Ashford Hospitality Trust Inc (AHT) 2006 Q1 法說會逐字稿

Good day, everyone, and welcome to the Ashford Hospitality Trust conference call. Just, as a reminder, today's call is being recorded. At this time for opening remarks, 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 2006. On the call today will be Monty Bennett, 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 in a listen-only basis over the Internet were released yesterday evening in the press release that has 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 and 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 Ashford's control. These forward-looking statements are subject to known and unknown risks and uncertainties 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 of the general (inaudible) economy, and the degree in nature of our competition.

These and other risk factors are more fully discussed in a section entitled "Risk Factors" in Ashford's registration statement on Form S-3 and 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.

In addition, certain terms used in this call such as adjusted funds from operations or AFFO; funds from operations or FFO; earnings before interest, taxes, depreciation and amortization or EBITDA; hotel EBITDA or hotel operating profit, and cash available for distribution or CAD are non-GAAP financial measures within the meaning of the Securities and Exchange Commission rules. Reconciliation of such non-GAAP financial measures to GAAP measures is provided in the Company's earnings release and the Company tables or schedules, which has been filed on Form 8-K with the SEC on May 3, 2006 and may also be accessed through the Company's website at www.ahtreit.com.

Each listener is encouraged to review those reconciliations provided in the earnings release, together with all other information provided in the release. The Company's management believes that AFFO, FFO, EBITDA, hotel EBITDA or hotel operating profit and CAD are meaningful measures of a REIT's performance and should be considered along with but not as an alternative to net income and cash flow as a measure of the Company's operating performance.

Lastly, as the Company has indicated in its earnings release, the Company's management believes reporting its operating metrics for continuing operations on a pro forma consolidated and pro forma not under renovation basis are measures that reflect a meaningful and more focused comparison of operating improvement in the Company's direct hotel portfolio.

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

Good morning and welcome. We are pleased to report on Ashford's accomplishments during the first quarter of 2006. There are four key points that I would like to highlight.

First, we made headway with our overall stock performance, delivering a 20% total return for the quarter. The success of our market and capital rates in January raised the awareness of our Company strategy and growth potential among institutional investors. We're committed to spend more time on the road over the next few months, meeting with our existing and potential new investors, as well as both institutional and retail salesforces. We believe that there is a valuation disconnect in the market relative to our peers.

We have a superior portfolio of hotel assets that continues to show performance upside, which is enhanced by a very favorable low-cost long-term debt structure. Since the capital structure is a very relevant component of the Company's value, we believe FFO performance in multiples are relatively more important to equity investors than EBITDA performance and EBITDA multiples.

Second, we have made a strong start to the year with our ongoing internal growth strategies, and we see more growth ahead. For the fifth consecutive quarter, we have reported double-digit RevPAR growth for hotels not under renovation. For those hotels not under renovation during the quarter, we reported a pro forma RevPAR increase of 12.0% on a 7.1% increase in ADR and a 327 basis point gain in occupancy. Pro forma RevPAR for all hotels and continuing operations gained 11.0%. Our RevPAR yield index for the quarter increased from 113.3% to 116.2% for all hotels and continuing operations and from 115.5% to 120.8% for those hotels not under renovation.

This performance is the result of our value-added capital expenditures combined without disciplined investment strategy to focus on strong branded predominately upscale to luxury hotels in growth markets. Our topline growth continues to be strong, and where we expect to see even more improvement over the next few quarters is in our hotel operating profit.

Hotel operating profit for those hotels not under renovation increased 8.0% for the quarter. Including the 12 hotels under renovation, hotel operating profit was up 2.6% in the quarter. Hotel operating profit margin or hotel level EBITDA margin dropped slightly for those hotels and continuing operations that are not under renovation by 80 basis points for the first quarter year-over-year. Some of this margin decline is part of a long-term strategy. Part of the decline is due to difficult to control cost pressures such as energy, and part of the decline is due to engrained unfavorable comparisons to last year due to changes in management, pay structures and the like. We anticipate all of these areas to moderate and improve in the second half of the year.

The lack of margin improvement, which I indicated is part of a longer-term strategy, has to do with a handful of properties that during and after the renovations we have asked the manager to increase service levels to match the new product. This service level increase has a short-term effect on margins, especially in year-over-year comparisons but helped fuel topline growth. In our earnings release, we have provided more detailed margin information.

