Ashford Hospitality Trust Inc (AHT) 2005 Q1 法說會逐字稿

Good day and welcome to the Ashford Hospitality Trust conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Tripp Sullivan. Please go ahead, sir.

Good morning and welcome to this Ashford Hospitality Trust conference call to review the Company's results for the first quarter of 2005.

On the call this morning will be Monty Bennet, President and Chief Executive Officer, Doug Kessler, Chief Operating Officer and Head of Acquisitions, and David Kimichik, Chief Financial Officer and Head of Asset Management. The results, as well as notice of the accessibility of this conference call on a listen-only basis over the Internet were released yesterday evening in a press release that's been covered by the financial media.

As we start, let me express that certain statements and assumptions in this conference call contain or are based upon forward-looking information that are being made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. When we use the words will likely result, may, anticipate, estimate, should, expect, believe, intend or similar expressions, we intend to identify forward-looking statements. Such statements are subject to numerous assumptions and uncertainties, many of which are outside of Ashford's control. These forward-looking statements are subject to known and unknown risks, which could cause actual results to differ materially from those anticipated, including without limitation general volatility of the capital markets and the market price of our common stock, changes in our business or investment strategy, availability, terms and deployment of capital, availability of qualified personnel, changes in our industry and the market in which we operate, interest rates or the general economy, and the degree and nature of our competition. These and other risk factors are more fully discussed in the section entitled "Risk Factors" in Ashford's registration statement on Form S-3 at from time to time in Ashford's other filings with the Securities and Exchange Commission. The Forward-looking statements included in this conference call are only made as of the date of this call. Investors should not place undue reliance on these forward-looking statements. We are not obligated to publicly update or revise any forward-looking statements, whether as a result of new information, future events or circumstances, changes in expectations or otherwise.

I will now turn the call over to Monty Bennet. Please go ahead, sir.

Good morning!

Ashford Hospitality Trust is a self advised Real Estate Investment Trust focused exclusively on the hospitality industry across all levels of the capital structure, including first mortgages, mezzanine loans, direct hotel investments and sale leaseback transactions. Ashford purposefully seeks and has achieved diversification by geography, service segment, brands, manager and capital structure position. Ashford's key financial statistics, FFO, CAD and AFFO, all continue to increase.

For the first quarter, Ashford's cash available for distribution reached $0.17 per share, a 55% improvement -- (technical difficulty) -- this estimate of $0.11 per share. As a private company, Ashford's management team capitalized on industry swings with well-respected private investors such as Fisher Brothers, The Gordon Getty Trust, George Soros, and Goldman Sachs Whitehall fund. We went public in August of 2003 to reap capital because of what we believed would be another strong upsurge in the fundamentals of the industry. We are proud to have many of these respected investors participating in this public platform.

The certain industry fundamentals has (sic) been even stronger than what we had hoped for. According to Smith Travel Research, through February of this year on a trailing 12-month basis, industrywide demand is up 4.5% while net new supply is up only 0.8%. This favorable imbalance, coupled with average daily rate growth of 4.3%, has yielded an industrywide revenue per available room growth rate of a staggering 8.1%, one of the highest increases on record.

With the high degree of operating leverage inherent in the industry, profits are expected to soon surpass the record level set in 2000. Interestingly, despite the tremendous upsurge in RevPAR and profitability, industrywide occupancy is still below the 1991 recession levels, indicating a good level of growth before it moderates. PKF, one of the industry's most respected consulting practices, predicts RevPAR growth continuing to be 8% throughout this year.

RevPAR for our hotels not under renovation was up 12.5% for the quarter, and hotel-level operating profit for hotels not under renovation increased by 280 basis points on a Pro Forma basis for the quarter. While this is strong growth, we still do not believe our properties have fully reflected the positive benefit from the completed renovations and changes in management.

We have closed a total of $890 million of investments to date with another 465 million under contract. Having just completed a $250 million portfolio of full-service assets one quarter and announcing 465 million of select service and extended-stay assets in the next, I couldn't imagine another REIT today being able to demonstrate that kind of diversification and commitment to an investment strategy. Further, we have already sold three of the eight noncore assets in the $250 million portfolio and we continue to be opportunistic in shedding non-strategic assets.

