
|
8,098
|
|
Deferred costs, net
|
|
924
|
|
|
1,020
|
|
Prepaid expenses
|
|
6,471
|
|
|
3,669
|
|
Investment in Ashford Inc., at fair value
|
|
11,498
|
|
|
8,407
|
|
Derivative assets
|
|
414
|
|
|
1,149
|
|
Other assets
|
|
9,068
|
|
|
2,249
|
|
Intangible assets, net
|
|
22,760
|
|
|
22,846
|
|
Due from Ashford Trust OP, net
|
|
—
|
|
|
488
|
|
Due from AQUA U.S. Fund
|
|
—
|
|
|
2,289
|
|
Due from related party, net
|
|
598
|
|
|
377
|
|
Due from third-party hotel managers
|
|
9,936
|
|
|
7,555
|
|
Total assets
|
|
$
|
1,450,822
|
|
|
$
|
1,256,997
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
Liabilities:
|
|
|
|
|
Indebtedness, net
|
|
$
|
856,161
|
|
|
$
|
764,616
|
|
Accounts payable and accrued expenses
|
|
52,939
|
|
|
44,791
|
|
Dividends and distributions payable
|
|
8,025
|
|
|
5,038
|
|
Due to Ashford Trust OP, net
|
|
6
|
|
|
—
|
|
Due to Ashford Inc.
|
|
3,525
|
|
|
5,085
|
|
Due to affiliate
|
|
—
|
|
|
2,500
|
|
Due to third-party hotel managers
|
|
962
|
|
|
973
|
|
Intangible liability, net
|
|
3,611
|
|
|
3,625
|
|
Other liabilities
|
|
1,465
|
|
|
1,432
|
|
Total liabilities
|
|
926,694
|
|
|
828,060
|
|
Commitments and contingencies (note 15)
|
|
|
|
|
5.50% Series B cumulative convertible preferred stock, $0.01 par value, 4,865,850 and 2,890,850 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively
|
|
104,321
|
|
|
65,960
|
|
Redeemable noncontrolling interests in operating partnership
|
|
48,585
|
|
|
59,544
|
|
Equity:
|
|
|
|
|
Common stock, $0.01 par value, 200,000,000 shares authorized, 31,765,912 and 26,021,552 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively
|
|
317
|
|
|
260
|
|
Additional paid-in capital
|
|
467,535
|
|
|
401,790
|
|
Accumulated deficit
|
|
(91,246
|
)
|
|
(93,254
|
)
|
Total stockholders’ equity of the Company
|
|
376,606
|
|
|
308,796
|
|
Noncontrolling interest in consolidated entity
|
|
(5,384
|
)
|
|
(5,363
|
)
|
Total equity
|
|
371,222
|
|
|
303,433
|
|
Total liabilities and equity
|
|
$
|
1,450,822
|
|
|
$
|
1,256,997
|
|
See Notes to Condensed Consolidated Financial Statements.
ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
REVENUE
|
|
|
|
Rooms
|
$
|
67,418
|
|
|
$
|
69,251
|
|
Food and beverage
|
24,473
|
|
|
24,865
|
|
Other
|
5,365
|
|
|
5,648
|
|
Total hotel revenue
|
97,256
|
|
|
99,764
|
|
Other
|
40
|
|
|
33
|
|
Total revenue
|
97,296
|
|
|
99,797
|
|
EXPENSES
|
|
|
|
Hotel operating expenses:
|
|
|
|
Rooms
|
15,797
|
|
|
15,819
|
|
Food and beverage
|
16,861
|
|
|
17,445
|
|
Other expenses
|
27,731
|
|
|
28,339
|
|
Management fees
|
3,545
|
|
|
3,807
|
|
Total hotel expenses
|
63,934
|
|
|
65,410
|
|
Property taxes, insurance and other
|
5,074
|
|
|
5,043
|
|
Depreciation and amortization
|
11,971
|
|
|
11,904
|
|
Advisory services fee
|
865
|
|
|
2,064
|
|
Transaction costs
|
4,328
|
|
|
—
|
|
Corporate general and administrative
|
3,874
|
|
|
3,923
|
|
Total expenses
|
90,046
|
|
|
88,344
|
|
OPERATING INCOME (LOSS)
|
7,250
|
|
|
11,453
|
|
Equity in earnings (loss) of unconsolidated entity
|
—
|
|
|
(2,650
|
)
|
Interest income
|
112
|
|
|
32
|
|
Other income (expense)
|
(157
|
)
|
|
(10
|
)
|
Interest expense and amortization of loan costs
|
(8,202
|
)
|
|
(10,634
|
)
|
Write-off of loan costs and exit fees
|
(1,963
|
)
|
|
—
|
|
Unrealized gain (loss) on investment in Ashford Inc.
|
3,091
|
|
|
(1,493
|
)
|
Unrealized gain (loss) on derivatives
|
(898
|
)
|
|
3,533
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
(767
|
)
|
|
231
|
|
Income tax (expense) benefit
|
478
|
|
|
(370
|
)
|
NET INCOME (LOSS)
|
(289
|
)
|
|
(139
|
)
|
(Income) loss from consolidated entities attributable to noncontrolling interests
|
21
|
|
|
(145
|
)
|
Net (income) loss attributable to redeemable noncontrolling interests in operating partnership
|
255
|
|
|
150
|
|
NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY
|
(13
|
)
|
|
(134
|
)
|
Preferred dividends
|
(1,673
|
)
|
|
(894
|
)
|
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
$
|
(1,686
|
)
|
|
$
|
(1,028
|
)
|
INCOME (LOSS) PER SHARE - BASIC:
|
|
|
|
Net income (loss) attributable to common stockholders
|
$
|
(0.07
|
)
|
|
$
|
(0.04
|
)
|
Weighted average common shares outstanding – basic
|
27,267
|
|
|
28,343
|
|
INCOME (LOSS) PER SHARE - DILUTED:
|
|
|
|
Net income (loss) attributable to common stockholders
|
$
|
(0.07
|
)
|
|
$
|
(0.04
|
)
|
Weighted average common shares outstanding – diluted
|
27,267
|
|
|
28,343
|
|
Dividends declared per common share
|
$
|
0.16
|
|
|
$
|
0.10
|
|
See Notes to Condensed Consolidated Financial Statements.
ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
NET INCOME (LOSS)
|
$
|
(289
|
)
|
|
$
|
(139
|
)
|
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
|
|
|
|
Total other comprehensive income (loss)
|
—
|
|
|
—
|
|
TOTAL COMPREHENSIVE INCOME (LOSS)
|
(289
|
)
|
|
(139
|
)
|
Comprehensive (income) loss attributable to noncontrolling interests in consolidated entities
|
21
|
|
|
(145
|
)
|
Comprehensive (income) loss attributable to redeemable noncontrolling interests in operating partnership
|
255
|
|
|
150
|
|
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY
|
$
|
(13
|
)
|
|
$
|
(134
|
)
|
See Notes to Condensed Consolidated Financial Statements.
ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-in
Capital
|
|
Accumulated Deficit
|
|
Noncontrolling
Interest in
Consolidated
Entities
|
|
Total
|
|
Redeemable Noncontrolling Interests in Operating Partnership
|
|
Shares
|
|
Amount
|
|
|
|
|
Balance at January 1, 2017
|
26,022
|
|
|
$
|
260
|
|
|
$
|
401,790
|
|
|
$
|
(93,254
|
)
|
|
$
|
(5,363
|
)
|
|
$
|
303,433
|
|
|
$
|
59,544
|
|
Purchase of common stock
|
(10
|
)
|
|
—
|
|
|
(118
|
)
|
|
—
|
|
|
—
|
|
|
(118
|
)
|
|
—
|
|
Equity-based compensation
|
|
|
|
—
|
|
|
(664
|
)
|
|
—
|
|
|
—
|
|
|
(664
|
)
|
|
(1,004
|
)
|
Issuance of common stock
|
5,750
|
|
|
57
|
|
|
66,460
|
|
|
—
|
|
|
—
|
|
|
66,517
|
|
|
—
|
|
Issuance of restricted shares/units
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Forfeiture of restricted common shares
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Dividends declared – common stock
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,149
|
)
|
|
—
|
|
|
(5,149
|
)
|
|
—
|
|
Dividends declared – preferred stock
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,673
|
)
|
|
—
|
|
|
(1,673
|
)
|
|
—
|
|
Distributions to noncontrolling interests
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(790
|
)
|
Redemption/conversion of operating partnership units
|
5
|
|
|
—
|
|
|
67
|
|
|
—
|
|
|
—
|
|
|
67
|
|
|
(67
|
)
|
Net income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
(13
|
)
|
|
(21
|
)
|
|
(34
|
)
|
|
(255
|
)
|
Redemption value adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
8,843
|
|
|
—
|
|
|
8,843
|
|
|
(8,843
|
)
|
Balance at March 31, 2017
|
31,766
|
|
|
$
|
317
|
|
|
$
|
467,535
|
|
|
$
|
(91,246
|
)
|
|
$
|
(5,384
|
)
|
|
$
|
371,222
|
|
|
$
|
48,585
|
|
See Notes to Condensed Consolidated Financial Statements.
ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
Net income (loss)
|
$
|
(289
|
)
|
|
$
|
(139
|
)
|
Adjustments to reconcile net income (loss) to net cash flows provided by (used in) operating activities:
|
|
|
|
Depreciation and amortization
|
11,971
|
|
|
11,904
|
|
Equity-based compensation
|
(1,668
|
)
|
|
(613
|
)
|
Bad debt expense
|
36
|
|
|
61
|
|
Amortization of loan costs
|
1,049
|
|
|
881
|
|
Write-off of loan costs and exit fees
|
1,963
|
|
|
—
|
|
Amortization of intangibles
|
50
|
|
|
5
|
|
Unrealized (gain) loss on investment in Ashford Inc.
|
(3,091
|
)
|
|
1,493
|
|
Realized and unrealized (gain) loss on derivatives
|
1,054
|
|
|
(3,533
|
)
|
Equity in (earnings) loss of unconsolidated entity
|
—
|
|
|
2,650
|
|
Deferred tax expense (benefit)
|
(693
|
)
|
|
53
|
|
Payments for derivatives
|
—
|
|
|
(114
|
)
|
Changes in operating assets and liabilities, exclusive of the effect of hotel acquisitions:
|
|
|
|
Accounts receivable and inventories
|
(2,733
|
)
|
|
(1,849
|
)
|
Prepaid expenses and other assets
|
(2,833
|
)
|
|
(2,952
|
)
|
Accounts payable and accrued expenses
|
1,927
|
|
|
8,103
|
|
Due to/from related party, net
|
(221
|
)
|
|
(290
|
)
|
Due to affiliate
|
(2,500
|
)
|
|
—
|
|
Due to/from third-party hotel managers
|
1,677
|
|
|
(1,874
|
)
|
Due to/from Ashford Trust OP, net
|
494
|
|
|
(515
|
)
|
Due to/from Ashford Inc.
|
(1,672
|
)
|
|
(1,186
|
)
|
Other liabilities
|
33
|
|
|
58
|
|
Net cash provided by (used in) operating activities
|
4,554
|
|
|
12,143
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
Proceeds from property insurance
|
—
|
|
|
673
|
|
Acquisition of hotel properties, net of cash and restricted cash acquired
|
(154,028
|
)
|
|
—
|
|
Proceeds from liquidation of AQUA U.S. Fund
|
2,289
|
|
|
—
|
|
Improvements and additions to hotel properties
|
(9,273
|
)
|
|
(3,357
|
)
|
Net cash provided by (used in) investing activities
|
(161,012
|
)
|
|
(2,684
|
)
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
Borrowings on indebtedness
|
432,500
|
|
|
—
|
|
Repayments of indebtedness
|
(334,774
|
)
|
|
(2,143
|
)
|
Payments of loan costs and exit fees
|
(9,097
|
)
|
|
(15
|
)
|
Payments for derivatives
|
(319
|
)
|
|
(4
|
)
|
Purchase of common stock
|
(6
|
)
|
|
—
|
|
Payments for dividends and distributions
|
(4,625
|
)
|
|
(3,405
|
)
|
Issuance of preferred stock
|
38,577
|
|
|
(54
|
)
|
Issuance of common stock
|
66,650
|
|
|
—
|
|
Distributions to a noncontrolling interest in a consolidated entity
|
—
|
|
|
(3,766
|
)
|
Other
|
—
|
|
|
19
|
|
Net cash provided by (used in) financing activities
|
188,906
|
|
|
(9,368
|
)
|
|
|
|
|
Net change in cash, cash equivalents and restricted cash
|
32,448
|
|
|
91
|
|
Cash, cash equivalents and restricted cash at beginning of period
|
164,645
|
|
|
138,174
|
|
Cash, cash equivalents and restricted cash at end of period
|
$
|
197,093
|
|
|
$
|
138,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
|
Interest paid
|
$
|
7,981
|
|
|
$
|
9,682
|
|
Income taxes paid
|
716
|
|
|
144
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
Common stock purchases accrued but not paid
|
112
|
|
|
103
|
|
Dividends and distributions declared but not paid
|
8,025
|
|
|
4,325
|
|
Capital expenditures accrued but not paid
|
1,697
|
|
|
479
|
|
Accrued common stock offering expense
|
133
|
|
|
—
|
|
Accrued preferred stock offering expenses
|
216
|
|
|
—
|
|
SUPPLEMENTAL DISCLOSURE OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
|
Cash and cash equivalents at beginning of period
|
$
|
126,790
|
|
|
$
|
105,039
|
|
Restricted cash at beginning of period
|
37,855
|
|
|
33,135
|
|
Cash, cash equivalents and restricted cash at beginning of period
|
$
|
164,645
|
|
|
$
|
138,174
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
$
|
161,314
|
|
|
$
|
101,891
|
|
Restricted cash at end of period
|
35,779
|
|
|
36,374
|
|
Cash, cash equivalents and restricted cash at end of period
|
$
|
197,093
|
|
|
$
|
138,265
|
|
See Notes to Condensed Consolidated Financial Statements.
ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Organization and Description of Business
Ashford Hospitality Prime, Inc., together with its subsidiaries (“Ashford Prime”), is a Maryland corporation that invests primarily in high revenue per available room (“RevPAR”) luxury hotels and resorts. High RevPAR, for purposes of our investment strategy, means RevPAR of at least twice the then-current U.S. national average RevPAR for all hotels as determined by Smith Travel Research. Ashford Prime has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code. Ashford Prime conducts its business and owns substantially all of its assets through its operating partnership, Ashford Hospitality Prime Limited Partnership (“Ashford Prime OP”). In this report, the terms “the Company,” “we,” “us” or “our” refers to Ashford Hospitality Prime, Inc. and, as the context may require, all entities included in its condensed consolidated financial statements.
We are advised by Ashford Hospitality Advisors LLC (“Ashford LLC”) through an advisory agreement. Ashford LLC is a subsidiary of Ashford Inc., which was spun-off from Ashford Hospitality Trust, Inc. (“Ashford Trust”). All of the hotel properties in our portfolio are currently asset-managed by Ashford LLC. We do not have any employees. All of the services that might be provided by employees are provided to us by Ashford LLC.
As of
March 31, 2017
, Remington Lodging & Hospitality, LLC, together with its affiliates (“Remington Lodging”), which is beneficially wholly-owned by Mr. Monty J. Bennett, Chairman of our board of directors, and Mr. Archie Bennett, Jr., chairman emeritus of Ashford Trust, managed
two
of our
twelve
hotel properties. Third-party management companies managed the remaining hotel properties. On September 17, 2015, Remington Lodging and Ashford Inc. entered into an agreement pursuant to which Ashford Inc. will acquire all of the general partner interest and
80%
of the limited partner interests in Remington Lodging. On April 12, 2016, Ashford Inc.’s stockholders approved the acquisition. On March 24, 2017, the agreement was terminated as Ashford Inc. was unsuccessful in receiving an acceptable private letter ruling from the Internal Revenue Service. The receipt of the private letter ruling was a condition to the closing of the transaction.
The accompanying condensed consolidated financial statements include the accounts of such wholly-owned and majority owned subsidiaries of Ashford Prime OP that as of
March 31, 2017
, own and operate
twelve
hotel properties in
seven
states, the District of Columbia and the U.S. Virgin Islands. The portfolio includes
ten
wholly-owned hotel properties and
two
hotel properties that are owned through a partnership in which Ashford Prime OP has a controlling interest. These hotel properties represent
3,892
total rooms, or
3,657
net rooms, excluding those attributable to our partner. As a REIT, Ashford Prime needs to comply with limitations imposed by the Internal Revenue Code related to operating hotels. As of
March 31, 2017
,
eleven
of our
twelve
hotel properties were leased by wholly-owned or majority-owned subsidiaries that are treated as taxable REIT subsidiaries (“TRS”) for federal income tax purposes (collectively the TRS entities are referred to as “Prime TRS”).
One
hotel property located in the U.S. Virgin Islands is owned by our U.S. Virgin Islands TRS. Prime TRS then engages third-party or affiliated hotel management companies to operate the hotel properties under management contracts. Hotel operating results related to the hotel properties are included in the condensed consolidated statements of operations. As of
March 31, 2017
,
nine
of the
twelve
hotel properties were leased by Ashford Prime’s wholly-owned TRS and
two
hotel properties majority-owned through a consolidated partnership were leased to a TRS wholly-owned by such consolidated partnership. Each leased hotel is leased under a percentage lease that provides for each lessee to pay in each calendar month the base rent plus, in each calendar quarter, percentage rent, if any, based on hotel revenues. Lease revenue from Prime TRS is eliminated in consolidation. The hotel properties are operated under management contracts with Marriott International, Inc. (“Marriott”), Hilton Worldwide (“Hilton”), Accor Business and Leisure Management, LLC (“Accor”), Hyatt Corporation (“Hyatt”) and Remington Lodging, which are eligible independent contractors under the Internal Revenue Code.
2. Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
—The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These condensed consolidated financial statements include the accounts of Ashford Hospitality Prime, Inc., its majority-owned subsidiaries, and its majority-owned entities in which it has a controlling interest. All significant intercompany accounts and transactions between consolidated entities have been eliminated in these condensed consolidated financial statements. We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with GAAP in the accompanying unaudited condensed consolidated financial statements. We believe the disclosures made herein are adequate to prevent the information presented from being misleading. However, the financial statements should be read in conjunction with
ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
the consolidated financial statements and notes thereto included in our 2016 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 28, 2017.
Ashford Prime OP is considered to be a variable interest entity (“VIE”), as defined by authoritative accounting guidance. A VIE must be consolidated by a reporting entity if the reporting entity is the primary beneficiary because it has (i) the power to direct the VIE’s activities that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE. All major decisions related to Ashford Prime OP that most significantly impact its economic performance, including but not limited to operating procedures with respect to business affairs and any acquisitions, dispositions, financings, restructurings or other transactions with sellers, purchasers, lenders, brokers, agents and other applicable representatives, are subject to the approval of our wholly-owned subsidiary, Ashford Prime OP General Partner LLC, its general partner. As such, we consolidate Ashford Prime OP.
The following items affect reporting comparability of our historical condensed consolidated financial statements:
|
|
•
|
Historical seasonality patterns at some of our properties cause fluctuations in our overall operating results. Consequently, operating results for the
three
months ended
March 31, 2017
, are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.
|
|
|
•
|
On July 1, 2016, we sold the Courtyard Seattle Downtown.
|
|
|
•
|
On
March 31, 2017
, we acquired the Park Hyatt Beaver Creek Resort & Spa. The results of operations of the hotel property have not been included in our results of operations for the period ended
March 31, 2017
as a result of the acquisition occurring on
March 31, 2017
.
|
Use of Estimates
—The preparation of these condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Restricted Cash
—Restricted cash includes reserves for debt service, real estate taxes, and insurance, as well as excess cash flow deposits and reserves for furniture, fixtures, and equipment replacements of approximately
4%
to
6%
of property revenue for certain hotels, as required by certain management or mortgage debt agreement restrictions and provisions. We early adopted Accounting Standards Updates (“ASU”) 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
effective January 1, 2017. See discussion in recently adopted accounting standards below.
Impairment of Investments in Hotel Properties
—Hotel properties are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Recoverability of the hotel is measured by comparison of the carrying amount of the hotel to the estimated future undiscounted cash flows, which take into account current market conditions and our intent with respect to holding or disposing of the hotel. If our analysis indicates that the carrying value of the hotel is not recoverable on an undiscounted cash flow basis, we recognize an impairment charge for the amount by which the property’s net book value exceeds its estimated fair value, or fair value, less cost to sell. In evaluating the impairment of hotel properties, we make many assumptions and estimates, including projected cash flows, expected holding period and expected useful life. Fair value is determined through various valuation techniques, including internally developed discounted cash flow models, comparable market transactions and third-party appraisals, where considered necessary. For the
three
months ended
March 31, 2017
and
2016
, we have not recorded any impairment charges.
Investment in Ashford Inc.
—We hold approximately
195,000
shares of Ashford Inc. common stock, which represented an approximate
9.7%
ownership interest in Ashford Inc. and had a fair value of
$11.5 million
at
March 31, 2017
. This investment would typically be accounted for under the equity method of accounting, under Accounting Standards Codification (“ASC”) 323-10 -
Investments - Equity Method and Joint Ventures
since we exercise significant influence. However, we have elected to record our investment in Ashford Inc. using the fair value option under ASC 825-10 -
Fair Value Option - Financial Assets and Financial Liabilities
.
Revenue Recognition
—Hotel revenues, including room, food, beverage, and ancillary revenues such as long-distance telephone service, laundry, parking and space rentals, are recognized when services have been rendered. Taxes collected from customers and submitted to taxing authorities are not recorded in revenue.
Equity-Based Compensation
—Stock/unit-based compensation for non-employees is accounted for at fair value based on the market price of the shares at period end in accordance with applicable authoritative accounting guidance that results in recording expense, included in “advisory services fee” and “management fees,” equal to the fair value of the award in proportion to the
ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
requisite service period satisfied during the period. Performance stock units (“PSUs”) and performance-based Long-Term Incentive Plan (“LTIP”) units granted to certain executive officers are accounted for at fair value at period end based on a Monte Carlo simulation valuation model that results in recording expense, included in “advisory services fee,” equal to the fair value of the award in proportion to the requisite service period satisfied during the period. Stock/unit grants to independent directors are recorded at fair value based on the market price of the shares at grant date, which amount is fully expensed as the grants of stock/units are fully vested on the date of grant and included in “corporate general and administrative” expense in the condensed consolidated statements of operations.
Recently Adopted Accounting Standards
—In November 2016, the
Financial Accounting Standards Board (“
FASB”) issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
(“ASU 2016-18”), which clarifies the presentation of restricted cash and restricted cash equivalents in the statements of cash flows. Under ASU 2016-18 restricted cash and restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. We adopted this standard effective January 1, 2017 on a retrospective basis. The adoption of this standard resulted in the inclusion of restricted cash with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows for all periods presented. As a result net cash provided by operating activities increased
$1.5 million
and net cash used in investing activities decreased
$1.7 million
in the three months ended March 31, 2016. Our beginning-of-period cash, cash equivalents and restricted cash increased
37.9 million
and
$33.1 million
in 2017 and 2016, respectively.
Recently Issued Accounting Standards
—
In May 2014, the FASB issued ASU
2014-09,
Revenue from Contracts with Customers
(“ASU 2014-09”). ASU 2014-09 is a comprehensive new revenue recognition model, which requires a company to recognize revenue to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration the company expects to receive in exchange for those goods or services. The update will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU 2015-14,
Revenue From Contracts With Customers (Topic 606): Deferral of the Effective Date
, which defers the effective date to fiscal periods beginning after December 15, 2017. The FASB has also issued additional updates that further clarify the requirements of Topic 606 and provide implementation guidance. Early adoption is permitted for fiscal periods beginning after December 15, 2016. The standard permits the use of either the retrospective or cumulative effect transition method. We are in the initial stages of evaluating the effect of the standard on our condensed consolidated financial statements, including as it pertains to accounting for real estate sales, and continue to evaluate the available transition methods. However, we have not yet selected a transition method. Based on our initial and ongoing assessment of ASU 2014-09, we do not currently believe there will be a material impact to the amount or timing of revenue recognition for rooms revenue, food and beverage revenue and other hotel revenue.
In January 2016, the FASB issued ASU 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
(“ASU 2016-01”), which requires an entity to: (i) measure equity investments at fair value through net income, with certain exceptions; (ii) present in OCI the changes in instrument-specific credit risk for financial liabilities measured using the fair value option; (iii) present financial assets and financial liabilities by measurement category and form of financial asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an exit price and; (v) assess a valuation allowance on deferred tax assets related to unrealized losses of available-for-sale (“AFS”) debt securities in combination with other deferred tax assets. ASU 2016-01 provides an election to subsequently measure certain nonmarketable equity investments at cost less any impairment and adjusted for certain observable price changes. It also requires a qualitative impairment assessment of such equity investments and amends certain fair value disclosure requirements. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Certain provisions of ASU 2016-01 are eligible for early adoption. We do not expect that ASU 2016-01 will have a material impact on our condensed consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02,
Leases
(“ASU 2016-02”). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The accounting for leases under which we are the lessor remains largely unchanged. While we are currently in the initial stages of assessing the impact that ASU 2016-02 will have on our condensed consolidated financial statements, we expect the primary impact to our condensed consolidated financial statements
ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
upon adoption will be the recognition, on a discounted basis, of our future minimum rentals due under noncancelable leases on our condensed consolidated balance sheets resulting in the recording of ROU assets and lease obligations.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments -
Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
("ASU 2016-13"). The ASU sets forth an “expected credit loss” impairment model to replace the current “incurred loss” method of recognizing credit losses. The standard requires measurement and recognition of expected credit losses for most financial assets held. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for periods beginning after December 15, 2018. We are currently evaluating the impact that ASU 2016-13 will have on the condensed consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments - a consensus of the Emerging Issues Task Force
(“ASU 2016-15”). The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. Certain issues addressed in this guidance include - Debt payments or debt extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, distributions received from equity method investments and beneficial interests in securitization transactions. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact that ASU 2016-15 will have on our condensed consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805) - Clarifying the Definition of a Business
(“ASU 2017-01”
)
, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether a transaction should be accounted for as an acquisition (or disposal) of an asset or a business. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017. Early adoption is permitted. While we are currently evaluating the potential impact of the standard, we currently expect that certain future hotel acquisitions may be considered asset acquisitions rather than business combinations, which would affect capitalization of acquisitions costs (such costs are expensed for business combinations and capitalized for asset acquisitions).
In February 2017, the FASB issued ASU 2017-05,
Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
(ASU “2017-05”), which clarifies the scope of ASC Subtopic 610-20,
Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets
and adds guidance for partial sales of nonfinancial assets.
ASU 2017-05 is effective for fiscal years beginning after December 15, 2017.
Early adoption is permitted. An entity may elect to apply ASU 2017-05 under a retrospective or modified retrospective approach. We are evaluating the impact that ASU 2017-05 will have on our condensed consolidated financial statements and related disclosures.
3. Investments in Hotel Properties, net
Investments in hotel properties, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Land
|
|
$
|
303,165
|
|
|
$
|
210,696
|
|
Buildings and improvements
|
|
1,022,514
|
|
|
972,412
|
|
Furniture, fixtures and equipment
|
|
79,655
|
|
|
70,922
|
|
Construction in progress
|
|
6,094
|
|
|
4,382
|
|
Total cost
|
|
1,411,428
|
|
|
1,258,412
|
|
Accumulated depreciation
|
|
(254,168
|
)
|
|
(243,880
|
)
|
Investments in hotel properties, net
|
|
$
|
1,157,260
|
|
|
$
|
1,014,532
|
|
Park Hyatt Beaver Creek
On March 31, 2017, we acquired a
100%
interest in the Park Hyatt Beaver Creek Resort & Spa in Beaver Creek, Colorado for total consideration of
$145.5 million
. Concurrent with the closing of the acquisition, we completed the financing of a
$67.5 million
mortgage loan. See note 7.
We have allocated the purchase price to the assets acquired and liabilities assumed on a preliminary basis using estimated fair value information currently available. We are in the process of evaluating the values assigned to investment in hotel property,
ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
property level working capital balances and intangibles. This valuation is considered a Level 3 valuation technique. Thus, the balances reflected below are subject to change, and any such changes could result in adjustments to the allocation. Any change to the amounts recorded within the investments in hotel properties or intangibles will also impact depreciation and amortization expense.
The following table summarizes the preliminary estimated fair value of the assets acquired in the acquisition (in thousands):
|
|
|
|
|
Land
|
$
|
92,470
|
|
Buildings and improvements
|
47,724
|
|
Furniture, fixtures, and equipment
|
5,306
|
|
|
$
|
145,500
|
|
Net other assets (liabilities)
|
$
|
4,528
|
|
The results of operations of the hotel property have not been included in our results of operations for the period ended
March 31, 2017
as a result of the acquisition occurring on
March 31, 2017
.
Pro Forma Financial Results
The following table reflects the unaudited pro forma results of operations as if the acquisition had occurred and the applicable indebtedness was incurred on January 1, 2016, and the removal of
$2.8 million
of non-recurring transaction costs directly attributable to the acquisitions for the three months ended March 31, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Total revenue
|
$
|
116,106
|
|
|
$
|
117,825
|
|
Net income (loss)
|
7,888
|
|
|
5,070
|
|
Net income (loss) attributable to common stockholders
|
5,418
|
|
|
3,517
|
|
Pro Forma income per share:
|
|
|
|
Basic
|
$
|
0.19
|
|
|
$
|
0.12
|
|
Diluted
|
$
|
0.19
|
|
|
$
|
0.12
|
|
Weighted average common shares outstanding (in thousands):
|
|
|
|
Basic
|
27,267
|
|
|
28,343
|
|
Diluted
|
27,450
|
|
|
28,459
|
|
ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
4. Hotel Disposition
On July 1, 2016, the Company sold the Courtyard Seattle Downtown for
$84.5 million
in cash. The sale resulted in a gain of
$26.4 million
for the year ended
December 31, 2016
. Since the sale of the hotel property did not represent a strategic shift that has (or will have) a major effect on our operations or financial results, its results of operations were not reported as discontinued operations in the condensed consolidated financial statements.
We included the results of operations for these assets through the date of disposition in net income (loss) as shown in the condensed consolidated statements of operations for the
three months ended
March 31, 2016
.
The following table includes the condensed financial information from this hotel property (in thousands):
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2016
|
Total hotel revenue
|
$
|
3,187
|
|
Total hotel operating expenses
|
(1,758
|
)
|
Operating income (loss)
|
1,429
|
|
Property taxes, insurance and other
|
(163
|
)
|
Depreciation and amortization
|
(539
|
)
|
Interest expense and amortization of loan costs
|
(847
|
)
|
Income (loss) before income taxes
|
(120
|
)
|
(Income) loss before income taxes attributable to redeemable noncontrolling interests in operating partnership
|
15
|
|
Income (loss) before income taxes attributable to the Company
|
$
|
(105
|
)
|
5. Note Receivable
As of
March 31, 2017
and
December 31, 2016
, we owned a note receivable of
$8.1 million
from the city of Philadelphia, Pennsylvania. The note bears interest at a rate of
12.85%
and matures in 2018. The interest income recorded on the note receivable is offset against the interest expense recorded on the TIF loan of the same amount. See note 7.
ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
6. Investment in Unconsolidated Entity
Ashford Inc.
As of
March 31, 2017
and
December 31, 2016
, we held approximately
195,000
shares of Ashford Inc. common stock. The closing price per share was
$59.00
and
$43.14
as of
March 31, 2017
and
December 31, 2016
, respectively. This represented an approximate
9.7%
ownership interest in Ashford Inc. for both
March 31, 2017
and
December 31, 2016
. See notes 10 and 11.
As we exercise significant influence over Ashford Inc., this investment would typically be accounted for under the equity method of accounting, under ASC 323-10 -
Investments - Equity Method and Joint Ventures
. However, we have elected to record our investment in Ashford Inc. using the fair value option under ASC 825-10 -
Fair Value Option - Financial Assets and Financial Liabilities
as the fair value is readily available since Ashford Inc. common stock is traded on a national exchange. The fair value of our investment in Ashford Inc. is included in “investment in Ashford Inc., at fair value” on our condensed consolidated balance sheets, and changes in market value are included in “unrealized gain (loss) on investment in Ashford Inc.” on our condensed consolidated statements of operations.
The following tables summarize the condensed balance sheets as of
March 31, 2017
and
December 31, 2016
, and the condensed statements of operations for the
three
months ended
March 31, 2017
and 2016, of Ashford Inc. (in thousands):
Ashford Inc.
Condensed Consolidated Balance Sheets
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Total assets
|
|
$
|
91,154
|
|
|
$
|
129,797
|
|
Total liabilities
|
|
51,278
|
|
|
38,168
|
|
Redeemable noncontrolling interests
|
|
1,671
|
|
|
1,480
|
|
Total stockholders’ equity of Ashford Inc.
|
|
37,877
|
|
|
37,377
|
|
Noncontrolling interests in consolidated entities
|
|
328
|
|
|
52,772
|
|
Total equity
|
|
38,205
|
|
|
90,149
|
|
Total liabilities and equity
|
|
$
|
91,154
|
|
|
$
|
129,797
|
|
Our investment in Ashford Inc., at fair value
|
|
$
|
11,498
|
|
|
$
|
8,407
|
|
Ashford Inc.