One such example of the success of our rebranding and capital expenditure program is the conversion of the Radisson Plaza Hotel Fort Worth to a Hilton Fort Worth, which was completed last month. We invested 10.5 million in this conversion, and already we're seeing significant results. Since the conversion, the hotel has been generating RevPAR increases of 82.1%, a dramatic difference that reflects the benefit of repositioning this hotel in a higher rated transient and corporate house.

We're also creating value by putting the 223 room East Tower up for sale as an office building conversion, thereby reducing market supply inventory while creating potential additional demand generators and creating a more efficient hotel with fewer rooms in a single tower. We have even more opportunities like this embedded in our portfolio where you should expect to see us create additional value. Capital expenditure plans currently in place provide for $50 million in improvements to our properties during the next 12 months.

Third, you should expect us to remain very disciplined and selective on how we invest your capital. We are very pleased with what we have acquired in terms of brand, location and upside potential. Through the period year-to-date, we have completed two acquisitions totaling $123 million, which we will discuss later in the call. Our acquisition pipeline remains strong with approximately $250 million of direct hotel and investment opportunities.

The final point is that we continue to effectively manage our capital structure. We recycled capital via sales and financings to enhance our balance sheet and portfolio composition. As of March 31, 97% of our debt is fixed compared to 87% at year-end with a weighted average interest rate of 5.6% and a weighted average maturity of 9.2 years. Our debt to enterprise value was 39%. Clearly This positions us with one of the best overall capital structure among our peers and with the ability to pursue accretive transactions. These accomplishments during the past year-end quarter enable us to maintain one of the highest dividends among our peers while still improving upon the stability of the dividends.

For the first quarter, we declared a dividend of $0.20 per share and reported CAD of $0.24 per share for a payout ratio of 83%.

Our outlook for the balance of the year and into 2007 is bullish. Supply continues to be constrained due to higher construction costs. Most indications of new supply are more related to early planning projects that we believe will not come to fruition. Demand remains strong in our markets, and ADR increases will continue to dominate RevPAR growth for those properties at least 18 months past their renovations. Even with the compression in cap rates, assets are still trading below replacement costs with a potential upside given the market fundamentals.

Torto Wheaton Research issued a recent report predicting that the hotel sector will offer investors the greatest returns in 2006. They predict unleveraged average annual returns to be 12.1% over the next 10 years in our sector. Based on the RevPAR results we have been experiencing in the last five quarters and the ambitious renovation plan under way throughout our portfolio, we expect to continue to show strong growth in that portfolio.

To speak in greater detail about our results, I would now like to turn the call over to David Kimichik to take you through the numbers.

Good morning. For the first quarter, we reported net income of $4,743,000, EBITDA of $31,587,000 and AFFO of $19,230,000 or $0.27 per diluted share. As of March 31, the Company had total assets of 1.4 billion, including 98 million of cash. As of March 31, we had 720 million of mortgage debt, leaving net debt to total enterprise value at 39% at the end of the quarter. Our blended annual interest cost was approximately 5.56%.

At that time, our fixed rate debt accounted for 97% of our total mortgage debt. The cash combined with our low debt balance and 15 hotels unencumbered by debt provide us with sufficient growth capital for accretive investments. At the end of the quarter, we owned 71 direct hotel investments. Of these assets, seven were held for sale and classified as discontinued operations. These seven hotels plus the Fort Worth East Tower are recorded as assets held for sale in the amount of $42 million on our balance sheet.

Throughout the year, we regularly monitor short, medium and long-term hold positions on our assets as we see changes in performance or market fundamentals. In concert with this and due to the strong current yield, we have made the decision to keep our TownePlace Suites portfolio. Accordingly, we will reclass these assets out of discontinued operations after March 31.

At quarter-end we had 57 million common shares outstanding, 2.3 million Series A perpetual preferred shares outstanding. 7.5 million Series B convertible preferred shares outstanding and 11 million OP units issued. Currently we own 72 core hotels containing 12,266 rooms. We have agreements for management with seven different companies. The most significant managers are Remington Hospitality and Lodging, which manages 29 of our properties, and Marriott International, which manages 23 of our hotels. Subsequent to the quarter-end, we closed on the $95 million acquisition of the 338-room Pan Pacific Hotel in San Francisco that we immediately rebranded as a JW Marriott.