We declared a common stock dividend of $0.16 in the first quarter based upon our closing price last night of $10.25. This equates to a 6.2% annualized yield. We've increased the dividend each quarter since the first quarter of 2003. Our original and continued expectation for 2005 is that we would like to raise our dividend to as much as $0.18 per share by the end of the year.

I will now turn the call over to our Chief Financial Officer, David Kimichik.

Good morning.

For the first quarter, we reported FFO of $4.584 million, or $0.11 per share, and EBITDA of $10.5 million. Included in these results is a non-recurring expense of $2.257 million, or $0.05 per share, for a debt defeasance charge associated with the noncore or for-sale assets acquired on March 16 as part of the $250 million purchase. This charge occurred upon the pay-off of the securitized debt to facilitate the sale of these assets. Adding this one-time chargeback for FFO produces a first-quarter adjusted FFO of $0.16 per share.

As of March 31, the Company had total assets of $879 million, including $66 million of cash. This is up from total assets of $596 million at the end of the fourth quarter, 2004. This increase in assets is the result of the $250 million portfolio acquisition, the Santa Fe Hilton acquisition, and the origination of the mezzanine loans on the Viceroy Hotel in Santa Monica.

At the end of the quarter, we owned 55 direct hotel investments. Of these assets, eight are held-for-sale and classified as discontinued operations. Three of the eight assets have already been sold. Three additional assets are under contract to be sold before the end of June and the remaining two assets are under contract to be sold prior to the end of the year, following the expiration of a lockout on prepayment on the related debt. All eight assets will be sold at prices above the Company's internal Pro Forma projections. However, the Company will record the acquisition of these assets at the ultimate sales price and therefore will not report any gain or loss on sales.

As of March 31, we had $427 million of mortgage debt, leaving net debt to total enterprise value at 44% at the end of the quarter. Our blended annual interest cost is approximately 5.62%. Fixed-rate debt accounts for 58% of our total mortgage debt. 105 million of our 180 million of floating debt contains an interest rate cap and 29 million of our floating debt is naturally hedged by virtue of being secured by a portion of our floating rate mezzanine loan portfolio. We're pleased to report that 90% of our current debt is either fixed, capped or hedged.

On April 27, we announced the agreement for the $465 million acquisition of 30 hotels from CNL. In connection with this transaction, we also announced the commitment for ten-year fixed-rate financing from Merrill Lynch at an interest rate of 5.32%. The Company has the capacity to fully fund this transaction via the agreements in place with Security Capital and Merrill Lynch, together with current capacity on our credit facility and cash on hand. Following the CNL transaction, the Company will have $807 million in mortgage debt on our balance sheet. At that time, 76% of our debt will be fixed-rate. Our blended interest costs will be 5.47%.

Following the CNL transaction, we will own 77 core hotels, containing 12,679 rooms, and we will have management agreements with seven different companies. We currently own a position in nine mezzanine and first-mortgage loans, with total principal outstanding of $90 million, with an average yield of close to 13%.

For the quarter, we have excellent operating results from our 47 core hotels. Pro Forma RevPAR for the core portfolio was up 8.9% during the first quarter, as compared to the first quarter '04, and for hotels not under renovation, which is all but 12 hotels, the RevPAR was up 12.5%. The increase was attributable to increases in both occupancy and average rate.

Pro Forma hotel operating profit for the entire portfolio was up approximately $2.6 million for the quarter, or 16% when compared to the first quarter '04. This was the result of both increases in revenue as well as enhanced flow-through, as our operating putting margin increased by 171 basis points. For hotels not under renovation, margins increased 280 basis points.

Finally, for the quarter, we reported CAD of $6.938 million or $0.17 per share, and we announced we paid a dividend of $0.16 per share.

I'd now like to turn it over to Douglas Kessler to discuss our ongoing investment plans.

Thank you, David, and good morning.