Condensed Consolidated Statements of Operations
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
2016
|
Total revenue
|
|
|
$
|
13,013
|
|
|
$
|
13,409
|
|
Total operating expenses
|
|
|
(15,149
|
)
|
|
(13,921
|
)
|
Operating income (loss)
|
|
|
(2,136
|
)
|
|
(512
|
)
|
Realized and unrealized gain (loss) on investment in unconsolidated entity
|
|
|
—
|
|
|
(1,460
|
)
|
Realized and unrealized gain (loss) on investments
|
|
|
(75
|
)
|
|
(5,684
|
)
|
Other
|
|
|
118
|
|
|
(102
|
)
|
Income tax (expense) benefit
|
|
|
(630
|
)
|
|
(640
|
)
|
Net income (loss)
|
|
|
(2,723
|
)
|
|
(8,398
|
)
|
(Income) loss from consolidated entities attributable to noncontrolling interests
|
|
|
(25
|
)
|
|
6,548
|
|
Net (income) loss attributable to redeemable noncontrolling interests
|
|
|
363
|
|
|
118
|
|
Net gain (loss) attributable to Ashford Inc.
|
|
|
$
|
(2,385
|
)
|
|
$
|
(1,732
|
)
|
Our unrealized gain (loss) on investment in Ashford Inc.
|
|
|
$
|
3,091
|
|
|
$
|
(1,493
|
)
|
ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
7. Indebtedness
Indebtedness consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indebtedness
|
|
Collateral
|
|
Maturity
|
|
Interest Rate
|
|
March 31, 2017
|
|
December 31, 2016
|
Secured revolving credit facility
(3)
|
|
None
|
|
November 2019
|
|
Base Rate
(2)
+ 1.25% to 2.50% or LIBOR
(1)
+ 2.25% to 3.50%
|
|
$
|
—
|
|
|
$
|
—
|
|
Mortgage loan
(10)
|
|
3 hotels
|
|
April 2017
|
|
5.95%
|
|
—
|
|
|
245,307
|
|
Mortgage loan
(10)
|
|
1 hotel
|
|
April 2017
|
|
5.95%
|
|
—
|
|
|
55,915
|
|
Mortgage loan
(7) (10)
|
|
1 hotel
|
|
April 2017
|
|
5.91%
|
|
—
|
|
|
32,879
|
|
Mortgage loan
(6)
|
|
1 hotel
|
|
December 2017
|
|
LIBOR
(1)
+ 4.95%
|
|
42,000
|
|
|
42,000
|
|
Mortgage loan
(6)
|
|
1 hotel
|
|
December 2017
|
|
LIBOR
(1)
+ 4.95%
|
|
40,000
|
|
|
40,000
|
|
Mortgage loan
(4)
|
|
1 hotel
|
|
March 2018
|
|
LIBOR
(1)
+ 2.30%
|
|
80,000
|
|
|
80,000
|
|
Mortgage loan
(5)
|
|
1 hotel
|
|
March 2018
|
|
LIBOR
(1)
+ 2.25%
|
|
70,000
|
|
|
70,000
|
|
TIF loan
(7)
(8)
|
|
1 hotel
|
|
June 2018
|
|
12.85%
|
|
8,098
|
|
|
8,098
|
|
Mortgage loan
(7) (10)
|
|
5 hotels
|
|
February 2019
|
|
LIBOR
(1)
+ 2.58%
|
|
365,000
|
|
|
—
|
|
Mortgage loan
(6)
|
|
1 hotel
|
|
April 2019
|
|
LIBOR
(1)
+ 2.75%
|
|
67,500
|
|
|
—
|
|
Mortgage loan
(9)
|
|
2 hotels
|
|
November 2019
|
|
LIBOR
(1)
+ 2.65%
|
|
192,092
|
|
|
192,765
|
|
|
|
|
|
|
|
|
|
864,690
|
|
|
766,964
|
|
Deferred loan costs, net
|
|
|
|
|
|
|
|
(8,529
|
)
|
|
(2,348
|
)
|
Indebtedness, net
|
|
|
|
|
|
|
|
$
|
856,161
|
|
|
$
|
764,616
|
|
__________________
|
|
(1)
|
LIBOR rates were
0.983%
and
0.772%
at
March 31, 2017
and
December 31, 2016
, respectively.
|
|
|
(2)
|
Base Rate, as defined in the secured revolving credit facility agreement, is the greater of (i) the prime rate set by Bank of America, (ii) federal funds rate +
0.5%
, or (iii) LIBOR +
1.0%
.
|
|
|
(3)
|
Our borrowing capacity under our secured revolving credit facility is
$100.0 million
. We have an option, subject to lender approval, to further increase the borrowing capacity to an aggregate of
$250.0 million
. We may use up to
$15.0 million
for standby letters of credit. The secured revolving credit facility has
two
one
-year extension options subject to advance notice, satisfaction of certain conditions and a
0.25%
extension fee.
|
|
|
(4)
|
This loan has
three
one
-year extension options, subject to satisfaction of certain conditions, of which the second was exercised in March 2017.
|
|
|
(5)
|
This loan has
three
one
-year extension options, subject to satisfaction of certain conditions, of which the first was exercised in March 2017.
|
|
|
(6)
|
This loan has
three
one
-year extension options, subject to satisfaction of certain conditions.
|
|
|
(7)
|
These loans are collateralized by the same property.
|
|
|
(8)
|
The interest expense from the TIF loan is offset against interest income recorded on the note receivable of the same amount. See note 5.
|
|
|
(9)
|
This loan has
two
one
-year extension options, subject to satisfaction of certain conditions.
|
|
|
(10)
|
On January 18, 2017, we refinanced
three
mortgage loans totaling
$333.7 million
set to mature in April 2017 with a new
$365.0 million
loan with a
two
-year initial term and
five
one
-year extension options subject to the satisfaction of certain conditions. The new loan is interest only and bears interest at a rate of LIBOR +
2.58%
.
|
On January 18, 2017, the Company refinanced
three
mortgage loans with existing outstanding balances totaling approximately
$333.7 million
. The previous mortgage loans that were refinanced had final maturity dates in April 2017. The new mortgage loan totals
$365.0 million
and has a stated maturity of February 2019 with
five
one
-year extension options, subject to the satisfaction of certain conditions. The mortgage loan is interest only and provides for a floating interest rate of LIBOR +
2.58%
. The mortgage loan is secured by
five
hotel properties: Plano Marriott Legacy Town Center, Seattle Marriott Waterfront, Tampa Renaissance, San Francisco Courtyard Downtown and Philadelphia Courtyard Downtown.
On March 31, 2017, in connection with the acquisition of Park Hyatt Beaver Creek, we completed the financing of a
$67.5 million
loan. This loan is interest only and provides for a floating interest rate of LIBOR +
2.75%
. The stated maturity date of the mortgage loan is April 2019, with
three
one
-year extension options, subject to the satisfaction of certain conditions. The mortgage loan is secured by the Park Hyatt Beaver Creek.
We are required to maintain certain financial ratios under our secured revolving credit facility. If we violate covenants in any debt 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 our inability to borrow unused amounts under our line of credit, even if repayment of some or all of our borrowings is not required. The assets of certain of our subsidiaries are pledged under non-recourse indebtedness and are not available to satisfy the debts and
ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
other obligations of the consolidated group. As of
March 31, 2017
, we were in compliance in all material respects with all covenants or other requirements set forth in our debt agreements as amended.
8. Income (Loss) Per Share
The following table reconciles the amounts used in calculating basic and diluted income (loss) per share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
Net income (loss) attributable to common stockholders - Basic and diluted:
|
|
|
|
|
Net income (loss) attributable to the Company
|
|
$
|
(13
|
)
|
|
$
|
(134
|
)
|
Less: Dividends on preferred stock
|
|
(1,673
|
)
|
|
(894
|
)
|
Less: Dividends on common stock
|
|
(5,033
|
)
|
|
(2,837
|
)
|
Less: Dividends on unvested performance stock units
|
|
(67
|
)
|
|
(35
|
)
|
Less: Dividends on unvested restricted shares
|
|
(50
|
)
|
|
(9
|
)
|
Undistributed net income (loss) allocated to common stockholders
|
|
(6,836
|
)
|
|
(3,909
|
)
|
Add back: Dividends on common stock
|
|
5,033
|
|
|
2,837
|
|
Distributed and undistributed net income (loss) - basic and diluted
|
|
$
|
(1,803
|
)
|
|
$
|
(1,072
|
)
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
Weighted average common shares outstanding – basic and diluted
|
|
27,267
|
|
|
28,343
|
|
|
|
|
|
|
Income (loss) per share - basic and diluted:
|
|
|
|
|
Net income (loss) allocated to common stockholders per share
|
|
$
|
(0.07
|
)
|
|
$
|
(0.04
|
)
|
Due to their anti-dilutive effect, the computation of diluted income (loss) per share does not reflect the adjustments for the following items (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
Net income (loss) allocated to common stockholders is not adjusted for:
|
|
|
|
|
Income (loss) allocated to unvested restricted shares
|
|
$
|
50
|
|
|
$
|
9
|
|
Income (loss) allocated to unvested performance stock units
|
|
67
|
|
|
35
|
|
Income (loss) attributable to redeemable noncontrolling interests in operating partnership
|
|
(255
|
)
|
|
(150
|
)
|
Dividends on preferred stock
|
|
1,673
|
|
|
894
|
|
Total
|
|
$
|
1,535
|
|
|
$
|
788
|
|
Weighted average diluted shares are not adjusted for:
|
|
|
|
|
Effect of unvested restricted shares
|
|
50
|
|
|
46
|
|
Effect of assumed conversion of operating partnership units
|
|
4,223
|
|
|
4,764
|
|
Effect of assumed conversion of preferred stock
|
|
4,550
|
|
|
3,439
|
|
Effect of incentive fee shares
|
|
182
|
|
|
116
|
|
Total
|
|
9,005
|
|
|
8,365
|
|
ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
9. Derivative Instruments
Interest Rate Derivatives
—We are exposed to risks arising from our business operations, economic conditions and financial markets. To manage these risks, we primarily use interest rate derivatives to hedge our debt and our cash flows. The interest rate derivatives include interest rate caps and interest rate floors, which are subject to master netting settlement arrangements. All derivatives are recorded at fair value.
During the three months ended
March 31, 2017
, we entered into interest rate caps with notional amounts totaling
$568.5 million
and strike rate ranging from
3.00%
to
5.35%
. These interest rate caps have effective dates from
January 2017
to
March 2017
, maturity dates from
March 2018
to
April 2019
, and a total cost of
$319,000
. These instruments were not designated as cash flow hedges.
In March 2016, concurrent with the extension of our
$80.0 million
mortgage loan, we extended our existing interest rate cap with a notional amount of
$80.0 million
, maturity date of March 2017 and a strike rate of
5.78%
for a total cost of
$4,500
. This instrument was not designated as a cash flow hedge.
As of
March 31, 2017
, we had interest rate caps with notional amounts totaling
$796.5 million
and strike rates ranging from
2.00%
to
5.43%
. These instruments cap the interest rates on our mortgage loans with principal balances of
$856.6 million
and maturity dates from December 2017 to November 2019. These instruments had maturity dates ranging from
December 2017
to
April 2019
. As of
March 31, 2017
, we had interest rate floors with notional amounts totaling
$3.0 billion
and strike rates of
-0.25%
and a maturity date of
July 2020
.
Options on Futures Contracts
—During the
three months ended
March 31, 2016
, we purchased options on Eurodollar futures for a total cost of
$124,000
and a maturity date of
June 2017
. During the three months ended
March 31, 2017
, we made
no
purchases.
10. Fair Value Measurements
Fair Value Hierarchy
—Our financial instruments measured at fair value either on a recurring or a non-recurring basis are classified in a hierarchy for disclosure purposes consisting of three levels based on the observability of inputs in the market place as discussed below:
|
|
•
|
Level 1: Fair value measurements that are quoted prices (unadjusted) in active markets that we have the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets.
|
|
|
•
|
Level 2: Fair value measurements based on inputs other than quoted prices included in Level 1, that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
|
|
|
•
|
Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable. The circumstances for using these measurements include those in which there is little, if any, market activity for the asset or liability.
|
The fair value of interest rate caps is determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rates of the caps. The variable interest rates used in the calculation of projected receipts on the caps are based on an expectation of future interest rates derived from observable market interest rate curves (LIBOR forward curves) and volatilities (the Level 2 inputs). We also incorporate credit valuation adjustments (the Level 3 inputs) to appropriately reflect both our own non-performance risk and the respective counterparty’s non-performance risk.
The fair value of interest rate floors is calculated using a third-party discounted cash flow model based on future cash flows that are expected to be received over the remaining life of the floor. These expected future cash flows are probability-weighted projections based on the contract terms, accounting for both the magnitude and likelihood of potential payments, which are both computed using the appropriate LIBOR forward curve and market implied volatilities as of the valuation date (Level 2 inputs).
The fair value of options on futures contracts is determined based on the last reported settlement price as of the measurement date (Level 1 inputs). These exchange-traded options are centrally cleared, and a clearinghouse stands in between all trades to ensure that the obligations involved in the trades are satisfied.
When a majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. However, when the valuation adjustments associated
ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by us and our counter-parties, which we consider significant (
10%
or more) to the overall valuation of our derivatives, the derivative valuations in their entirety are classified in Level 3 of the fair value hierarchy. Transfers of inputs between levels are determined at the end of each reporting period.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present our assets and liabilities measured at fair value on a recurring basis aggregated by the level within which measurements fall in the fair value hierarchy (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Market Prices (Level 1)
|
|
Significant Other
Observable Inputs (Level 2)
|
|
Total
|
|
March 31, 2017
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Derivative assets:
|
|
|
|
|
|
|
Interest rate derivatives - floors
|
$
|
—
|
|
|
$
|
331
|
|
|
$
|
331
|
|
|
Interest rate derivatives - caps
|
—
|
|
|
64
|
|
|
64
|
|
|
Options on futures contracts
|
19
|
|
|
—
|
|
|
19
|
|
|
|
19
|
|
|
395
|
|
|
414
|
|
(1)
|
Non-derivative assets:
|
|
|
|
|
|
|
Investment in Ashford Inc.
|
11,498
|
|
|
—
|
|
|
11,498
|
|
|
Total
|
$
|
11,517
|
|
|
$
|
395
|
|
|
$
|
11,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Market Prices (Level 1)
|
|
Significant Other
Observable Inputs (Level 2)
|
|
Total
|
|
December 31, 2016
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Derivative assets:
|
|
|
|
|
|
|
Interest rate derivatives - floors
|
$
|
—
|
|
|
$
|
1,091
|
|
|
$
|
1,091
|
|
|
Options on futures contracts
|
58
|
|
|
—
|
|
|
58
|
|
|
|
58
|
|
|
1,091
|
|
|
1,149
|
|
(1)
|
Non-derivative assets:
|
|
|
|
|
|
|
Investment in Ashford Inc.
|
8,407
|
|
|
—
|
|
|
8,407
|
|
|
Total
|
$
|
8,465
|
|
|
$
|
1,091
|
|
|
$
|
9,556
|
|
|
__________________
|
|
(1)
|
Reported as “derivative assets” in the condensed consolidated balance sheets.
|
ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Effect of Fair Value Measured Assets and Liabilities on Condensed Consolidated Statements of Operations
The following table summarizes the effect of fair value measured assets and liabilities on the condensed consolidated statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in Income
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
2016
|
|
Assets
|
|
|
|
|
|
Derivative assets:
|
|
|
|
|
|
Interest rate derivatives - floors
|
|
$
|
(759
|
)
|
|
$
|
3,560
|
|
|
Interest rate derivatives - caps
|
|
(256
|
)
|
|
(47
|
)
|
|
Options on futures contracts
|
|
(39
|
)
|
|
20
|
|
|
|
|
|
|
|
|
|
|
Non-derivative assets:
|
|
|
|
|
|
Investment in Ashford Inc.
|
|
3,091
|
|
|
(1,493
|
)
|
|
Total
|
|
$
|
2,037
|
|
|
$
|
2,040
|
|
|
Total combined
|
|
|
|
|
|
Interest rate derivatives - floors
|
|
$
|
(759
|
)
|
|
$
|
3,560
|
|
|
Interest rate derivatives - caps
|
|
(256
|
)
|
|
(47
|
)
|
|
Options on futures contracts
|
|
117
|
|
|
20
|
|
|
Unrealized gain (loss) on derivatives
|
|
(898
|
)
|
|
$
|
3,533
|
|
|
Realized gain (loss) on options on futures contracts
|
|
(156
|
)
|
(1)
|
—
|
|
(1)
|
Unrealized gain (loss) on investment in Ashford Inc.
|
|
3,091
|
|
|
(1,493
|
)
|
|
Net
|
|
$
|
2,037
|
|
|
$
|
2,040
|
|
|
__________________
|
|
(1)
|
Included in “other income (expense)” in the condensed consolidated statements of operations.
|
ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
11. Summary of Fair Value of Financial Instruments
Determining the estimated fair values of certain financial instruments such as notes receivable and indebtedness requires considerable judgment to interpret market data. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Accordingly, the estimates presented are not necessarily indicative of the amounts at which these instruments could be purchased, sold or settled.
The carrying amounts and estimated fair values of financial instruments were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
|
Carrying
Value
|
|
Estimated
Fair Value
|
|
Carrying
Value
|
|
Estimated
Fair Value
|
Financial assets and liabilities measured at fair value:
|
|
|
|
|
|
|
|
|
Investment in Ashford Inc.
|
|
$
|
11,498
|
|
|
$
|
11,498
|
|
|
$
|
8,407
|
|
|
$
|
8,407
|
|
Derivative assets
|
|
414
|
|
|
414
|
|
|
1,149
|
|
|
1,149
|
|
Financial assets not measured at fair value:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
161,314
|
|
|
$
|
161,314
|
|
|
$
|
126,790
|
|
|
$
|
126,790
|
|
Restricted cash
|
|
35,779
|
|
|
35,779
|
|
|
37,855
|
|
|
37,855
|
|
Accounts receivable, net
|
|
24,912
|
|
|
24,912
|
|
|
18,194
|
|
|
18,194
|
|
Note receivable
|
|
8,098
|
|
|
8,490 to 9,384
|
|
|
8,098
|
|
|
8,511 to $ 9,407
|
|
Due from Ashford Trust OP, net
|
|
—
|
|
|
—
|
|
|
488
|
|
|
488
|
|
Due from AQUA U.S. Fund
|
|
—
|
|
|
—
|
|
|
2,289
|
|
|
2,289
|
|
Due from related party, net
|
|
598
|
|
|
598
|
|
|
377
|
|
|
377
|
|
Due from third-party hotel managers
|
|
9,936
|
|
|
9,936
|
|
|
7,555
|
|
|
7,555
|
|
Financial liabilities not measured at fair value:
|
|
|
|
|
|
|
|
|
Indebtedness
|
|
$
|
864,690
|
|
|
$ 812,563 to $ 898,094
|
|
|
$
|
766,964
|
|
|
$ 726,774 to $ 803,276
|
|
Accounts payable and accrued expenses
|
|
52,939
|
|
|
52,939
|
|
|
44,791
|
|
|
44,791
|
|
Dividends and distributions payable
|
|
8,025
|
|
|
8,025
|
|
|
5,038
|
|
|
5,038
|
|
Due to Ashford Trust OP, net
|
|
6
|
|
|
6
|
|
|
—
|
|
|
—
|
|
Due to Ashford Inc.
|
|
3,525
|
|
|
3,525
|
|
|
5,085
|
|
|
5,085
|
|
Due to affiliate
|
|
—
|
|
|
—
|
|
|
2,500
|
|
|
2,500
|
|
Due to third-party hotel managers
|
|
962
|
|
|
962
|
|
|
973
|
|
|
973
|
|
Cash, cash equivalents and restricted cash
. These financial assets have maturities of less than
90
days and most bear interest at market rates. The carrying value approximates fair value due to their short-term nature. This is considered a Level 1 valuation technique.