As of March 31, we owned a position in 12 mezzanine and first mortgage loans with total principal outstanding of $108 million with an average annual unleveraged yield of 14.6%. For the quarter pro forma RevPAR for the core portfolio of 64 hotels was up 11% as compared to the first quarter '05, and for hotels not under renovation, which is all but 12 hotels, RevPAR was up 12%. Pro forma hotel operating profit for the entire portfolio, which includes the 12 hotels under renovation, was up by $758,000 for the quarter, but was up 1.9 million in the quarter for the 52 hotels not under renovation.

Finally, for the quarter we reported CAD of $17,291,000 or $0.24 per diluted share and announced and paid a dividend of $0.20 per share. For the quarter our dividend payout ratio was 83%.

I would now like to turn the call over to Douglas Kessler to discuss our investment and financing activities.

Good morning. This is an active period for hotel investment and lending. We have considered many transactions and have been very selective in what we pursued based upon price, brand, asset quality or growth opportunities. While pricing for all real estate is aggressive today, we have a longer-term focus on cyclical pricing. Our goal remains to acquire assets at good initial yields or the potential for outsized growth in top markets with strong brands. We have done just that with this year's acquisitions. Even with our disciplined approach, we continue to source market and off-market transactions.

In late February we acquired the Marriott at Research Triangle Park for $28 million in cash. We intend to invest another $5.7 million in renovating the asset later this year. This hotel is in a solid market near one of the premier research parks in the country, a clear demand generator.

In mid-April we completed the acquisition of the $95 million Pan Pacific Hotel, a AAA four-diamond hotel located in San Francisco. The forward 12 month projection is for an EBITDA yield of 8.2% and an NOI caprate of 6.5%, an improvement of nearly 300 basis points on each metric in the first year alone.

The improvement will come from three areas. First, we announced the rebranding of the hotel to the luxury brand JW Marriott. With Marriott's proven reservation system, we expect a much greater contribution from the brand than under previous operations.

Second, we believe San Francisco is poised to experience a turnaround similar to what New York has seen over the last couple of years. This hotel has lagged its competitive set in terms of RevPAR growth by 50%. With the brand changing capital improvements, we expect a significant upside.

Finally, we expect to see margin improvements as Marriott implements more efficient operating system at the hotel. Since the acquisition, over a dozen management positions at the hotel have been eliminated. We are very pleased to have this luxury asset in our portfolio.

We did not complete any hotel loans during the quarter, mainly due to our selective lending criteria. We continue to market our strategy based upon our lower cost of capital we now have through our restructured revolver. We are very careful in what we pursue. For example, we have seen many loans with significant equity cash-outs and debt service that exceeds net operating income. These are obviously less appealing loans for us. We hope to announce a few deal shortly.

Our capital recycling continued during the quarter. In late March we completed the sale of eight Gen-1 Residence Inns we acquired from CNL for $102 million and in January completed the last two asset sales from the 21 hotel portfolio we acquired last March. Proceeds from these sales are been reinvested as capital dollars or funds for new investments.

We also put the East Tower of the Hilton Fort Worth up for sale as an office conversion, which we see as the Tower's highest and best use.

We continue to make additional improvements in our capital structure during the quarter. The largest transaction was the successful completion of our follow-on offering in January, which raised net proceeds of $128 million. We are very pleased with the execution of this offering and the proceeds utilization. With this equity offering, we expanded our investor base and research coverage.

On the debt side, we converted the floater on the Hyatt Dulles airport through a single property revolver and slightly increased the borrowing base to $47.5 million, and the floating rate adjusted to 100 to 150 basis points over LIBOR during the revolver period and resets to the original 200 basis points over LIBOR after the revolver period. This change enhanced the flexibility of that financing. There were no material charges associated with the modification.

I will now turn the call over to Monty for some concluding remarks.

Thank you, Doug. We remain bullish on the lodging industry and our platform. While we're committed to our policy of not providing earnings guidance, in response to investor questions last quarter, we have explained those factors affecting margin growth and when we expect them to abate. Further, we continue to offer dividend guidance of $0.20 per share per quarter through the end of this year.

As a point of interest, our FFO per share came in $0.02 below the consensus of street estimates. When we raised common equity in January, consensus FFO per share estimates for that quarter were not lowered. Since it took us until just after the end of the quarter to deploy the equity, approximately $0.02 dilution occurred in the first quarter due to the equity raised. Without this short-term dilution, we would have reported FFO per share of $0.29, which would have been in line with consensus expectations.