Our investment base has accelerated, resulting in our highest level of activity since going public. We are clearly capitalizing on attractive investment opportunities, whether widely marketed or privately negotiated, given our management team's extensive industry and lending relationships. While this growth is sizable, we believe that the impressive yields on our recent investments are the more meaningful statistics. We're definitely getting our fair share of attractive, accretive deals in today's market. We do so by creatively and proactively pursuing deals that meet our investment objectives.

The CNL transaction is a good example, where we were able to secure a portfolio that offers attractive returns with measurable upside by aggressively structuring a bid together with locking in low-cost, long-term fixed-rate debt. Once the CNL transaction closes, we will become one of the larger hotel REITs and among the most active in capitalizing on current market opportunities. We continue to source investments on both debt and equity deals and have an active pipeline.

Our investment activity during the quarter was dominated by the $250 million FGS portfolio of 21 hotels that we closed in March. In addition, we also completed the sale of the office building located adjacent to the Sheraton Bucks County for nearly $3 million, originated an $8 million loan on the Viceroy Santa Monica, and acquired the Hilton Santa Fe for $18.2 million. Subsequent to the end of the quarter, we originated an $8 million loan on the Hyatt Regency Philadelphia at Penn's Landing, completed the sale of three noncore hotels that David Kimichik described earlier, and announced the agreement to acquire 30 select service and extended stay hotels with from CNL for $465 million in cash.

The CNL portfolio is our largest transaction since our IPO and perhaps our most strategic. Not only does it enhance our existing portfolio with significant diversification by segment and geography, but it also demonstrates our ability to obtain low-cost financing to generate very high returns on invested capital for our shareholders. Without our financial flexibility and commitment to a diversified investment platform, this acquisition would not have been possible.

Our portfolio composition and returns will improve as a result of the CNL deal. 76% of the hotels are Marriott, Hilton, Starwood and Hyatt-branded. With the addition of these assets to the Company, 50% of the portfolio will be full-service and 50% will be select service and extended stay. 31% will be upper upscale, 54% upscale, and 15% mid scale. Our direct hotels are diversified by geography, market location and demand generators.

With an even greater concentration this quarter of our investments in direct hotels, debt investments will look comparatively smaller on a percentage basis than we had originally envisioned for our portfolio. That is not to say that we are focusing less on this segment of the capital structure than we were before. Far from it; our pipeline of loan originations continues to be the active and very attractive. The two mezz loans we originated this year clearly demonstrate our ability to source well-underwritten assets with strong sponsorship. Debt investments will remain a strategic component of our investment platform. We believe offering this capability to potential borrowers complements our direct investments and will remain a competitive advantage for us.

To date, we've originated or purchased a total of $114 million in loans. As we mentioned earlier, the loan portfolio currently stands at $90 million with an average yield of close to 13%. The primary difference between our originated and current principal balance is related to the sale of the Hotel Teatro first mortgage and paydowns from sale of certain Wyndham assets that secured a $25 million mezz loan we purchased in the first quarter of 2004.

We continue to seek loan opportunities to replenish and exceed our prior levels. Our pricing remains competitive with the market and attractive to our shareholders. We were able to originate a loan recently with fixed interest rate steps starting at 14% and rising to 18% over time.

Year-to-date, we've completed two follow-on offerings. The first raised $94.3 million in net proceeds with the sale of 10.350 million shares and the second raised 51.4 million in net proceeds with the sale of 5.1821 million shares. Our debt and equity arrangements enable Ashford to access capital and match fund concurrently with new investments.

I will now turn the call back to Monty for some closing concluding remarks on funding our investment pace in 2005.

Thank you, Doug.

To date, we've readily accessed the capital markets in combination with the debt markets to fund our growth. After the closing of the CNL transaction in June, according to SEC requirements, we will have to conduct lengthy 305 audits on all 30 CNL assets. Until these audits are complete, we cannot access our shelf registration.

Post-CNL, we have approximately $150 million in dry powder assuming we do not sell any assets other than the eight noncore assets previously identified. We are currently (indiscernible) through the CNL portfolio, developing strategic plans and options for each asset.

