Q1 earnings suddenly plunged 32% to 0.28 ex items, the worst quarterly FFO earnings since 2007. To add insult to injury the company provided no explanation other than to say that a huge one time benefit to earnings ended in 2011 and would be without this benefit from now on - meaning significantly lower FFO earnings going foreward. Also after buying back a ton of shares for years, shares are now soaring massively diluting the existing stock. To make matters worse the CEO totally ignored the horrible bottom line (worst FFO since 2007)and and talked about how great the quarter was and how optimistic he is even though earnings collapsed. Yes the stock is still very cheap but the fundamentals now look much worse. When the economy was horrible, AHT has soaring earnings and bought back 50% of their shares. Now the economy is better and their earnings are falling off a cliff and they are massively diluting their shares. Makes no sense, something is seriously wrong. I sold at the open this morning.
As many stocks hit a 4 year high, the health of AHT can be measured best by the falling stock prices. Monty and his team placed all their cards on litigation and trying to come out of this recession as financial wizards. They lost track of shareholders best interests which was to own quality and profitable hotels. They confused their role as hotel owners and tried to be financial wizards by cooking the books to always make the hotels look good to impress investors at all cost. Not once has any of the AHT hotels won their market in RevPar Index.
The bigger challenge for AHT is not Monty’s dream to be a financial player; but, the extremely serious challenges facing their hotels that are in dire need of renovations. Their radical political and religious views have also impacted what should have been a rebound for the company. Instead, they have caused more litigation, boycotts, massive guests flight from AHT hotels by meeting planners and niche markets.
All you have to do is look at last week’s STAR report in San Antonio and how badly their hotel did during what should have been an extremely profitable week for all downtown hotels.
i took a closer look at the income statement. op inc in Q111 was 18, grew to 22 by Q112. add depr/amort of 35 to each and you get EBITDA of 53 and 57. so EBITDA growth of just under 10%. the 57 in cash flow was sufficient to pay interest (35) and dividends (7 on common and 7 on preferred, although i wasn't positive on the amount of the preferred div payment).
i added up EBITDA for Q1 to Q3 of 2011 and divided by three. came up with 59. so seems like cash flow is doing okay. not great but not bad. i couldn't get the 10k, where is that ?
there are alot of non cash charges on the income statement below operating income. there were a couple of cash events but those were positive (they provided cash to the company). gain/(loss) on the jv is a non cash deal. i think the interest rate derivative charges eventually offset each other.
but i am wondering why the company added 14 in EBITDA from the highlands deal to come up with the 70 in their press release. i need to read some more on highlands. maybe it is just a way for the lenders to value to total assets of the two entities, they'll apply a cap rate to the EBITDA of the combined entities.
i'm not expecting these folks to be hitting any home runs just yet. but this qtr doesn't seem all that bad. i did notice EBITDA for Q211 was 71 and that doesn't include any EBITDA from highlands. so they have some work to do if they want to get the 57 from Q1 to 71 by end of Q2. might make for interesting earnings next qtr.
I'm long AHT and thought earnings were disappointing but likely discounted in the stock price. Yes, they missed by 0.05 but even then the stock is cheaper on a Price/FFO or EV/EBITDA than virtually any other REIT. Even if you assume they miss the analyst target for 2012 and 2013 earnings by 10%, are there any other comparable REITS that are cheaper? Seriously...I'd be interested to know so I can take a look at them.
When I run the numbers, what stands out is that cap ex on the legacy hotels increased 10M or 0.12/share which was a deduction in the FFO.
And that's my problem with relying on FFO. Best management practice is to do what AHT is doing, using capex to improve the asset base, not just maintain it. But FFO reward management which skimps on capex, inflating current FFO (and bonus based thereon).
Therefore I can understand why AHT's management prefers to use EBITDA and I will go with them on this one. That is management is judged on hotels operating performance and excluding diddling with the capex budget for window dressing.
Adding on dips.
i'm not an expert on hotel reits, specifically the FFO versus EBITDA debate (i think deducting cap ex from EBITDA gives you FFO but that is only a guess). but here is how i see it.
if EBITDA for Q1 was 70. annualize that to get 280. apply a cap rate of 8% to get a portfolio value of 3600 (which is what they claim the value is). they have debt of 2400 against it. so leverage is roughly 70%.
then they have the unconsolidated entity (highlands). which they claim has a value of 1000 and debt of 700. so again, 70%. i didn't see anything to help support their claim of 1000 value in the earnings release. so can't be sure.
they certainly don't seem overly leveraged if you believe the 3600 asset value.
if you consider enterprise value (market cap plus total debt) you get 600 (market cap) plus 2500 (total debt) or 3100 total value. i think that means the stock (market cap) could increase by 500 such that the enterprise value is equal to the total asset value. not sure these will ever be exactly equal but it seems to imply there is upside to the stock rather than downside.
i hold AHT shares now and am planning on buying more. i like the prospects here.
FFO is is not meaningful. Hotel REITs are valued EV/EBITDA. So the decline in FFO is not the problem. The problem with earnings was weak RevPar growth, and somewhat weak increase in EBITDA given the RevPar growth. The FFO decrease was not a big deal. At least if you are going to diss the stock, do it for the right reason.
I own many REIT's and FFO is the main way to evaluate the stock. Their earnings are reduced from the depreciation on the properties which is a non cash expense. Thus, FFO is their real earnings.
People own REIT's for the dividend which is directly related to the stock's FFO.
Yes the earnings were not good but if you really followed this stock you would know that they hedged to protect themselves from a down economy and that it ran out at the end of 2011 and it would have a negative impact on earnings. They did explain this in the conference call.
That being said, I was disappointed in the earnings and the tone of the conference call.
I believe the dividend is safe and the strategy is to hold on to the shares, suck up your 5% dividend and hope that the economy continues to improve.
I was surprised by the results too. I'm still long and intend to keep my position, but my exuberance for the stock is toned down a notch now.
All the same, Q1 is always a slow quarter in the hotel industry and without the help of the hedge they still had AFFO of 28 cents. They are paying an 11 cent dividend. That’s a 2.5x coverage ratio during what I'm almost positive will be the worst quarter of the year.
I still think there is a ton of upside - I suppose it's just a year further out than I thought....