Now that the equity capital is placed largely in the Pan Pacific Hotel, we do not anticipate further dilutive effects from the equity raised. Due to this recent equity raise and the leverage capacity available on our credit lines and related to our unencumbered assets, we estimate that we have the ability to acquire up to approximately $500 million more in product.

That concludes our prepared remarks. Now we will open up to any questions that you may have.

(OPERATOR INSTRUCTIONS). Will Marks, JMP Securities.

A few questions. One, can you just give us maybe your CapEx budget for '06 and maybe break it out in what you would call maintenance versus revenue generating projects?

And then secondly, on the third page of your release, you mentioned that for the research triangle property that using a 5% FF&E reserve and then you give the trailing EBITDA multiple, EBITDA yield and cap rate, to get to the EBITDA multiple and EBITDA yield, you don't take out an FF&E reserve, is that correct?

That is correct. I imagine that at one point during our earnings, we talked about NOI in there, too, and then we took it out and added it and then changed the first part about referencing the FF&E reserve. But you are right. We do not deduct FF&E reserve for EBITDA.

Regarding the first question about CapEx, why don't I turn it over to Kimo to comment on that?

We talked about a $50 million CapEx plan for the balance of the year. The lion's share of those dollars are dedicated to rooms, refreshes or public area refreshes and not maintenance capital. So we view a majority of those dollars as potential revenue enhancements.

We don't have it broken out that way right here in front of us, but just from our knowledge of the capital plans, I would concurrent with Kimo. I would say maybe of the 50 million, maybe 35 of it, 40 of it is more revenue enhancing, while a relatively smaller amount is for maintenance CapEx.

Great. Thanks, Monty.

(OPERATOR INSTRUCTIONS). David Anders, Merrill Lynch.

Can you guys talk a little bit about how you think about moving the hotels in between the discontinued ops line? Give us some more color on bringing them back into the existing portfolio and the catalyst for that?

You bet. This is Monty, David. When we first bought the CNL assets, we looked at it and we kind of came up with what we wanted to keep and what we wanted to sell. And that is what we generally do, is when we buy a portfolio, we will maybe spend 30 days, or oftentimes before we even close, we will decide which ones we want to keep and which ones we want to sell. And when we decided which assets we were going to market and sell, there is a few factors that went into it. We decided to sell two kind of portfolios.

One portfolio was the Gen-1 one Residence Inns. We decided to market and sell those because they were about 20, 25-years-old. They were going to require significant amounts of CapEx. We just saw them as an older product. We gave them exterior corridors and not good long-term holds. Big construction (inaudible). So that is what we decided to put in that category, and of course, we subsequently sold that portfolio for just over $100 million this past quarter.

At the same time, we took the approximately seven TownePlace Suites portfolio and put them in the same category. The reason we put them at the same time is that the TownePlace brand was something we were not overly familiar with and were stick construction, and at the time we had a philosophy of a bit more aggressive culling of our portfolio.

We went to market with both, and we have got pricing on the TownePlace portfolio above our allocated purchase price. However, during the course of the year, we had a chance to sit down with Marriott and understand the TownePlace program a little bit better, get more comfortable with the program. Then the assets themselves started performing very very well. In fact, RevPAR through the past 12 months is up 17% for that portfolio. The EBITDA for those assets for the past trailing 12 months is up 22.4%, so very very strong growth. We have not even put any capital yet into those assets either to enhance that. That is going to require us to put in about $4 million or maybe $5 million worth of CapEx.

So again, we got the price we were asking for. But we just stepped back and said, you know let's just think about this. So as we pondered it for a few weeks and strong performance continued to come in and our trailing EBITDA yield on that property when we bought it at 8% turned into something like 11% or higher. We see asset prices going up all around us, we thought, you know what, while we're not huge fans of stick construction, these assets are generally only about five-years-old, and we think we are at least four, five, six years away from peak valuations. So we will just hang onto these four, maybe all the way through to the next three or four or five years since this performance is so strong. So I hope that answers your question without being too verbose.

Smedes Rose, Calyon Securities.

I just had a question on your CapEx budget again. It looks like in your fourth-quarter release, you had talked about 75 million of spending for the year, and now it looks like it is more about I get 60 million. I just wanted to make sure, so that includes projects as well as maintenance CapEx and as well as anything you will be putting in or start putting into the Pan Pacific?