We continue to have properties that move in and out of major renovations. During the first quarter of this year, we had approximately 50% more rooms under renovation than the fourth quarter of last year. Those hotels under renovation included the Sheraton Bucks County, eight select service hotels acquired from Dunn Hospitality last year, one of the select service hotels acquired from Sivica Hospitality last year, and two of the core hotels in the FGS portfolio. All of these assets should remain under renovation in the second quarter as well. Of the 13 core hotels in the FGS portfolio, we are currently ascertaining the timing of their renovations involved. We expect to invest a total of 30 million in these 13 hotels between now and the second quarter of 2006, with an additional 16 million in 2006.

Consistent with our previous discussions on this topic, the number of renovations underway and planned continues to create a bit of noise in our results, but I believe that we've demonstrated the value of this approach, even if it makes quarter-by-quarter forecasts somewhat difficult. Accordingly, we continue to shy away from earnings guidance.

We still expect 2005 to be a year of ramping up FFO growth. The second and third quarters will show year-over-year improvement as our results reflect the addition of new acquisitions completed in the second half of 2004 and the $700 million-plus of investments completed or announced thus far this year, as well as the expected positive impact from completed renovations. We have already seen, this quarter, what kind of improvement we can expect to see from assets that have been renovated and are enjoying the benefits of several quarters of improved sales, marketing and expense controls. As we complete the 12 renovations currently underway and a number of others contemplated for the balance of the year, we would again expect to see another layer of growth added to our results.

That covers our prepared remarks. We will now answer any questions that you may have.

Thank you. The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). Will Marks at JMP Securities.

I was wondering if you comment on the EBITDA for that P&L portfolio. I know, in the past acquisition, you guys had typically (inaudible).

You're asking about the EBITDA on the CNL portfolio?

Yes.

We've not released the EBITDA on that CNL portfolio because they have not released it yet. But the net operating income is something that we released, which is trailing at 8.4% through March of the $465 million purchase price.

Great. Thank you.

(OPERATOR INSTRUCTIONS). Jeff Randall with A.G. Edwards.

Monty, you talked about the audits that -- the requisite SEC audits for the CNL assets. What kind of costs are we talking about? Is that included in the "closing costs" that you all have spoken about regarding the acquisition, or is that over and above that?

No, that's going to be rolled into our closing costs for the acquisition.

Okay. Any idea on the magnitude of that?

About a couple of hundred thousand is what Kimo (ph) is telling me here.

So pretty immaterial?

Yes -- relative to the size, certainly.

Okay. I mean, with the flow-through and the ADR component on the RevPAR gain, you know, I guess I would -- I thought maybe you'd see a little more upside on the EBITDA margin or in the gross profit margin. I wondered if you could comment on that.

You mean in this past quarter?

Yes.

I think you had said what was the percentage of the 8.9 RevPAR gain was how much in rate?

Let's see. Of the 8.9%, we looked at a lot at stats. Let us pull it up to make sure we give you the right number here. But as far as the flow-throughs go, you know, what we are going through is that, even though some of these properties are no longer in renovation, we find that, internally, we still have some expenses that kind of linger on, and those expenses affect our margins for a quarter or two. So, that's probably my best offer for why the EBITDA margin isn't bigger than 280 basis points on those assets that are not in renovation.

Of the 8.9% growth for the whole portfolio in RevPAR, 6.7% was attributable to ADR.

Okay, right.

The flow-through on the assets on a year-on-year basis was about a 50% flow-through, so the increased dollars gave us a 50% flow-through. That was on the entire portfolio. Typically, if it is all-rate, we would think that we would get a little better flow-through on that, but again, we've got a lot of noise and a lot of things going on because of renovations recently finished and renovations currently underway.

Okay. Are there any brand initiative costs that have been underway that you all expect to sort of lap in the coming year and what the timing of that would be? Is it more of a first-half '05 phenomenon or back half of the year?

The brand initiatives, as you know, are ongoing and never-ending, or so it seems. So you know, we just incorporate those initiatives into our capital plans and then we roll them out. We do it by an asset-by-asset and brand-by-brand basis. Sometimes, we will want to get ahead of the required timing. (indiscernible) is a big issue for most of the brands now. Sometimes they will have a deadline of '06 but we will decide to go ahead and do the whole hotel in '05. It really depends upon things going on in the marketplace, the availability of the rooms, the timing and the availability of the product. So it's more of a specific type of item that we address rather than across the board, but it's ongoing. Those brand-specific initiatives don't affect our operating performance so much. It's mainly these major renovations that we go through.

