The play went into motion on the same day Ashford's CFO and treasurer David Kimichik appeared at Deutsche Bank's 2008 Hospitality & Gaming Conference in Boston. Ashford's leaders are betting RevPAR will follow its historical path--mimicking short-term interest rates by rising or falling five months after the turn.
The Dallas-based Ashford bought a Libor cap and sold a Libor floor. According to this morning's press release, the REIT's team says every 25-point basis point drop equates to a $4.5-million annual net savings of interest payments. The swap is based on notional amount, which is the nominal or face amount used to calculate payments for a specific financial instrument. By definition, the swapped amount doesn't change hands so financial circles refer to it as notional.
Ashford's swap replaces $1.8 billion of debt with a 5.84% weighted average interest rate with a floater based on Libor plus 264 basis points. Yesterday's Libor rate was 2.86%. To execute the swap, Ashford sold a five-year Libor-floor notional amount of $1.8 billion at 1.25% interest and bought a Libor cap notional amount of $1 billion with a weighted average interest of 3.75% for the first three years of the five-year term.
Ashford now has about 87% of its $2.7 billion of debt at floating rates, with a weighted average of Libor plus 241 basis points. The REIT says 78% of the debt is capped at an average weighted Libor of 4.3%. The average maturity is 6.3 years, including extensions. The REIT will continue to carry $340 million of fixed-rate debt at an average interest rate of 5.84% and average maturity of 7.2 years.
Kimichik's presentation mirrored Ashford's last earnings call, but he gave no hint that the swap was in motion. Ashford's total net debt to gross assets is 61%--this year's goal is to get it below 60%, which is in keeping with its past practice.
As the country moves closer toward recession, Ashford has implemented several strategies and has more on standby that it believes will soften the blow and protects its dividend. Cap-ex and cost-cutting measures are part of the plan, but the most significant move is to jump full force into the mezzanine lending business. "We are a recycler of capital and not just a property aggregator," Kimichik told the Deutsche Bank panel of analysts.
In this morning's press release, Ashford president and CEO Monty J. Bennett says the team has watched RevPAR decline since the earnings call. "It is hard to know whether this short trend will continue," he says. "As a precaution, we wanted to hedge our asset cash flows by swapping our debt to floating-rate."
Bennett adds that the team's analysis of the last two recessions shows a "strong correlation" between the changes in RevPAR and Libor. If RevPAR continues downward, the swap will add "a measure of protection to our cash flow and dividend," he says. "Simply put, we feel this is an effective way to match the sensitivity of our assets' cash flow to our liabilities' interest expense."
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