Accounts receivable, net, due from AQUA U.S. Fund, due from related party, net, accounts payable and accrued expenses, dividends and distributions payable, due to/from Ashford Trust OP, net, due to Ashford Inc., due to affiliate and due to/from third-party hotel managers
. The carrying values of these financial instruments approximate their fair values due to the short-term nature of these financial instruments. This is considered a Level 1 valuation technique.
Note receivable
. Fair value of the note receivable was determined by using similar loans with similar collateral. Since there is very little to no trading activity, we relied on our internal analysis of what we believe a willing buyer would pay for this note at
March 31, 2017
and
December 31, 2016
. We estimated the fair value of the note receivable to be approximately
4.8%
to
15.9%
higher than the carrying value of
$8.1 million
at
March 31, 2017
and approximately
5.1%
to
16.2%
higher than the carrying value of
$8.1 million
at
December 31, 2016
. This is considered a Level 2 valuation technique.
Investment in Ashford Inc.
Fair value of the investment in Ashford Inc. is based on the quoted closing price on the balance sheet date. This is considered a Level 1 valuation technique.
Derivative assets
. Fair value of the interest rate derivatives is determined using the net present value of the expected cash flows of each derivative based on the market-based interest rate curve and adjusted for credit spreads of us and the counterparties. Fair value of interest rate floors is calculated using a third-party discounted cash flow model based on future cash flows that are expected to be received over the remaining life of the floor. The fair values of options on futures contracts are valued at their last
ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
reported settlement price as of the measurement date. See notes 2, 9 and 10 for a complete description of the methodology and assumptions utilized in determining fair values.
Indebtedness
. Fair value of indebtedness is determined using future cash flows discounted at current replacement rates for these instruments. Cash flows are determined using a forward interest rate yield curve. The current replacement rates are determined by using the U.S. Treasury yield curve or the index to which these financial instruments are tied, and adjusted for the credit spreads. Credit spreads take into consideration general market conditions, maturity and collateral. We estimated the fair value of the total indebtedness to be approximately
94.0%
to
103.9%
of the carrying value of
$864.7 million
at
March 31, 2017
and approximately
94.8%
to
104.7%
of the carrying value of
$767.0 million
at
December 31, 2016
. This is considered a Level 2 valuation technique.
12. Redeemable Noncontrolling Interests in Operating Partnership
Redeemable noncontrolling interests in the operating partnership represents the limited partners’ proportionate share of equity and their allocable share of equity in earnings/losses of Ashford Prime OP, which is an allocation of net income/loss attributable to the common unitholders based on the weighted average ownership percentage of these limited partners’ common units of limited partnership interest in the operating partnership (“common units”) and units issued under our Long-Term Incentive Plan (the “LTIP units”) that are vested. Beginning one year after issuance, each common unit may be redeemed, by the holder, for either cash or, at our sole discretion, up to one share of our REIT common stock, which is either (i) issued pursuant to an effective registration statement; (ii) included in an effective registration statement providing for the resale of such common stock; or (iii) issued subject to a registration rights agreement.
LTIP units, which are issued to certain executives and employees of Ashford LLC as compensation, have vesting periods of
three years
. Additionally, certain independent members of the board of directors have elected to receive LTIP units as part of their compensation, which are fully vested upon grant. Upon reaching economic parity with common units, each vested LTIP unit can be converted by the holder into one common unit which can then be redeemed for cash or, at our election, settled in our common stock. An LTIP unit will achieve parity with the common units upon the sale or deemed sale of all or substantially all of the assets of our operating partnership at a time when our stock is trading at a level in excess of the price it was trading on the date of the LTIP issuance. More specifically, LTIP units will achieve full economic parity with common units in connection with (i) the actual sale of all or substantially all of the assets of our operating partnership or (ii) the hypothetical sale of such assets, which results from a capital account revaluation, as defined in the partnership agreement, for our operating partnership.
The compensation committee of the board of directors of the Company approves performance-based LTIP units to certain executive officers from time to time. The award agreements provide for the grant of a target number of performance-based LTIP units that will be settled in common units of the Ashford Prime OP, if and when the applicable vesting criteria have been achieved following the end of the performance and service period. The target number of performance-based LTIP units may be adjusted from
0%
to
200%
of the target number based on achievement of a specified relative total stockholder return based on the formula determined by the Company’s Compensation Committee on the grant date. As of
March 31, 2017
, a total of
701,000
performance-based LTIP units representing
200%
of the target were issued. The performance criteria for the performance-based LTIP units are based on market conditions under the relevant literature, and the performance-based LTIP units were granted to non-employees.
The unamortized fair value of performance-based LTIP units of
$1.1 million
at
March 31, 2017
will be expensed over a period of
1.8
years, subject to future mark to market adjustments. We recorded credits to compensation expense in the amount of
$1.0 million
and
$324,000
for the
three months ended
March 31, 2017
and
2016
, respectively, due to lower fair values as compared to prior periods. The related amounts are included in “advisory services fee” on our condensed consolidated statements of operations.
As of
March 31, 2017
, we have issued a total of
1.1 million
LTIP units (including performance-based LTIP units), all of which, other than approximately
3,000
LTIP units issued in March 2015,
6,000
LTIP units issued in May 2015,
389,000
performance-based LTIP units issued in June 2015, and
312,000
performance-based LTIP units issued in October 2016, had reached full economic parity with, and are convertible into, common units. For the
three
months ended
March 31, 2017
and
2016
, compensation expense of
$43,000
and
$86,000
was recorded related to LTIP units issued to Ashford LLC’s employees, respectively, and is included in “advisory services fee.” The fair value of the unrecognized cost of LTIP units, which was
$24,000
at
March 31, 2017
, will be amortized over a period of
1.3
years, subject to future mark to market adjustments.
During the
three
months ended
March 31, 2017
, approximately
5,000
common units with an aggregate fair value of
$67,000
at redemption were redeemed by the holders and, at our election, we issued shares of our common stock to satisfy the redemption. During the
three
months ended
March 31, 2016
,
no
common units were redeemed by the holders.
ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Redeemable noncontrolling interests in Ashford Prime OP as of
March 31, 2017
and
December 31, 2016
, were
$48.6 million
and
$59.5 million
, respectively, which represented ownership of our operating partnerships of
13.12%
and
13.90%
, respectively. The carrying value of redeemable noncontrolling interests as of
March 31, 2017
and
December 31, 2016
, included adjustments of
$0
and
$8.9 million
, respectively, to reflect the excess of redemption value over the accumulated historical costs. For the
three
months ended
March 31, 2017
and
2016
, we allocated net loss of
$255,000
and
$150,000
to the redeemable noncontrolling interests, respectively. We declared aggregate cash distributions to holders of common units and holders of LTIP units of
$790,000
and
$516,000
, respectively, for the
three
months ended
March 31, 2017
and
2016
. These distributions are recorded as a reduction of redeemable noncontrolling interests in operating partnership.
13. Equity and Stock-Based Compensation
Equity Offering
— On March 1, 2017, we commenced an underwritten public offering of approximately
5.8 million
shares of common stock at
$12.15
per share for gross proceeds of
$69.9 million
. The offering closed on March 7, 2017. The net proceeds from the sale of the shares after underwriting discounts and offering expense were approximately
$66.5 million
.
Dividends
—Common stock dividends declared for the
three
months ended
March 31, 2017
and 2016, were
$5.1 million
and
$2.8 million
, respectively.
Performance Stock Units
—The compensation committee of the board of directors of the Company approves grants of PSUs to certain executive officers from time to time. The award agreements provide for the grant of a target number of PSUs that will be settled in shares of common stock of the Company, if and when the applicable vesting criteria have been achieved following the end of the performance and service period of
three years
from the issuance date. The target number of PSUs may be adjusted from
0%
to
200%
based on achievement of a specified relative total stockholder return based on the formula determined by the Company’s Compensation Committee on the grant date. The performance criteria for the PSUs are based on market conditions under the relevant literature, and the PSUs were granted to non-employees. At
March 31, 2017
, the outstanding PSUs had a fair value of
$2.6 million
. We recorded credits to compensation expense in the amount of
$800,000
and
$398,000
for the
three
months ended
March 31, 2017
and
2016
, respectively, due to lower fair values of the PSUs. These amounts are included in “advisory services fee” on our condensed consolidated statements of operations. As of
March 31, 2017
, we had unamortized compensation expense of
$1.7 million
related to PSUs which is expected to be recognized over a period of
1.8
years, subject to future mark to market adjustments.
Restricted Stock Units
—Stock-based compensation expense of
$118,000
and
$23,000
was recognized for the
three
months ended
March 31, 2017
and
2016
, respectively, in connection with restricted units awarded to employees of Ashford LLC and is included in “advisory services fee” on our condensed consolidated statements of operations. There were also restricted shares granted to certain employees of Remington Lodging, and the associated expenses are recorded as a component of “management fees” on our condensed consolidated statements of operations. For the
three months ended March 31, 2017
and 2016, expense related to such grants was immaterial. In addition,
$18,000
and
$0
of stock-based compensation expense was recognized for the
three
months ended
March 31, 2017
and 2016, respectively, in connection with common stock issued to our independent directors, which vested immediately, and is included in “corporate general and administrative” expense on our condensed consolidated statements of operations. At
March 31, 2017
, the outstanding restricted shares had a fair value of
$3.3 million
. At
March 31, 2017
, the unamortized cost of the unvested shares of restricted stock was
$2.8 million
, which will be expensed over a period of
4.6 years
, subject to future mark to market adjustments, and have vesting dates between
April 2017
and
November 2021
.
Stock Repurchases
—On October 27, 2014, our board of directors approved a share repurchase program under which the Company may purchase up to
$100 million
of the Company’s common stock from time to time. The repurchase program does not have an expiration date. The specific timing, manner, price, amount and other terms of the repurchases is at management’s discretion and depends on market conditions, corporate and regulatory requirements and other factors. The Company is not required to repurchase shares under the repurchase program, and may modify, suspend or terminate the repurchase program at any time for any reason. On April 8, 2016, our board of directors authorized utilizing up to
$50 million
to repurchase common stock.
No
shares were repurchased during the three months ended
March 31, 2017
and 2016, pursuant to this authorization. As of
March 31, 2017
, we have purchased a cumulative
4.3 million
shares of our common stock, for approximately
$63.2 million
, since the program’s inception on November 4, 2014.
Noncontrolling Interest in Consolidated Entities
—A partner had noncontrolling ownership interests of
25%
in
two
hotel properties with a total carrying value of
$(5.4) million
and
$(5.4) million
at
March 31, 2017
and
December 31, 2016
, respectively. Noncontrolling interests in consolidated entities were allocated net loss of
$21,000
and net income of
$145,000
for the three months ended
March 31, 2017
and
2016
, respectively.
ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
14. 5.5% Series B Cumulative Convertible Preferred Stock
Each share of our
5.5%
Series B Cumulative Convertible Preferred Stock (the “Series B Preferred Stock”) is convertible at any time, at the option of the holder, into a number of whole shares of common stock at an initial conversion price of
$18.90
(which represents an initial conversion rate of
1.3228
shares of our common stock, subject to certain adjustments). The Series B Preferred Stock is also subject to conversion upon certain events constituting a change of control. Holders of the Series B Preferred Stock have no voting rights, subject to certain exceptions.
The Company may, at its option, cause the Series B Preferred Stock to be converted in whole or in part, on a pro-rata basis, into fully paid and nonassessable shares of the Company’s common stock at the conversion price, provided that the “Closing Bid Price” (as defined in the Articles Supplementary) of the Company’s common stock shall have equaled or exceeded
110%
of the conversion price for the immediately preceding
45
consecutive trading days ending
three days
prior to the date of notice of conversion. In the event of such mandatory conversion, the Company shall pay holders of the Series B Preferred Stock any additional dividend payment to make the holder whole on dividends expected to be received through June 11, 2019, in an amount equal to the net present value, where the discount rate is the dividend rate on the Series B Preferred Stock, of the difference between (i) the annual dividend payments the holders of Series B Preferred Stock would have received in cash from the date of the mandatory conversion to June 11, 2019, and (ii) the common stock quarterly dividend payments the holders of Series B Preferred Stock would have received over the same time period had such holders held common stock.
On April 26, 2016, in connection with a previously announced required public offering, we issued
290,850
shares of our Series B Preferred Stock at
$17.24
per share for gross proceeds of
$5.0 million
. The Series B Preferred Stock offering includes accrued and unpaid dividends since April 15, 2016. The offering closed on April 29, 2016. The net proceeds, after deducting underwriting discounts, advisory fees, commissions and other estimated offering expenses payable by the company, were approximately
$4.2 million
. Dividends on the Series B Preferred Stock accrue at a rate of
5.50%
on the liquidation preference of
$25.00
per share.
On March 7, 2017, we closed an offering of approximately
2.0 million
shares of our Series B Preferred Stock at
$20.19
per share for gross proceeds of
$39.9 million
. The net proceeds to us, after underwriting discounts and offering expenses were approximately
$38.4 million
. Dividends on the Series B Preferred Stock accrue at a rate of
5.50%
on the liquidation preference of
$25.00
per share. On March 31, 2017, the underwriters partially exercised their over-allotment option and purchased an additional
100,000
shares of the Series B Preferred Stock, which closed on April 5, 2017. The net proceeds from the sale of the shares after underwriting discounts and offering expenses were approximately
$1.9 million
.
At
March 31, 2017
, we had
4.9 million
outstanding shares of Series B Preferred Stock which do not meet the requirements for permanent equity classification prescribed by the authoritative guidance because these contain certain cash redemption features that are outside our control. As such, the Series B Preferred Stock is classified outside of permanent equity.
The Series B Preferred Stock dividend for all issued and outstanding shares is set at
$1.375
per annum per share. For the
three
months ended
March 31, 2017
and
2016
, we declared dividends of
$1.7 million
and
$894,000
, respectively, with respect to shares of Series B Preferred Stock.
15. Commitments and Contingencies
Restricted Cash
—Under certain management and debt agreements for our hotel properties existing at
March 31, 2017
, escrow payments are required for insurance, real estate taxes, and debt service. In addition, for certain properties based on the terms of the underlying debt and management agreements, we escrow
4%
to
5%
of gross revenues for capital improvements.
Management Fees
—Under management agreements for our hotel properties existing at
March 31, 2017
, we pay a) monthly property management fees equal to the greater of
$10,000
(CPI adjusted since 2003) or
3%
of gross revenues, or in some cases
3%
to
7%
of gross revenues, as well as annual incentive management fees, if applicable, b) project management fees of up to
4%
of project costs, c) market service fees including purchasing, design and construction management not to exceed
16.5%
of project management budget cumulatively, including project management fees, and d) other general fees at current market rates as approved by our independent directors, if required. These management agreements expire from December 2019 through December 2065, with renewal options. If we terminate a management agreement prior to its expiration, we may be liable for estimated management fees through the remaining term, liquidated damages or, in certain circumstances, we may substitute a new management agreement.
Income Taxes
—We and our subsidiaries file income tax returns in the federal jurisdiction and various states. Tax years 2013 through 2016 remain subject to potential examination by certain federal and state taxing authorities.
ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Litigation
—On February 3, 2016, Sessa Capital (Master), L.P. (“Sessa”) filed an action (the “Maryland Action”) in the Circuit Court for Baltimore City, Maryland, captioned
Sessa Capital (Master) L.P. v. Bennett, et al.
, Case No. 24-C-16-000557 (Baltimore City Cir. Ct. 2016), against Ashford Prime, the members of the Ashford Prime board of directors, Ashford LLC and Ashford Inc. The Maryland Action generally alleged that the directors of Ashford Prime breached their fiduciary duties in connection with the June 2015 amendments to the Company’s advisory agreement with Ashford LLC. The Maryland Action also alleged that Ashford Inc. aided and abetted those breaches of fiduciary duties. On February 29, 2016, the Company filed a motion to dismiss the Maryland Action. On March 14, 2016, Sessa voluntarily dismissed the Maryland Action.
On February 25, 2016, Ashford Prime filed a lawsuit (the “Texas Federal Action”) in the United States District Court for the Northern District of Texas, captioned
Ashford Hospitality Prime, Inc. v. Sessa Capital (Master), L.P., et al.
, No. 16-cv-00527 (N.D. Texas 2016) (DCG), against Sessa, related entities, and Sessa’s proposed director nominees John E. Petry, Philip B. Livingston, Lawrence A. Cunningham, Daniel B. Silvers and Chris D. Wheeler. The Texas Federal Action generally alleges that the defendants violated federal securities laws because Sessa’s proxy materials contain numerous false claims, material misrepresentations and omissions relating to, among other things, the proposed nominees, the financial risks associated with Sessa’s efforts to gain control of the board and Sessa’s plans and strategy for the Company and its assets. Among other remedies, the Texas Federal Action seeks to enjoin Sessa from proceeding with its proxy contest.
On March 8, 2016, Ashford Prime filed a lawsuit (the “Texas State Action”) in the District Court of Dallas County, Texas, captioned
Ashford Hospital Prime, Inc. v. Sessa Capital (Master) L.P., et al.