So on balance, it's kind of hard to comment on whether or not you're going to be lapping some of that midyear versus later in the year?

What do you mean? As far as when it's going to be put in place?

Right. Some of the costs, whether it's, you know, the free breakfast or what have you, I mean, those costs, they sort of anniversary. I would expect them to -- you're not going to continue to see year-over-year increases -- or year-over-year decreases in margins as a result of that or pressure on margins. I was wondering when that -- when you might see some let-up from those kind of costs that have been -- that have come in over the last year.

We don't see a lot of those pressures coming in on the operating expense side. I mean, there's some and there always are some, but those aren't overly significant. We find most of those costs coming in on the capital side, so I don't see those affecting our numbers a lot in the past or the future. It certainly does on the margin but not significantly so.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS). Sean Smith at Stifel, Nicolaus.

Regarding the 30-property portfolio, as it stands now, do you anticipate keeping all of those hotels or do you think you will be selling some of them off, as you did with the other large portfolio this year?

We may be selling some off. We are evaluating all of our options. We are going through each asset and trying to understand what we would like to do with each one, whether we want to hold it for sure, sell it for sure, or kick the can down the road and re-evaluate it in a year or 2. The affects how we put the financing that we've announced on these assets, so it's certainly a possibility.

Okay, because my real question is, I noticed on the commitment letter with Merrill Lynch Mortgage, that it looked like about half of them were listed as held-for-sales properties, so I was just trying to understand what that was.

That really has more to do with how we are putting the financing on the assets. That's how it was described to Merrill Lynch. The financing on those assets are pools such that we have more flexibility on those assets than the others. It's half the assets but it's about a third of the value of the portfolio. If we were to sell assets, those would be the assets that would be more likely to sell.

Okay. If you did sell them, would you use the proceeds to just pay down the debt or is it transferable?

We would probably -- depending upon the buyer, but we would probably, at this point, just let the buyer assume that. The financing that we are able to procure -- Doug Kessler here and David Brooks and David Kimichik -- is very, very attractive and we think that adds value to any prospective buyer, so we would transfer those mortgages. You know, these are all done in little pools of three and four, five assets each. So we would try to transfer those mortgages at wholesale to the buyer and receive that value from them.

Okay, that makes sense. Finally, do you have any preliminary RevPAR numbers for April?

We are not releasing those at this time.

Adam Kranz (ph) at Charlotte (ph) Capital.

Good morning, guys. If you could, Monty, help me. I seem to get myself confused on your financing sources. In the simplest form here, we need 95 million to cover the rest of the CNL acquisition. Is this -- tell me where that's coming from in terms of -- I thought we had a pool of preferred stock and a pool of common equity. What are we using and what capacity is left over? I don't know if that's a good way of phrasing it, but could you straighten me out here?

Sure. Let me see if I can walk you through it, then Kimo (ph), correct me here if I don't get it quite right. We need about another $90 million, as you said, in order to close the transaction. The sourcing of that comes from a few areas. We do have some cash; we've got ability to draw down on our credit facility and thereby encumber or increase the leverage on some of the other assets that we've got. We've got this facility with Security Capital, which is a convertible preferred instrument, the $75 million facility on which we've only draw down $10 million. So, there's $65 million of that that we can draw down upon. Back when we did our equity raise in January, Security Capital elected an option to participate in that, and we haven't drawn those dollars down either; that's about $20 million. So, when you look at the $20 million of common from Security Capital, the $65 million from Security Capital from the convertible preferred standpoint, the additional leverage capability we have in our credit line and cash, those will be the sources to fund that $90 million.

I got you. Super. Thank you very much.

Mr. Bennet, there are no further questions at this time. I will turn the conference back over to you.

Okay. Well, I appreciate your questions today and your participation and interest in Ashford Hospitality Trust. We look forward to speaking with you guys again on our second-quarter conference call. Thank you.

That does conclude today's conference. Again, thank you for your participation.