, Cause No. DC-16-02738, against Sessa, related entities, and Sessa’s proposed director nominees John E. Petry, Philip B. Livingston, Lawrence A. Cunningham, Daniel B. Silvers and Chris D. Wheeler. The Texas State Action generally alleges that Sessa’s purported notice of proposed nominees for election to the Ashford Prime board of directors is invalid due to numerous failures by the defendants to comply with material provisions in the Company’s bylaws. Among other things, the Texas State Action seeks a declaratory judgment confirming the inability of Sessa’s proposed director nominees to stand for election at the 2016 annual meeting of stockholders. On March 14, 2016, Sessa removed the Texas State Action from state court to the U.S. District Court for the Northern District of Texas with Cause No. 16-cv-00713.
On March 14, 2016, Sessa filed counterclaims and a motion for a preliminary injunction in the Texas Federal Action. These counterclaims include substantially the same claims as previously asserted by Sessa in the Maryland Action, and also allege that the directors of Ashford Prime breached their fiduciary duties in connection with the approval of the Series C Preferred Stock for issuance and the February 2016 amendments to the Amended Partnership Agreement (as defined below). Among other things, Sessa seeks an injunction prohibiting the issuance of shares of Series C Preferred Stock and requiring the board to approve the Sessa candidates, or in the alternative, prohibiting the solicitation of proxies until the board approves the Sessa candidates. On April 2, 2016, Sessa amended its counterclaims alleging that the Company had violated federal proxy solicitation laws by, among other things, stating that Sessa had not complied with the Company’s bylaws and that its purported director nominations are invalid. On April 6, 2016, the Court granted expedited discovery in connection with Sessa’s motion for preliminary injunction and the Company’s anticipated motion for preliminary injunction in the Texas State Action. On April 8, 2016, the Company notified the court that Sessa’s claims relating to the Series C Preferred Stock were moot after the Company unwound the OP Unit enfranchisement preferred equity transaction for the Company’s OP unitholders. On April 13, 2016, the Company filed its motion for preliminary injunction seeking an order declaring that Sessa’s slate of nominees is invalid and enjoining Sessa from submitting the nominees to stockholders for election to the board. On May 20, 2016, the court denied Sessa’s motion for a preliminary injunction and granted the Company’s motion for a preliminary injunction. Sessa appealed the district court’s decision to the United States Court of Appeals for the Fifth Circuit on May 23, 2016. On December 16, 2016, the Fifth Circuit dismissed Sessa’s appeal of the preliminary injunction as moot. On February 17, 2017, the District Court consolidated the Texas State Action into the Texas Federal Action (the “Consolidated Texas Federal Action”). On the same day, the District Court also dismissed all of Sessa’s counterclaims, except for its claim for violation of federal proxy solicitation laws, which the Company did not move to dismiss. The District Court granted Sessa’s motion to dismiss the Company claim for prima facie tort, but denied Sessa’s motion to dismiss the Company’s remaining claims.
On February 16, 2017, the Company, Ashford Trust and Ashford Inc., and together with the Company, Ashford Trust and each affiliate of the Company, Ashford Trust and Ashford Inc. (the “Ashford Entities”), entered into a Settlement Agreement (the “Settlement Agreement”) with Sessa, Sessa Capital GP, LLC, Sessa Capital IM, L.P., Sessa Capital IM GP, LLC and John Petry (collectively, the “Sessa Entities”) regarding the composition of the Company’s board of directors (the “Board”), dismissal of pending litigation involving the parties and certain other matters.
Under the Settlement Agreement, the Company agreed to appoint to the Company’s board of directors
two
of the
five
individuals Sessa previously sought to nominate as directors of the Company (“Independent Designees”). The Company is required to make
ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
such appointments within two weeks of the date of the Settlement Agreement. Additionally, the Settlement Agreement provides that the Company and the Sessa Entities will work together in good faith to identify
one
additional director who will be independent of both the Company and Sessa (“Additional Independent Director”).
So long as the Sessa Entities satisfy certain ownership thresholds with respect to the Company’s common stock, the Company agreed to nominate: (i) the Independent Designees; (ii) the Additional Independent Director; and (iii) Montgomery J. Bennett, Stefani D. Carter, Kenneth H. Fearn, Douglas A. Kessler, Curtis B. McWilliams and Matthew D. Rinaldi (or their successors) at each of the 2017 and 2018 annual meetings of Company’s stockholders. In the case of any contested election of directors of the Company, the Sessa Entities have agreed to cause
one
or both of the Independent Designees to resign from the Board if the preliminary results provided by the inspector of elections at any meeting of stockholders of the Company prior to the closing of the polls indicates with reasonable certainty that any of the incumbent directors or their successors (other than the Independent Designees) will not be elected at such meeting but for the resignation of
one
or more of the Independent Designees.
Under the Settlement Agreement, the Sessa Entities are subject to specified standstill restrictions relating to the Ashford Entities and lasting generally until the earlier of (x) the date that is
fifteen
business days prior to the deadline for the submission of stockholder nominations for the 2019 annual meeting of the Company’s stockholders pursuant to the Company’s bylaws or (y) the date that is
one hundred fifty days
prior to the first anniversary of the 2018 annual meeting of the Company’s stockholders. During the standstill period, the Sessa Entities have agreed to cause all of its shares of the Company to be present for quorum purposes at any meeting of the Company’s stockholders and voted in accordance with the board’s recommendations, subject to certain exceptions. The Settlement Agreement contains various other obligations and provisions applicable to the Ashford Entities and Sessa Entities.
Additionally, the Company agreed to pay the Sessa Entities
$2.5 million
, of which the Company was reimbursed
$2.0 million
by its insurance carrier. The net
$500,000
expense was included in the Company’s consolidated statement of operations for the year ended December 31, 2016, and the
$2.5 million
payable and the
$2.0 million
receivable were included in the Company’s consolidated balance sheet as of December 31, 2016. The amounts were paid as of March 31, 2017.
On February 20, 2017, the parties submitted a Joint Stipulation of Dismissal, which dismissed each of the parties’ remaining claims in the Consolidated Texas Federal Action with prejudice.
Jesse Small v. Monty J. Bennett, et al., Case No. 24-C-16006020 (Md. Cir. Ct.)
On November 16, 2016, Jesse Small, a purported shareholder of Ashford Prime, commenced a derivative action in Maryland Circuit Court for Baltimore City asserting causes of action for breach of fiduciary duty, corporate waste, and declaratory relief against the members of the Ashford Prime board of directors, David Brooks (collectively, the “Individual Defendants”), Ashford Inc. and Ashford LLC. Ashford Prime is named as a nominal defendant. The complaint alleges that the Individual Defendants breached their fiduciary duties to Ashford Prime by negotiating and approving the termination fee provision set forth in Ashford Prime’s advisory agreement with Ashford LLC, that Ashford Inc. and Ashford LLC aided and abetted the Individual Defendants’ fiduciary duty breaches, and that the Ashford Prime board of directors committed corporate waste in connection with Ashford Prime’s purchase of
175,000
shares of Ashford Inc. common stock. The complaint seeks monetary damages and declaratory and injunctive relief, including a declaration that the termination fee provision is unenforceable. The defendants filed motions to dismiss the complaint on March 24, 2017. The plaintiff’s response is due May 23, 2017. The outcome of this matter cannot be predicted with any certainty.
We are engaged in other various legal proceedings which have arisen but have not been fully adjudicated. The likelihood of loss from these legal proceedings, based on definitions within contingency accounting literature, ranges from remote to reasonably possible and to probable. Based on estimates of the range of potential losses associated with these matters, management does not believe the ultimate resolution of these proceedings, either individually or in the aggregate, will have a material adverse effect on our consolidated financial position or results of operations. However, the final results of legal proceedings cannot be predicted with certainty and if we fail to prevail in one or more of these legal matters, and the associated realized losses exceed our current estimates of the range of potential losses, our consolidated financial position or results of operations could be materially adversely affected in future periods.
16. Segment Reporting
We operate in
one
business segment within the hotel lodging industry: direct hotel investments. Direct hotel investments refer to owning hotel properties through either acquisition or new development. We report operating results of direct hotel investments on an aggregate basis as substantially all of our hotel investments have similar economic characteristics and exhibit similar long-term financial performance. As of
March 31, 2017
and
December 31, 2016
, all of our hotel properties were in the U.S. and its territories.
ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
17. Related Party Transactions
Ashford LLC, a subsidiary of Ashford Inc., acts as our advisor, and as a result, we pay advisory fees to Ashford LLC. We are required to pay Ashford LLC a quarterly base fee that is a percentage of our total market capitalization on a declining sliding scale plus the Key Money Asset Management Fee (defined in our advisory agreement as the aggregate gross asset value of all key money assets multiplied by
0.70%
), subject to a minimum quarterly base fee, as payment for managing our day-to-day operations in accordance with our investment guidelines. Total market capitalization includes the aggregate principal amount of our consolidated indebtedness (including our proportionate share of debt of any entity that is not consolidated but excluding our joint venture partners’ proportionate share of consolidated debt). The range of base fees on the scale are between
0.70%
and
0.50%
per annum for total market capitalization that ranges from less than
$6.0 billion
to greater than
$10.0 billion
. At
March 31, 2017
, the quarterly base fee was
0.70%
based on our current market capitalization. We are also required to pay Ashford LLC an incentive fee that is earned annually by Ashford LLC in each year that our annual total stockholder return exceeds the average annual total stockholder return for our peer group, subject to the FCCR Condition, as defined in the advisory agreement. We also reimburse Ashford LLC for certain reimbursable overhead and internal audit, insurance claims advisory and asset management services, as specified in the advisory agreement. We also record equity-based compensation expense for equity grants of common stock and LTIP units awarded to our officers and employees of Ashford LLC in connection with providing advisory services equal to the fair value of the award in proportion to the requisite service period satisfied during the period.
The following table summarizes the advisory services fees incurred (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Advisory services fee
|
|
|
|
Base advisory fee
|
$
|
2,003
|
|
|
$
|
2,025
|
|
Reimbursable expenses
(1)
|
547
|
|
|
652
|
|
Equity-based compensation
(2)
|
(1,685
|
)
|
|
(613
|
)
|
|
$
|
865
|
|
|
$
|
2,064
|
|
________
|
|
(1)
|
Reimbursable expenses include overhead, internal audit, insurance claims advisory and asset management services.
|
|
|
(2)
|
Equity-based compensation is associated with equity grants of Ashford Prime’s common stock, PSUs, LTIP units and Performance LTIP units awarded to officers and employees of Ashford LLC.
|
At
March 31, 2017
and
December 31, 2016
, we held a due to Ashford Trust OP, net, of
$6,000
and a due from Ashford Trust OP, net, of
$488,000
, respectively, which are both associated with certain expenses. At
March 31, 2017
and
December 31, 2016
, the balance in due to Ashford Inc., which is primarily associated with advisory services fee payable, was
$3.5 million
and
$5.1 million
, respectively. In addition, at
December 31, 2016
, we held a receivable from the AQUA U.S. Fund of
$2.3 million
, associated with the hold back from the AQUA U.S. Fund, of which the funds were received during the first quarter of 2017.
On January 24, 2017, we entered into an amended and restated advisory agreement with Ashford Inc. (the “Amended and Restated Advisory Agreement”) that amends and restates our advisory agreement discussed herein. Although our board of directors, through the action of the independent directors only, may amend the advisory agreement without stockholder approval, the independent directors have elected to seek stockholder approval of the Amended and Restated Advisory Agreement. Accordingly, the Amended and Restated Advisory Agreement will not become effective unless and until it is approved by our stockholders. The material terms of the Amended and Restated Advisory Agreement include:
|
|
•
|
we will make a cash payment to Ashford LLC of
$5.0 million
at the time the Amended and Restated Advisory Agreement becomes effective;
|
|
|
•
|
the termination fee payable to Ashford LLC has been amended by eliminating the
1.1
x multiplier and tax gross up components of the fee;
|
|
|
•
|
Ashford Inc. will disclose publicly the revenues and expenses used to calculate “Net Earnings” on a quarterly basis which is used to calculate the termination fee; Ashford LLC will retain an accounting firm to provide a quarterly report to us on the reasonableness of Ashford LLC’s determination of expenses, which will be binding on the parties;
|
|
|
•
|
the right of Ashford LLC to appoint a “Designated CEO” has been eliminated;
|
ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
|
|
•
|
the right of Ashford LLC to terminate the advisory agreement due to a change in a majority of the “Company Incumbent Board” (as defined in the current advisory agreement) has been eliminated;
|
|
|
•
|
we will be incentivized to grow our assets under a “growth covenant” in the Amended and Restated Advisory Agreement under which we will receive a deemed credit against a base amount of
$45.0 million
for:
3.75%
of the total purchase price of each hotel acquired after the date of the Amended and Restated Advisory Agreement that was recommended by Ashford LLC, netted against
3.75%
of the total sale price of each hotel sold after the date of the Amended and Restated Advisory Agreement. The difference between
$45.0 million
and such net credit, if any, is referred to as the “Uninvested Amount.” If the Amended and Restated Advisory Agreement is terminated, other than due to certain acts by Ashford LLC, we must pay Ashford LLC the Uninvested Amount, in addition to any termination fee payable under the Amended and Restated Advisory Agreement;
|
|
|
•
|
the Amended and Restated Advisory Agreement requires us to maintain a net worth of not less than
$390 million
plus
75%
of the equity proceeds from the sale of securities by us after December 31, 2016 and a covenant prohibiting us from paying dividends except as required to maintain our REIT status if paying the dividend would reduce our net worth below the required minimum net worth;
|
|
|
•
|
the initial term of the Amended and Restated Advisory Agreement ends on the 10th anniversary of its effective date, subject to renewal by Ashford LLC for up to
seven
additional successive
10
-year terms;
|
|
|
•
|
the base management fee payable to Ashford LLC will be fixed at
70
bps, and the fee will be payable on a monthly basis;
|
|
|
•
|
reimbursements of expenses to Ashford LLC will be made monthly in advance, based on an annual expense budget, with a quarterly true-up for actual expenses;
|
|
|
•
|
our right to terminate the advisory agreement due to a change of control of Ashford LLC has been eliminated;
|
|
|
•
|
our rights to terminate the advisory agreement at the end of each term upon payment of the termination fee based on the parties being unable to agree on new market-based fees or advisor’s performance have been eliminated; however, the Amended and Restated Advisory Agreement provides a mechanism for the parties to renegotiate the fees payable to Ashford LLC at the end of each term based on then prevailing market conditions, subject to floors and caps on the changes;
|
|
|
•
|
if a Change of Control (as defined in the Amended and Restated Advisory Agreement) is pending, we have agreed to deposit not less than
50%
, and in certain cases
100%
, of the applicable termination fee in escrow, with the payment of any remaining amounts owed to Ashford LLC secured by a letter of credit and/or first priority lien on certain assets;
|
|
|
•
|
our ability to terminate the Amended and Restated Advisory Agreement due to a material default by Ashford LLC is limited to instances where a court finally determines that the default had a material adverse effect on us and Ashford LLC fails to pay monetary damages in accordance with the Amended and Restated Advisory Agreement; and
|
|
|
•
|
if we repudiate the Amended and Restated Advisory Agreement through actions or omissions that constitute a repudiation as determined by a final non-appealable order from a court of competent jurisdiction, we will be liable to Ashford LLC for a liquidated damages amount.
|
Certain employees of Remington Lodging, who perform work on behalf of Ashford Prime, were granted approximately
21,000
and
1,000
shares of restricted stock under the Ashford Prime Stock Plan on April 1, 2016 and July 1, 2016, respectively. These share grants were accounted for under the applicable accounting guidance related to share-based payments granted to non-employees and are recorded as a component of “management fees” in our condensed consolidated statements of operations. For the
three months ended March 31, 2017
and 2016, expense related to such grants was immaterial. The unamortized fair value of these grants was
$141,000
as of
March 31, 2017
, which will be amortized over a period of
2.0
years.
During first quarter of 2017, we reached a legal settlement with Sessa. See note 15.
18. Subsequent Event
On March 31, 2017, the underwriters of our offering of Series B Preferred Stock that closed on March 7, 2017, partially exercised their over-allotment option and purchased an additional
100,000
shares of our Series B Preferred Stock at
$20.19
per share, which closed on April 5, 2017. The net proceeds to us from the sale of the shares after underwriting discounts were approximately
$1.9 million
. See note 14.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As used in this Quarterly Report on Form 10-Q, unless the context otherwise indicates, the references to “we,” “us,” “our,” the “Company” or “Ashford Prime” refer to Ashford Hospitality Prime, Inc., a Maryland corporation, and, as the context may require, its consolidated subsidiaries, including Ashford Hospitality Prime Limited Partnership, a Delaware limited partnership, which we refer to as “our operating partnership” or “Ashford Prime OP.” “Ashford Trust” or “AHT” refers to Ashford Hospitality Trust, Inc., a Maryland corporation, and, as the context may require, its consolidated subsidiaries, including Ashford Hospitality Limited Partnership, a Delaware limited partnership and Ashford Trust’s operating partnership, which we refer to as “Ashford Trust OP.” “Ashford LLC” refers to Ashford Hospitality Advisors LLC, a Delaware limited liability company and a wholly-owned subsidiary of Ashford Inc., an affiliate of Ashford Trust. “Remington Lodging” refers to Remington Lodging and Hospitality LLC, a Delaware limited liability company, a property management company owned by Mr. Monty J. Bennett, chairman of our board of directors, and his father, Mr. Archie Bennett, Jr., chairman emeritus of Ashford Trust. “Our TRSs” refers to our taxable REIT subsidiaries, including Ashford Prime TRS Corporation, a Delaware corporation, which we refer to as “Ashford Prime TRS,” and its subsidiaries, together with the two taxable REIT subsidiaries that lease our two hotels held in a consolidated joint venture and are wholly-owned by the joint venture and the U.S. Virgin Islands’ (“USVI”) taxable REIT subsidiary that owns the Ritz-Carlton St. Thomas hotel.
This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains registered trademarks that are the exclusive property of their respective owners, which are companies other than us, including Marriott International®, Hilton Worldwide®, Sofitel®, Hyatt® and Accor®.
FORWARD-LOOKING STATEMENTS
Throughout this Form 10-Q, we make forward-looking statements that are subject to risks and uncertainties. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “anticipate,” “estimate,” “approximately,” “believe,” “could,” “project,” “predict,” or other similar words or expressions. Additionally, statements regarding the following subjects are forward-looking by their nature:
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|
•
|
our business and investment strategy;
|
|
|
•
|
our projected operating results and dividend rates;
|
|
|
•
|
our ability to obtain future financing arrangements;
|
|
|
•
|
our understanding of our competition;
|
|
|
•
|
projected capital expenditures;
|
|
|
•
|
anticipated acquisitions or dispositions; and
|
|
|
•
|
the impact of technology on our operations and business.
|
Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain financial and operating projections or state other forward looking information. Our ability to predict results or the actual effect of future events, actions, plans or strategies is inherently uncertain. Although we believe that the expectations reflected in our forward-looking statements are based on reasonable assumptions, taking into account all information currently available to us, our actual results and performance could differ materially from those set forth in our forward-looking statements. Factors that could have a material adverse effect on our forward-looking statements include, but are not limited to:
|
|
•
|
factors discussed in our Form 10-K for the year ended
December 31, 2016
, as filed with the Securities and Exchange Commission (the “SEC”) on March 15,
2017
(the “
2016
10-K”), including those set forth under the sections titled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” and “Properties,” as updated in our subsequent Quarterly Reports on Form 10-Q;
|
|
|
•
|
general volatility of the capital markets, the general economy or the hospitality industry, whether the result of market events or otherwise;
|
|
|
•
|
our ability to deploy capital and raise additional capital at reasonable costs to repay debts, invest in our properties and fund future acquisitions;
|
•
unanticipated increases in financing and other costs, including a rise in interest rates;
|
|
•
|
the degree and nature of our competition;
|
|
|
•
|
actual and potential conflicts of interest with Ashford Trust, Ashford LLC, Ashford Inc., Remington Lodging, our executive officers and our non-independent directors;
|
|
|
•
|
changes in personnel of Ashford LLC or the lack of availability of qualified personnel;
|
|
|
•
|
changes in governmental regulations, accounting rules, tax rates and similar matters;
|
|
|
•
|
legislative and regulatory changes, including changes to the Internal Revenue Code and related rules, regulations and interpretations governing the taxation of real estate investment trusts (“REITs”); and
|
|
|
•
|
limitations imposed on our business and our ability to satisfy complex rules in order for us to qualify as a REIT for U.S. federal income tax purposes.
|
When considering forward-looking statements, you should keep in mind the matters summarized under “Item 1A. Risk Factors” of our
2016
10-K and any subsequent updates to this disclosure in our Quarterly Reports on Form 10-Q, and the discussion in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, could cause our actual results and performance to differ significantly from those contained in our forward-looking statements. Accordingly, we cannot guarantee future results or performance. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our views as of the date of this Form 10-Q. Furthermore, we do not intend to update any of our forward-looking statements after the date of this Form 10-Q to conform these statements to actual results and performance, except as may be required by applicable law.
Overview
We are a Maryland corporation formed in April 2013. We became a public company on November 19, 2013 when Ashford Trust, a NYSE-listed REIT, completed the spin-off of our company through the distribution of our outstanding common stock to the Ashford Trust stockholders. We invest primarily in high revenue per available room (“RevPAR”), luxury hotels and resorts. High RevPAR, for purposes of our investment strategy, means RevPAR of at least twice the then-current U.S. national average RevPAR for all hotels as determined by Smith Travel Research. Two times the U.S. national average was $162 for the year ended December 31, 2016. We have elected to be taxed as a REIT under the Internal Revenue Code beginning in the year ended December 31, 2013. We conduct our business and own substantially all of our assets through our operating partnership, Ashford Prime OP.
We operate in the direct hotel investment segment of the hotel lodging industry. As of
May 5, 2017
, we own interests in twelve hotel properties in seven states, the District of Columbia and St. Thomas, U.S. Virgin Islands with
3,892
total rooms, or
3,657
net rooms, excluding those attributable to our joint venture partner. The hotel properties in our current portfolio are predominantly located in U.S. urban markets with favorable growth characteristics resulting from multiple demand generators. We own ten of our hotel properties directly, and the remaining two hotel properties through an investment in a majority-owned consolidated entity.
We are advised by Ashford LLC, a subsidiary of Ashford Inc., through an advisory agreement. All of the hotel properties in our portfolio are currently asset-managed by Ashford LLC.
We do not have any employees. All of the services that might be provided by employees are provided to us by Ashford LLC.
Recent Developments
On January 18, 2017, the Company refinanced three mortgage loans with existing outstanding balances totaling approximately $333.7 million. The previous mortgage loans that were refinanced had final maturity dates in April 2017. The new mortgage loan totals $365.0 million and has stated maturity of February 2019 with five one-year extension options, subject to the satisfaction of certain conditions. The mortgage loan is interest only and provides for a floating interest rate of LIBOR + 2.58%. The mortgage loan is secured by five hotel properties: Plano Marriott Legacy Town Center, Seattle Marriott Waterfront, Tampa Renaissance, San Francisco Courtyard Downtown and Philadelphia Courtyard Downtown.
On January 24, 2017, the Company announced refinements to its strategy in an effort to enhance shareholder value. The refinements, which have been unanimously endorsed by the Board of Directors, include the following:
|
|
•
|
Focused Portfolio:
Going forward, the Company's portfolio will be predominantly focused on investing in the luxury chain scale segment. Empirical evidence has shown the luxury segment has had greater RevPAR growth over the long term. The Company will continue to target acquisitions of hotels with a RevPAR of at least 2.0x the national average. As a result, four hotel properties have been designated as non-core to the portfolio, including the Courtyard Philadelphia Downtown Hotel, Courtyard San Francisco Downtown Hotel, Renaissance Tampa Hotel and Marriott Legacy Center Hotel in Plano, Texas. The Company intends to either reposition or opportunistically sell these hotel properties in the future if conditions warrant. The Company will also simultaneously pursue new acquisitions in order to grow the portfolio consistent with its stated strategy. Luxury hotels have proven to have superior long-term RevPAR growth versus other chain scales, and the Company believes its exclusive focus of investing in luxury hotels should generate attractive returns for its shareholders.
|
|
|
•
|
Increased Dividend:
The Company's 2017 dividend policy will be amended commencing with the first quarter by increasing the expected quarterly cash dividend for the Company's common stock by 33%, from $0.12 per diluted share
|
to $0.16 per diluted share. This equates to an annual rate of $0.64 per diluted share, representing a 4.5% yield based on the Company's closing stock price on January 23, 2017;
|
|
•
|
Reaffirming Conservative Leverage:
The Company will continue to target conservative leverage, with a target leverage level of 45% net debt to gross assets;
|
|
|
•
|
Strong Liquidity:
The Company will continue to focus on having access to liquidity for both opportunistic investments and as a hedge against economic uncertainty. The Company will target holding 10-15% of its gross debt balance in cash.
|
On January 24, 2017, we entered into an amended and restated advisory agreement with Ashford Inc. that amends and restates our advisory agreement discussed herein. Although our board of directors, through the action of the independent directors only, may amend the advisory agreement without stockholder approval, the independent directors have elected to seek stockholder approval of the Amended and Restated Advisory Agreement. Accordingly, the Amended and Restated Advisory Agreement will not become effective unless and until it is approved by our stockholders. The material terms of the Amended and Restated Advisory Agreement include:
|
|
•
|
we will make a cash payment to Ashford LLC of
$5.0 million
at the time the Amended and Restated Advisory Agreement becomes effective;
|
|
|
•
|
the termination fee payable to Ashford LLC has been amended by eliminating the
1.1x
multiplier and tax gross up components of the fee;
|
|
|
•
|
Ashford Inc. will disclose publicly the revenues and expenses used to calculate “Net Earnings” on a quarterly basis which is used to calculate the termination fee; Ashford LLC will retain an accounting firm to provide a quarterly report to us on the reasonableness of Ashford LLC’s determination of expenses, which will be binding on the parties;
|
|
|
•
|
the right of Ashford LLC to appoint a “Designated CEO” has been eliminated;
|
|
|
•
|
the right of Ashford LLC to terminate the advisory agreement due to a change in a majority of the “Company Incumbent Board” (as defined in the current advisory agreement) has been eliminated;
|
|
|
•
|
we will be incentivized to grow our assets under a “growth covenant” in the Amended and Restated Advisory Agreement under which we will receive a deemed credit against a base amount of
$45.0 million
for:
3.75%
of the total purchase price of each hotel acquired after the date of the Amended and Restated Advisory Agreement that was recommended by Ashford LLC, netted against
3.75%
of the total sale price of each hotel sold after the date of the Amended and Restated Advisory Agreement. The difference between
$45.0 million
and such net credit, if any, is referred to as the “Uninvested Amount.” If the Amended and Restated Advisory Agreement is terminated, other than due to certain acts by Ashford LLC, we must pay Ashford LLC the Uninvested Amount, in addition to any termination fee payable under the Amended and Restated Advisory Agreement;
|
|
|
•
|
the Amended and Restated Advisory Agreement requires us to maintain a net worth of not less than
$390 million
plus
75%
of the equity proceeds from the sale of securities by us after December 31, 2016 and a covenant prohibiting us from paying dividends except as required to maintain our REIT status if paying the dividend would reduce our net worth below the required minimum net worth;
|
|
|
•
|
the initial term of the Amended and Restated Advisory Agreement ends on the 10th anniversary of its effective date, subject to renewal by Ashford LLC for up to
seven
additional successive
10
-year terms;
|
|
|
•
|
the base management fee payable to Ashford LLC will be fixed at
70
bps, and the fee will be payable on a monthly basis;
|
|
|
•
|
reimbursements of expenses to Ashford LLC will be made monthly in advance, based on an annual expense budget, with a quarterly true-up for actual expenses;
|
|
|
•
|
our right to terminate the advisory agreement due to a change of control of Ashford LLC has been eliminated;
|
|
|
•
|
our rights to terminate the advisory agreement at the end of each term upon payment of the termination fee based on the parties being unable to agree on new market-based fees or advisor’s performance have been eliminated; however, the Amended and Restated Advisory Agreement provides a mechanism for the parties to renegotiate the fees payable to Ashford LLC at the end of each term based on then prevailing market conditions, subject to floors and caps on the changes;
|
|
|
•
|
if a Change of Control (as defined in the Amended and Restated Advisory Agreement) is pending, we have agreed to deposit not less than
50%
, and in certain cases
100%
, of the applicable termination fee in escrow, with the payment of any remaining amounts owed to Ashford LLC secured by a letter of credit and/or first priority lien on certain assets;
|
|
|
•
|
our ability to terminate the Amended and Restated Advisory Agreement due to a material default by Ashford LLC is limited to instances where a court finally determines that the default had a material adverse effect on us and Ashford LLC fails to pay monetary damages in accordance with the Amended and Restated Advisory Agreement; and
|
|
|
•
|
if we repudiate the Amended and Restated Advisory Agreement through actions or omissions that constitute a repudiation as determined by a final non-appealable order from a court of competent jurisdiction, we will be liable to Ashford LLC for a liquidated damages amount.
|
On February 16, 2017, the Ashford Entities entered into a Settlement Agreement with the Sessa Entities regarding the composition of the Company’s board of directors, dismissal of pending litigation involving the parties and certain other matters. For more information, please see “Legal Proceedings” herein.
On March 1, 2017, we commenced an underwritten public offering of approximately
5.8 million
shares of our common stock at
$12.15
per share for gross proceeds of
$69.9 million
. The offering closed on March 7, 2017. The net proceeds from the sale of the shares after underwriting discounts and offering expense were approximately
$66.5 million
.
On March 1, 2017, we announced that we entered into a definitive agreement to acquire the 80-room Hotel Yountville in Yountville, California for $96.5 million. We expect the acquisition to close on or about May 11, 2017.
On March 7, 2017, we closed an offering of approximately
2.0 million
shares of our our 5.5% Series B Cumulative Convertible Preferred Stock (the”Series B Preferred Stock”) at
$20.19
per share for gross proceeds of
$39.9 million
. The net proceeds, after underwriting discounts and offering expenses were approximately
$38.4 million
. Dividends on the Series B Preferred Stock accrue at a rate of
5.50%
on the liquidation preference of
$25.00
per share. On March 31, 2017, the underwriters partially exercised their over-allotment option and purchased an additional 100,000 shares of the Series B Preferred Stock, which closed on April 5, 2017. The net proceeds to us from the sale of the shares after underwriting discounts and offering expenses were approximately
$1.9 million
.
On March 31, 2017, we acquired a
100%
interest in the Park Hyatt Beaver Creek Resort & Spa in Beaver Creek, Colorado for total consideration of
$145.5 million
. Concurrent with the closing of the acquisition, we completed the financing of a
$67.5 million
mortgage loan. This loan is interest only and provides for a floating interest rate of LIBOR + 2.75%. The stated maturity date of the mortgage loan is April 2019, with three one-year extension options. The mortgage loan is secured by the Park Hyatt Beaver Creek.
On April 27, 2017, Mr. Douglas A. Kessler resigned from the Board of Directors of Ashford Prime and no longer is President of Ashford Prime as a result of being appointed Chief Executive Officer of Ashford Trust.
Key Indicators of Operating Performance
We use a variety of operating and other information to evaluate the operating performance of our business. These key indicators include financial information that is prepared in accordance with GAAP as well as other financial measures that are non-GAAP measures. In addition, we use other information that may not be financial in nature, including statistical information and comparative data. We use this information to measure the operating performance of our individual hotels, groups of hotels and/or business as a whole. We also use these metrics to evaluate the hotels in our portfolio and potential acquisitions to determine each hotel’s contribution to cash flow and its potential to provide attractive long-term total returns. These key indicators include:
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|
•
|
Occupancy-Occupancy means the total number of hotel rooms sold in a given period divided by the total number of rooms available. Occupancy measures the utilization of our hotels’ available capacity. We use occupancy to measure demand at a specific hotel or group of hotels in a given period.
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|
•
|
ADR-ADR means average daily rate and is calculated by dividing total hotel rooms revenues by total number of rooms sold in a given period. ADR measures average room price attained by a hotel and ADR trends provide useful information concerning the pricing environment and the nature of the customer base of a hotel or group of hotels. We use ADR to assess the pricing levels that we are able to generate.
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•
|
RevPAR-RevPAR means revenue per available room and is calculated by multiplying ADR by the average daily occupancy. RevPAR is one of the commonly used measures within the hotel industry to evaluate hotel operations. RevPAR does not include revenues from food and beverage sales or parking, telephone or other non-rooms revenues generated by the property. Although RevPAR does not include these ancillary revenues, it is generally considered the leading indicator of core revenues for many hotels. We also use RevPAR to compare the results of our hotels between periods and to analyze results of our comparable hotels (comparable hotels represent hotels we have owned for the entire period). RevPAR improvements attributable to increases in occupancy are generally accompanied by increases in most categories of variable operating costs. RevPAR improvements attributable to increases in ADR are generally accompanied by increases in limited categories of operating costs, such as management fees and franchise fees.
|
RevPAR changes that are primarily driven by changes in occupancy have different implications for overall revenues and profitability than changes that are driven primarily by changes in ADR. For example, an increase in occupancy at a hotel would lead to additional variable operating costs (including housekeeping services, utilities and room supplies) and could also result in increased other operating department revenue and expense. Changes in ADR typically have a greater impact on operating margins and profitability as they do not have a substantial effect on variable operating costs.
Occupancy, ADR and RevPAR are commonly used measures within the lodging industry to evaluate operating performance. RevPAR is an important statistic for monitoring operating performance at the individual hotel level and across our entire business. We evaluate individual hotel RevPAR performance on an absolute basis with comparisons to budget and prior periods, as well as on a regional and company-wide basis. ADR and RevPAR include only rooms revenue. Rooms revenue comprised approximately
69.3%
and
69.4%
of our total hotel revenue for the
three
months ended
March 31, 2017
and 2016, respectively, and is dictated by demand (as measured by occupancy), pricing (as measured by ADR) and our available supply of hotel rooms.
We also use funds from operations (“FFO”), Adjusted FFO (“AFFO”), earnings before interest, taxes, depreciation and amortization (“EBITDA”) and Adjusted EBITDA as measures of the operating performance of our business. See “Non-GAAP Financial Measures.”
LIQUIDITY AND CAPITAL RESOURCES
Our short-term liquidity requirements consist primarily of funds necessary to pay for operating expenses and other expenditures directly associated with our hotels, including:
|
|
•
|
advisory fees payable to Ashford LLC;
|
|
|
•
|
recurring maintenance necessary to maintain our hotel properties in accordance with brand standards;
|
|
|
•
|
interest expense and scheduled principal payments on outstanding indebtedness, including our secured revolving credit facility (see “Contractual Obligations and Commitments”);
|
|
|
•
|
distributions, in the form of dividends on our common stock, necessary to qualify for taxation as a REIT;
|
|
|
•
|
dividends on preferred stock; and
|
|
|
•
|
capital expenditures to improve our hotels.
|
We expect to meet our short-term liquidity requirements generally through net cash provided by operations, existing cash balances and, if necessary, short-term borrowings under our secured revolving credit facility.
Our long-term liquidity requirements consist primarily of funds necessary to pay for the costs of acquiring additional hotel properties and redevelopments, renovations, expansions and other capital expenditures that need to be made periodically with respect to our hotel properties and scheduled debt payments. We expect to meet our long-term liquidity requirements through various sources of capital, including our secured revolving credit facility and future equity and preferred equity issuances, existing working capital, net cash provided by operations, hotel mortgage indebtedness and other secured and unsecured borrowings. However, there are a number of factors that may have a material adverse effect on our ability to access these capital sources, including the state of overall equity and credit markets, our degree of leverage, our unencumbered asset base and borrowing restrictions imposed by lenders (including as a result of any failure to comply with financial covenants in our existing and future indebtedness), general market conditions for REITs, our operating performance and liquidity and market perceptions about us. The success of our business strategy will depend, in part, on our ability to access these various capital sources.
Our hotel properties will require periodic capital expenditures and renovation to remain competitive. In addition, acquisitions, redevelopments or expansions of hotel properties may require significant capital outlays. We may not be able to fund such capital improvements solely from net cash provided by operations because we must distribute annually at least 90% of our REIT taxable income, determined without regard to the deductions for dividends paid and excluding net capital gains, to qualify and maintain our qualification as a REIT, and we are subject to tax on any retained income and gains. As a result, our ability to fund capital expenditures, acquisitions or hotel redevelopment through retained earnings is very limited. Consequently, we expect to rely heavily upon the availability of debt or equity capital for these purposes. If we are unable to obtain the necessary capital on favorable terms, or at all, our financial condition, liquidity, results of operations and prospects could be materially and adversely affected.
Certain of our loan agreements contain cash trap provisions that may be triggered if the performance of our hotel properties decline. When these provisions are triggered, substantially all of the profit generated by our hotel properties is deposited directly into lockbox accounts and then swept into cash management accounts for the benefit of our various lenders. Cash is not distributed to us at any time after the cash trap provisions have been triggered until we have cured the performance issues. Currently, none of the cash trap provisions of our loans are triggered.
On October 27, 2014, our board of directors approved a share repurchase program under which the Company may purchase up to $100 million of the Company’s common stock from time to time. The repurchase program does not have an expiration date. The specific timing, manner, price, amount and other terms of the repurchases are at management’s discretion and depend on market conditions, corporate and regulatory requirements and other factors. The Company is not required to repurchase shares under the repurchase program, and may modify, suspend or terminate the repurchase program at any time for any reason. On April 8, 2016, our board of directors authorized utilizing up to $50 million to repurchase common stock. As of
May 5, 2017
, we have
purchased a cumulative 4.3 million shares of our common stock, for approximately $63.2 million, since the program’s inception on November 4, 2014.
On January 18, 2017, the Company refinanced three mortgage loans with existing outstanding balances totaling approximately $333.7 million. The previous mortgage loans that were refinanced had final maturity dates in April 2017. The new mortgage loan totals $365.0 million and has stated maturity of February 2019 with five one-year extension options, subject to the satisfaction of certain conditions. The mortgage loan is interest only and provides for a floating interest rate of LIBOR + 2.58%. The mortgage loan is secured by five hotel properties: Plano Marriott Legacy Town Center, Seattle Marriott Waterfront, Tampa Renaissance, San Francisco Courtyard Downtown and Philadelphia Courtyard Downtown.
On March 1, 2017, we commenced an underwritten public offering of approximately
5.8 million
shares of our common stock at
$12.15
per share for gross proceeds of
$69.9 million
. The offering closed on March 7, 2017. The net proceeds from the sale of the shares after underwriting discounts and offering expense were approximately
$66.5 million
.
On March 7, 2017, we closed an offering of approximately
2.0 million
shares of our Series B Preferred Stock at
$20.19
per share for gross proceeds of
$39.9 million
. The net proceeds, after underwriting discounts and offering expenses were approximately
$38.4 million
. Dividends on the Series B Preferred Stock accrue at a rate of
5.50%
on the liquidation preference of
$25.00
per share. On March 31, 2017, the underwriters partially exercised their over-allotment option and purchased an additional 100,000 shares of the Series B Preferred Stock, which closed on April 5, 2017. The net proceeds to us from the sale of the shares after underwriting discounts and offering expenses were approximately
$1.9 million
.
On March 31, 2017, in connection with the acquisition of Park Hyatt Beaver Creek, we completed the financing of a
$67.5 million
loan. This loan is interest only and provides for a floating interest rate of LIBOR + 2.75%. The stated maturity date of the mortgage loan is April 2019, with three one-year extension options. The mortgage loan is secured by the Park Hyatt Beaver Creek.
Secured Revolving Credit Facility
We have a three-year, senior secured revolving credit facility in the amount of $100 million. It includes $15 million available in letters of credit and $15 million available in swingline loans. We believe the secured revolving credit facility will provide us with significant financial flexibility to fund future acquisitions and hotel redevelopments.
The secured credit facility is provided by a syndicate of financial institutions with Bank of America, N.A., serving as the administrative agent to Ashford Prime OP, as the borrower. We and certain of our subsidiaries guarantee the secured revolving credit facility, which is secured by a pledge of 100% of the equity interests we hold in Ashford Prime OP and 100% of the equity interest issued by any guarantor (other than Ashford Prime) or any other subsidiary of ours that is not restricted under its loan documents or organizational documents from having its equity pledged (subject to certain exclusions), all mortgage receivables held by the borrower or any guarantor, and certain deposit accounts and securities accounts held by the borrower and any guarantor. The proceeds of the secured revolving credit facility may be used for working capital, capital expenditures, property acquisitions, and any other lawful purposes.
The secured revolving credit facility also contains customary terms, covenants, negative covenants, events of default, limitations and other conditions for credit facilities of this type. Subject to certain exceptions, we are subject to restrictions on incurring additional indebtedness, mergers and fundamental changes, sales or other dispositions of property, changes in the nature of our business, investments, and capital expenditures.
We also are subject to certain financial covenants, as set forth below, which are tested by the borrower on a consolidated basis (net of the amounts attributable to the non-controlling interest held by our partner in a majority-owned consolidated entity) and include, but are not limited to, the following:
|
|
•
|
Consolidated indebtedness (less cash and cash equivalents and amounts represented by marketable securities) to EBITDA not to exceed 6.00x initially, with such ratio being reduced beginning October 1, 2017 to 5.75x and beginning October 1, 2019 to 5.50x. Our ratio was
5.51
x at
March 31, 2017
.
|
|
|
•
|
Consolidated recourse indebtedness other than the secured revolving credit facility not to exceed $50,000,000.
|
|
|
•
|
Consolidated fixed charge coverage ratio not less than 1.40x initially, with such ratio being increased beginning October 1, 2017 to 1.50x. This ratio was
1.90
x at
March 31, 2017
.
|
|
|
•
|
Indebtedness of the consolidated parties that accrues interest at a variable rate (other than the secured revolving credit facility) that is not subject to a “cap,” “collar,” or other similar arrangement not to exceed 25% of consolidated indebtedness.
|
|
|
•
|
Consolidated tangible net worth not less than 75% of the consolidated tangible net worth on the closing date of the secured revolving credit facility plus 75% of the net proceeds of any future equity issuances.
|
|
|
•
|
Secured debt that is secured by real property (excluding the eight hotels we acquired in connection with the spin-off) not to exceed 70% of the as-is appraised value of such real property.
|
All financial covenants are tested and certified by the borrower on a quarterly basis. We were in compliance with all covenants at
March 31, 2017
.
The secured revolving credit facility includes customary events of default, and the occurrence of an event of default will permit the lenders to terminate commitments to lend under the secured revolving credit facility and accelerate payment of all amounts outstanding thereunder. If a default occurs and is continuing, we will be precluded from making distributions on our shares of common stock (other than those required to allow us to qualify and maintain our status as a REIT, so long as such default does not arise from a payment default or event of insolvency).
Borrowings under the secured revolving credit facility bear interest, at our option, at either LIBOR for a designated interest period plus an applicable margin, or the base rate (as defined in the credit agreement) plus an applicable margin. The applicable margin for borrowings under the secured revolving credit facility for base rate loans range from 1.25% to 2.50% per annum and the applicable margin for borrowings under the secured revolving credit facility for LIBOR loans range from 2.25% to 3.50% per annum, depending on the ratio of consolidated indebtedness to EBITDA described above, with the lowest rate applying if such ratio is less than 4x, and the highest rate applying if such ratio is greater than 6.5x.
The secured revolving credit facility is a three-year interest-only facility with all outstanding principal being due at maturity on November 10, 2019, subject to two one-year extension options if certain terms and conditions are satisfied. The secured revolving credit facility has an accordion feature whereby the aggregate commitments may be increased up to $250 million, subject to certain terms and conditions and a 0.25% extension fee. No amounts were drawn under the secured revolving credit facility as of
March 31, 2017
.
We intend to repay indebtedness incurred under our secured revolving credit facility from time to time out of net cash provided by operations and from the net proceeds of issuances of additional equity and debt securities, as market conditions permit.
Sources and Uses of Cash
As of
March 31, 2017
, we had
$161.3 million
of cash and cash equivalents, compared to
$126.8 million
at
December 31, 2016
.
We anticipate that our principal sources of funds to meet our cash requirements will include cash on hand, positive cash flow from operations and capital market activities.
Net Cash Flows Provided by (Used in) Operating Activities
.
Net cash flows provided by operating activities were
$4.6 million
and
$12.1 million
for the
three months ended
March 31, 2017
and
2016
, respectively. Cash flows from operations are impacted by changes in hotel operations of our eleven comparable hotel properties and the sale of the
Seattle Courtyard Downtown
on July 1, 2016. Cash flows from operations are also impacted by the timing of working capital cash flows such as collecting receivables from hotel guests, paying vendors, settling with related parties and settling with hotel managers. The decrease in net cash flows provided by operating activities is primarily attributable to changes in working capital balances.
Net Cash Flows Provided by (Used in) Investing Activities
.
For the
three months ended
March 31, 2017
, net cash flows used in investing activities were
$161.0 million
. These cash outflows were primarily attributable to
$154.0 million
for the acquisition of the Park Hyatt Beaver Creek and deposits on the acquisition of Hotel Yountville and
$9.3 million
of capital improvements made to various hotel properties, partially offset by
$2.3 million
of proceeds received from the liquidation of our investment in the AQUA U.S. Fund. For the
three months ended
March 31, 2016
, investing activities used net cash flows of
$2.7 million
. These cash outlays were primarily attributable to cash outflows of
$3.4 million
of capital improvements made to various hotel properties partially offset by proceeds from property insurance of
$673,000
.
Net Cash Flows Provided by (Used in) Financing Activities.
For the
three months ended
March 31, 2017
, net cash flows provided by financing activities were
$188.9 million
. Cash inflows primarily consisted of borrowings on indebtedness of
$432.5 million
, proceeds of
$66.7 million
from the issuance of common stock and
$38.6 million
from the issuance of convertible preferred stock. These cash inflows were partially offset by
$334.8 million
for repayments of indebtedness,
$9.1 million
for payments of loan costs and exit fees,
$4.6 million
for payments of dividends and distributions,
$319,000
for purchases of derivatives and repurchase of common stock of
$6,000
. For the
three months ended
March 31, 2016
, net cash flows used in financing activities were
$9.4 million
. Cash outflows primarily consisted of
$3.8 million
for distributions to the holder of a noncontrolling interest in consolidated entities,
$3.4 million
for payments of dividends and distributions,
$2.1 million
for repayments of indebtedness and
$15,000
for payments of loan costs and exit fees. These cash outflows were slightly offset by other miscellaneous cash inflows of
$19,000
.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2017
Compared to
Three Months Ended March 31,
2016
The following table summarizes changes in key line items from our condensed consolidated statements of operations for the
three months ended
March 31, 2017
and
2016
(in thousands except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Favorable (Unfavorable)
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
Revenue
|
|
|
|
|
|
|
|
Rooms
|
$
|
67,418
|
|
|
$
|
69,251
|
|
|
$
|
(1,833
|
)
|
|
(2.6
|
)%
|
Food and beverage
|
24,473
|
|
|
24,865
|
|
|
(392
|
)
|
|
(1.6
|
)
|
Other
|
5,365
|
|
|
5,648
|
|
|
(283
|
)
|
|
(5.0
|
)
|
Total hotel revenue
|
97,256
|
|
|
99,764
|
|
|
(2,508
|
)
|
|
(2.5
|
)
|
Other
|
40
|
|
|
33
|
|
|
7
|
|
|
21.2
|
|
Total revenue
|
97,296
|
|
|
99,797
|
|
|
(2,501
|
)
|
|
(2.5
|
)
|
Expenses
|
|
|
|
|
|
|
|
Hotel operating expenses:
|
|
|
|
|
|
|
|
Rooms
|
15,797
|
|
|
15,819
|
|
|
22
|
|
|
0.1
|
|
Food and beverage
|
16,861
|
|
|
17,445
|
|
|
584
|
|
|
3.3
|
|
Other expenses
|
27,731
|
|
|
28,339
|
|
|
608
|
|
|
2.1
|
|
Management fees
|
3,545
|
|
|
3,807
|
|
|
262
|
|
|
6.9
|
|
Total hotel expenses
|
63,934
|
|
|
65,410
|
|
|
1,476
|
|
|
2.3
|
|
Property taxes, insurance and other
|
5,074
|
|
|
5,043
|
|
|
(31
|
)
|
|
(0.6
|
)
|
Depreciation and amortization
|
11,971
|
|
|
11,904
|
|
|
(67
|
)
|
|
(0.6
|
)
|
Advisory services fee
|
865
|
|
|
2,064
|
|
|
1,199
|
|
|
58.1
|
|
Transaction costs
|
4,328
|
|
|
—
|
|
|
(4,328
|
)
|
|
|
|
Corporate general and administrative
|
3,874
|
|
|
3,923
|
|
|
49
|
|
|
1.2
|
|
Total expenses
|
90,046
|
|
|
88,344
|
|
|
(1,702
|
)
|
|
(1.9
|
)
|
Operating income (loss)
|
7,250
|
|
|
11,453
|
|
|
(4,203
|
)
|
|
(36.7
|
)
|
Equity in earnings (loss) of unconsolidated entity
|
—
|
|
|
(2,650
|
)
|
|
2,650
|
|
|
(100.0
|
)
|
Interest income
|
112
|
|
|
32
|
|
|
80
|
|
|
250.0
|
|
Other income (expense)
|
(157
|
)
|
|
(10
|
)
|
|
(147
|
)
|
|
1,470.0
|
|
Interest expense and amortization of loan costs
|
(8,202
|
)
|
|
(10,634
|
)
|
|
2,432
|
|
|
(22.9
|
)
|
Write-off of loan costs and exit fees
|
(1,963
|
)
|
|
—
|
|
|
(1,963
|
)
|
|
|
|
Unrealized gain (loss) on investment in Ashford Inc.
|
3,091
|
|
|
(1,493
|
)
|
|
4,584
|
|
|
(307.0
|
)
|
Unrealized gain (loss) on derivatives
|
(898
|
)
|
|
3,533
|
|
|
(4,431
|
)
|
|
(125.4
|
)
|
Income (loss) before income taxes
|
(767
|
)
|
|
231
|
|
|
(998
|
)
|
|
(432.0
|
)
|
Income tax (expense) benefit
|
478
|
|
|
(370
|
)
|
|
848
|
|
|
(229.2
|
)
|
Net income (loss)
|
(289
|
)
|
|
(139
|
)
|
|
(150
|
)
|
|
107.9
|
|
(Income) loss from consolidated entities attributable to noncontrolling interests
|
21
|
|
|
(145
|
)
|
|
(166
|
)
|
|
114.5
|
|
Net (income) loss attributable to redeemable noncontrolling interests in operating partnership
|
255
|
|
|
150
|
|
|
(105
|
)
|
|
(70.0
|
)
|
Net income (loss) attributable to the Company
|
$
|
(13
|
)
|
|
$
|
(134
|
)
|
|
$
|
121
|
|
|
(90.3
|
)%
|
All hotel properties owned for the
three months ended
March 31, 2017
and
2016
have been included in our results of operations during the respective periods in which they were owned. Based on when a hotel property was acquired or disposed of, operating results for certain hotel properties are not comparable for the
three months ended
March 31, 2017
and 2016. The hotel properties listed below are not comparable hotel properties for the periods indicated and all other hotel properties are considered comparable hotel properties. The following acquisitions and dispositions affect reporting comparability related to our condensed consolidated financial statements:
|
|
|
|
|
|
|
|
Hotel Properties
|
|
Location
|
|
Acquisition/Disposition
|
|
Acquisition/Disposition Date
|
Seattle Courtyard Downtown
|
|
Seattle, WA
|
|
Disposition
|
|
July 1, 2016
|
Park Hyatt Beaver Creek
(1)
|
|
Beaver Creek, CO
|
|
Acquisition
|
|
March 31, 2017
|
________
|
|
(1)
|
The results of operations of the hotel property have not been included in our results of operations for the period ended
March 31, 2017
as a result of the acquisition occurring on
March 31, 2017
.
|
The following table illustrates the key performance indicators of our hotel properties for the periods indicated:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Occupancy
|
78.43
|
%
|
|
77.77
|
%
|
ADR (average daily rate)
|
$
|
258.00
|
|
|
$
|
247.62
|
|
RevPAR (revenue per available room)
|
$
|
202.35
|
|
|
$
|
192.56
|
|
Rooms revenue (in thousands)
|
$
|
67,418
|
|
|
$
|
69,251
|
|
Total hotel revenue (in thousands)
|
$
|
97,256
|
|
|
$
|
99,764
|
|
The following table illustrates the key performance indicators of the eleven hotel properties that were included for the full
three months ended
March 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Occupancy
|
78.43
|
%
|
|
77.75
|
%
|
ADR (average daily rate)
|
$
|
258.00
|
|
|
$
|
253.95
|
|
RevPAR (revenue per available room)
|
$
|
202.35
|
|
|
$
|
197.45
|
|
Rooms revenue (in thousands)
|
$
|
67,418
|
|
|
$
|
66,516
|
|
Total hotel revenue (in thousands)
|
$
|
97,256
|
|
|
$
|
96,578
|
|
Net income (loss) attributable to the Company.
Net loss attributable to the Company decreased
$121,000
, or
90.3%
, to
$13,000
for the
three months ended March 31, 2017
(the “
2017 quarter
”) compared to a net loss attributable to the Company of
$134,000
for the
three months ended March 31, 2016
(the “
2016 quarter
”) as a result of the factors discussed below.
Rooms Revenue
.
Rooms revenue from our hotel properties
de
creased
$1.8 million
, or
2.6%
, to
$67.4 million
during the
2017 quarter
compared to the
2016 quarter
. During the
2017 quarter
, we experienced a
4.2%
in
crease in room rates and a
66
basis point
in
crease in occupancy. Rooms revenue from our eleven comparable hotel properties increased
$902,000
due to a
68
basis point increase in occupancy and higher room rates of
1.6%
. Rooms revenue decreased (i)
$2.7 million
at the
Seattle Courtyard Downtown
as a result of the sale of the hotel property on July 1, 2016; (ii)
$1.1 million
at the
San Francisco Courtyard Downtown
as a result of a
843
basis point decrease in occupancy and a
0.7%
decrease in room rates at the hotel due to a renovation during the 2017 quarter; (iii)
$162,000
at the
Key West Pier House
as a result of a
344
basis point decrease in occupancy, partially offset by
2.1%
higher room rates at the hotel; (iv)
$145,000
at the
Chicago Sofitel Magnificent Mile
as a result of
5.1%
lower room rates, partially offset by a
150
basis point increase in occupancy at the hotel; (v)
$112,000
at the
Plano Marriott Legacy Town Center
as a result of
4.9%
lower room rates, partially offset by a
281
basis point increase in occupancy at the hotel; (vi)
$105,000
at the
Philadelphia Courtyard
as a result of
0.2%
lower room rates and a
58
basis point decrease in occupancy at the hotel; and (vii)
$94,000
at the
Ritz-Carlton, St. Thomas
as a result of an
80
basis point decrease in occupancy, partially offset by
1.2%
higher room rates at the hotel. These decreases were partially offset by increases of (i)
$1.6 million
at the
Capital Hilton
as a result of
12.2%
higher room rates and a
504
basis point increase in occupancy at the hotel; (ii)
$426,000
at the
Seattle Marriott Waterfront
as a result of a
767
basis point increase in occupancy, partially offset by
0.6%
lower room rates at the hotel; (iii)
$301,000
at the
Hilton La Jolla Torrey Pines
as a result of
3.8%
higher room rates and a
193
basis point increase in occupancy at the hotel; (iv)
$167,000
at the
Bardessono
Hotel
as a result of
7.9%
higher room rates and
39
basis point increase in occupancy at the hotel; and (v)
$35,000
at the
Tampa Renaissance
as a result of
6.8%
higher room rates, partially offset by a
411
basis point decrease in occupancy at the hotel.
Food and Beverage Revenue
.
Food and beverage revenue from our hotel properties
de
creased
$392,000
, or
1.6%
, to
$24.5 million
during the
2017 quarter
compared to the
2016 quarter
. This
de
crease is due to a decrease of
$269,000
at the
Seattle Courtyard Downtown
as a result of the sale of the hotel property on July 1, 2016 and an aggregate decrease in food and beverage revenue of
$1.1 million
at the
Ritz-Carlton, St. Thomas
,
Chicago Sofitel Magnificent Mile
,
Bardessono Hotel
,
Hilton La Jolla Torrey Pines
,
San Francisco Courtyard Downtown
and
Tampa Renaissance
. These decreases were partially offset by higher aggregate food and beverage revenue of
$983,000
at the
Capital Hilton
,
Seattle Marriott Waterfront
,
Plano Marriott Legacy Town Center
,
Key West Pier House
and
Philadelphia Courtyard
.
Other Hotel Revenue
.
Other hotel revenue, which consists mainly of telecommunications, parking and rentals,
de
creased
$283,000
, or
5.0%
, to
$5.4 million
during the
2017 quarter
compared to the
2016 quarter
. This
de
crease is attributable to an decrease of
$182,000
at the
Seattle Courtyard Downtown
as a result of the sale of the hotel property on July 1, 2016 and an aggregate decrease of
$439,000
at the
Bardessono Hotel
,
San Francisco Courtyard Downtown
,
Philadelphia Courtyard
,
Key West Pier House
,
Plano Marriott Legacy Town Center
,
Seattle Marriott Waterfront
and
Chicago Sofitel Magnificent Mile
. This decrease was partially offset by higher aggregate other revenue at the
Ritz-Carlton, St. Thomas
,
Hilton La Jolla Torrey Pines
,
Capital Hilton
and
Tampa Renaissance
of approximately
$338,000
.
Other Non-Hotel Revenue
.
Other non-hotel revenue
in
creased
$7,000
, or
21.2%
, to
$40,000
in the
2017 quarter
compared to the
2016 quarter
. The
in
crease is attributable to higher Texas margin tax recoveries from guests.
Rooms Expense
.
Rooms expense
de
creased
$22,000
, or
0.1%
, to
$15.8 million
in the
2017 quarter
compared to the
2016 quarter
. The
de
crease is attributable to a decrease of
$524,000
at the
Seattle Courtyard Downtown
as a result of the sale of the hotel property on July 1, 2016, partially offset by an aggregate increase in rooms expense at our eleven comparable hotel properties of approximately
$502,000
.
Food and Beverage Expense
.
Food and beverage expense
de
creased
$584,000
, or
3.3%
, to
$16.9 million
during the
2017 quarter
compared to the
2016 quarter
. The decrease is due to an aggregate decrease of $361,000 at our eleven comparable hotel properties and $223,000 from the sale of the
Seattle Courtyard Downtown
.
Other Operating Expenses
.
Other operating expenses
de
creased
$608,000
, or
2.1%
, to
$27.7 million
in the
2017 quarter
compared to the
2016 quarter
. Hotel operating expenses consist of direct expenses from departments associated with revenue streams and indirect expenses associated with support departments and incentive management fees. We experienced a
de
crease of
$9,000
in direct expenses and
$599,000
in indirect expenses and incentive management fees in the
2017 quarter
compared to the
2016 quarter
. Direct expenses were
1.9%
of total hotel revenue for both the
2017 quarter
and the
2016 quarter
. The decrease in direct expenses is comprised of a decrease of $16,000 from the sale of the
Seattle Courtyard Downtown
partially offset by an aggregate increase of $7,000 at our eleven comparable hotel properties. The decrease in indirect expenses is primarily attributable to decreases in (i) repairs and maintenance of $235,000, including $150,000 from our eleven comparable hotel properties and $85,000 from the sale of the
Seattle Courtyard Downtown
; (ii) marketing costs of $185,000, comprised of $218,000 from the sale of the
Seattle Courtyard Downtown
, partially offset by an increase of $33,000 from our eleven comparable hotel properties; (iii) incentive management fees of $157,000, including $83,000 from our eleven comparable hotel properties and $74,000 from the sale of the
Seattle Courtyard Downtown
, and (iv) general and administrative costs of $129,000, comprised of a $317,000 decrease related to the sale of the
Seattle Courtyard Downtown
, partially offset by an increase of $187,000 from our eleven comparable hotel properties. These decreases were partially offset by increases in (i) energy costs of $98,000, comprised of an increase of $171,000 from our eleven comparable hotel properties, partially offset by a decrease of $73,000 resulting from the sale of the
Seattle Courtyard Downtown
and (ii) lease expense of $10,000, comprised of an increase of $13,000 from our eleven comparable hotel properties, partially offset by a decrease of $3,000 resulting from the sale of the
Seattle Courtyard Downtown
.
Management Fees
.
Base management fees
de
creased
$262,000
, or
6.9%
, to
$3.5 million
in the
2017 quarter
compared to the
2016 quarter
. The decrease is comprised of a decrease of $223,000 as a result of the sale of the
Seattle Courtyard Downtown
on July 1, 2016 and $81,000 associated with the lower hotel revenue at the
San Francisco Courtyard Downtown
due to ongoing renovations. These decreases are partially offset by an aggregate increase of $42,000 from our ten remaining hotel properties which had higher hotel revenues in the
2017 quarter
.
Property Taxes, Insurance and Other
.
Property taxes, insurance and other
in
creased
$31,000
, or
0.6%
, to
$5.1 million
in the
2017 quarter
compared to the
2016 quarter
, which is attributable to increases of $194,000 from our eleven comparable hotel properties partially offset by a decrease of $163,000 from the sale of the
Seattle Courtyard Downtown
.
Depreciation and Amortization
.
Depreciation and amortization
in
creased
$67,000
, or
0.6%
, to
$12.0 million
for the
2017 quarter
compared to the
2016 quarter
, which is due to an aggregate increase of $606,000 from our eleven comparable hotel properties partially offset by a decrease of $539,000 from the sale of the
Seattle Courtyard Downtown
.
Advisory Services Fee.
Advisory services fee
de
creased
$1.2 million
, or
58.1%
, to
$865,000
in the
2017 quarter
compared to the
2016 quarter
as a result of decreases in equity-based compensation of
$1.1 million
, reimbursable expenses of
$105,000
and base advisory fee of
$22,000
. In the
2017 quarter
, we recorded an advisory services fee of
$865,000
which included a base advisory fee of
$2.0 million
, reimbursable expenses of
$547,000
and a credit to equity-based compensation expense in the amount of
$1.7 million
associated with equity grants of our common stock and LTIP units awarded to the officers and employees of Ashford Inc. The credit to equity-based compensation expense is a result of lower fair values at March 31, 2017 as compared to December 31, 2016. In the
2016 quarter
, we incurred an advisory services fee of
$2.1 million
, which included a base advisory fee of
$2.0 million
, reimbursable expenses of
$652,000
and a credit to equity-based compensation of
$613,000
associated with equity grants of our common stock and LTIP units awarded to the officers and employees of Ashford Inc.
Transaction Costs.
In the
2017 quarter
, we recorded transaction costs of
$4.3 million
primarily related to the acquisition of Park Hyatt Beaver Creek and transfer taxes.
Corporate General and Administrative
.
Corporate general and administrative expenses
de
creased
$49,000
, or
1.2%
, to
$3.9 million
in the
2017 quarter
compared to the
2016 quarter
as a result of decreases in professional fees of $269,000, primarily related to the proxy contest and litigation in 2016 and lower public company costs of $64,000. These decreases were partially offset by higher miscellaneous expenses of $266,000 and equity-based compensation to non-employee directors of $18,000.
Equity in Earnings (Loss)
of Unconsolidated Entity
.
We recorded equity in loss of unconsolidated entity of
$2.7 million
in the
2016 quarter
related to our investment in the AQUA U.S. Fund. We did not have any equity in earnings (loss) in the
2017 quarter
as this investment was liquidated in June 2016.
Interest Income
.
Interest income
in
creased
$80,000
, or
250.0%
, to
$112,000
for the
2017 quarter
compared to the
2016 quarter
.
Other Income (Expense)
.
Other income (expense) increased
$147,000
, from expense of
$10,000
in
2016 quarter
to expense of
$157,000
in the
2017 quarter
. In
2017
, we recognized a realized loss of
$157,000
related to options on futures contracts. In
2016
, we recorded $10,000 of commissions paid upon purchasing options on futures contracts.
Interest Expense and Amortization of Loan Costs
.
Interest expense and amortization of loan costs
de
creased
$2.4 million
, or
22.9%
, to
$8.2 million
for the
2017 quarter
compared to the
2016 quarter
. The decrease is primarily driven by lower interest expense from the sale of
Seattle Courtyard Downtown
on July 1, 2016 and the refinancing of three mortgage loans, partially offset by higher amortization of loan costs from the refinance and higher average LIBOR rates. The average LIBOR rates for the
2017 quarter
and the
2016 quarter
were
0.83%
and
0.42%
, respectively.
Unrealized Gain (Loss) on Investment in Ashford Inc.
Unrealized gain (loss) on investment in Ashford Inc. changed
$4.6 million
, or
307.0%
, from an unrealized loss of
$1.5 million
to an unrealized gain of
$3.1 million
for the
2017 quarter
compared to the
2016 quarter
. The fair value is based on the closing market price of Ashford Inc. common stock at the end of the period.
Write-off of Loan Costs and Exit Fees.
Write-off of loan costs and exit fees were
$2.0 million
for the
2017 quarter
, resulting from the write-off of unamortized loan costs of $107,000 and exit fees of $1.9 million associated with the refinancing of three mortgage loans maturing April of 2017. The mortgage loans were refinanced with a $365.0 million mortgage loan due February 2019. There were no write-off of loan costs and exit fees in the
2016 quarter
.
Unrealized Gain (Loss) on Derivatives
.
Unrealized loss on derivatives of
$898,000
for the
2017 quarter
consisted of a $759,000 unrealized loss on interest rate floors, $256,000 unrealized loss on interest rate caps, partially offset by a $117,000 unrealized gain on options on futures contracts. Unrealized gain on derivatives of
$3.5 million
for the
2016 quarter
consisted of a $3.6 million unrealized gain on interest rate floors and a $20,000 unrealized gain on options on futures contracts, partially offset by an unrealized loss on interest rate caps of $47,000. The fair value of the interest rate caps and floors are primarily based on movements in the LIBOR forward curve and the passage of time. The fair value of options on futures contracts is the last reported settlement price as of the measurement date.
Income Tax (Expense) Benefit
.
Income tax (expense) benefit
in
creased
$848,000
, or
229.2%
, from income tax expense of
$370,000
in the
2016 quarter
to an income tax benefit of
$478,000
in the
2017 quarter
. This change was primarily due to a decrease in the profitability of the Company’s taxable REIT subsidiaries in the 2017 period compared to the 2016 period.
(Income) Loss from Consolidated Entities Attributable to Noncontrolling Interest
.
The noncontrolling interest partner in consolidated entities was allocated loss of
$21,000
and income of
$145,000
for the
2017 quarter
and the
2016 quarter
, respectively.
At both
March 31, 2017
and 2016, noncontrolling interest in consolidated entities represented an ownership interest of 25% in two hotel properties held by one entity.
Net (Income) Loss Attributable to Redeemable Noncontrolling Interests in Operating Partnership.
Noncontrolling interests in operating partnership were allocated net loss of
$255,000
and
$150,000
for the
2017 quarter
and the
2016 quarter
, respectively. Redeemable noncontrolling interests represented ownership interests in Ashford Prime OP of
13.12%
and 12.75% as of
March 31, 2017
and
2016
, respectively.
Seasonality
Our properties’ operations historically have been seasonal as certain properties maintain higher occupancy rates during the summer months and some during the winter months. This seasonality pattern can cause fluctuations in our quarterly lease revenue under our percentage leases. We anticipate that our cash flows from the operations of our properties and cash on hand will be sufficient to enable us to make quarterly distributions to maintain our REIT status. To the extent that cash flows from operations and cash on hand are insufficient during any quarter due to temporary or seasonal fluctuations in lease revenue, we expect to utilize borrowings to fund distributions required to maintain our REIT status. However, we cannot make any assurances that we will make distributions in the future.
Contractual Obligations and Commitments
There have been no material changes since
December 31, 2016
, outside of the ordinary course of business, to contractual obligations specified in the table of contractual obligations included in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our
2016
10-K.
Off-Balance Sheet Arrangements
In the normal course of business, we may form or invest in partnerships or joint ventures. We evaluate each partnership and joint venture to determine whether the entity is a variable interest entity (“VIE”). If the entity is determined to be a VIE we assess whether we are the primary beneficiary and need to consolidate the entity. For further discussion see note 2 to our condensed consolidated financial statements.
We have no other off-balance sheet arrangements.
Critical Accounting Policies
Our accounting policies that are critical or most important to understanding our financial condition and results of operations and that require management to make the most difficult judgments are described in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our
2016
10-K. There have been no material changes in these critical accounting policies.
Non-GAAP Financial Measures
The following non-GAAP presentations of EBITDA, Adjusted EBITDA, FFO and AFFO are made to help our investors evaluate our operating performance.
EBITDA is defined as net income (loss) attributable to the Company before interest expense and amortization of loan costs, interest income, depreciation and amortization, income taxes and redeemable noncontrolling interests in the operating partnership. We adjust EBITDA to exclude certain additional items such as amortization of favorable (unfavorable) contract assets (liabilities), transaction costs, write-off of loan costs and exit fees, legal, advisory and settlement costs and non-cash items such as other (income) expense, unrealized (gain) loss on investments, unrealized (gain) loss on derivatives, stock/unit-based compensation and the Company’s portion of unrealized (gain) loss of investment in securities investment fund. Unless otherwise indicated, EBITDA and Adjusted EBITDA exclude amounts attributable to the portion of a partnership owned by the third party. We present EBITDA and Adjusted EBITDA because we believe they reflect more accurately the ongoing performance of our hotel assets and other investments and provide more useful information to investors as they are indicators of our ability to meet our future debt payment requirements, working capital requirements and they provide an overall evaluation of our financial condition. EBITDA and Adjusted EBITDA as calculated by us may not be comparable to EBITDA and Adjusted EBITDA reported by other companies that do not define EBITDA and Adjusted EBITDA exactly as we define the terms. EBITDA and Adjusted EBITDA do not represent cash generated from operating activities determined in accordance with GAAP, and should not be considered as an alternative to operating income or net income determined in accordance with GAAP as an indicator of performance or as an alternative to cash flows from operating activities as determined by GAAP as an indicator of liquidity.
The following table reconciles net income (loss) to EBITDA and Adjusted EBITDA (in thousands) (unaudited):