The disconnect between those two numbers is just a timing difference. The plans that are in motion still total the $75 million number that we talked about. But what we expect to spend between now and the balance of the year is about 50 million. We spend 10 million in the first quarter. So 60 million this year, and then the balance will be spent in the first part of next year. That does include what we intend to spend on the Pan Pacific.

Okay. And that includes any maintenance CapEx as well, right?

Doug?

It includes maintenance CapEx. We don't have a breakout of what that percent is, but I know the vast majority of the dollars we're spending in her dedicated to brand standards and improvements in guest areas. So we see those as really opportunities for revenue enhancement.

And then at the Pan Pacific, you talked a little bit about where you think the improvement comes from. But I'm also wondering is there group business that has been maybe booked in prior periods that is burning off or sort of low rated business that will also help for next year as those rooms become available? Can you just talk a little bit more about (multiple speakers) because it is a fairly big improvement as an absolute dollar amount.

Sure. This is Monty. You know, there are a few things happening at that property. We referenced or Doug referenced his comments about some cost eliminations, which is going on at the property. But the Pan Pacific brand I believe last year generated something like 1000 room nights through the reservation system. With JW Marriott, we anticipate that to be many many multiples of that.

Also, how we have come up with our forecast and we have matched it with what Marriott came up with when they gave us their projections is our anticipated average daily rate going forward is settled in between the Marriott Moscone Center and the Ritz-Carlton. That is about where JW Marriott positions its brand. That is about where this property will be in a physical condition, and so it kind of matches up pretty well. We think that is a good number and Marriott thinks it is a good number as far as where it is positioned.

This property in order to fill up has had some international business, international tour type business, and they have run high occupancies. But in the past 12 months or especially the past six months, as transient demand has picked up in the city, you may notice if you happen to see (inaudible) travel report, this property's competitors had increased by about 25% RevPAR, while this property has increased only about 12%. That is because they had already committed so many of the rooms to these international tours, which oftentimes you have to book a year maybe a year and half in advance. So while their occupancy was high, their rate was not growing to the extent that some of these peers were.

There is some of this business still on the books. We are going to have to work through it. Fortunately here in the short-term, there were some nice business on the books, not only in the international business but some group business that is a little higher rated. So we will have to work through some of this, and as we do, we expect RevPAR performance to continue to increase as that business is replaced with Marriott generated transient corporate business.

(OPERATOR INSTRUCTIONS). Gustavo Sarago, FBR.

I have got a quick question. Just looking, the detail on page 14 of the supplement was great. I noticed that your commentary in the press release and on the call has indicated that these kind of trends should continue at least into the second quarter. Do you think the color or the distribution or the type of increases that we saw in the first quarter will be mimicked during the second quarter?

Do you mean as far as RevPAR?

Not less RevPAR more on the impact to margins. I know you guys don't give guidance, but looking at what you saw on the portfolio of hotels not under renovation, an indication that the trends should carry through at least in the first half of '06, do you expect the same type of increases in the operating expense departments that you showed in the first quarter of '06?

You know, for the second quarter and the rest of the year, we sit down here internally and we have modeled all that as you can imagine. The challenge is that something could happen somewhere, and it can push it one way or the other.

But I would say generally we think the second quarter is going to look a lot like the first quarter. We are kind of a little biased hopefully on the upside to that. But we are hesitant to come out and state that because, like I said, some things could kind of pushed it around. But I would say it is probably pretty close to the first quarter, maybe a little bit of improvement there.

The second and third quarter, we started to see it is improving and, therefore, expect margin improvements, again unless something else changes with it accelerating in the third quarter and even better in the fourth quarter. So that is what we are anticipating in-house, and for whatever it is worth, as we go down and we listed all of these items here, the items that we have discussed where everything is something that we understood and anticipated and are part of our operating budgets. So, from a management standpoint, we knew these things were going to be washing through our statements on a year-over-year comparison.

Some of them are just deals that were cut with lower management fees and franchise fees upfront that would provide negative margin comparisons when those started to ramp back up. In some cases, the fee service levels increase, which we think are just smart to do, with the product, and we knew we would have a little bit of a spike and a blip when that happened and even the energy cost controls. I think energy came in up over last year right in line with our internal budget.

So this is not a surprise to us, but we wanted to provide more information because we can see in light of what is happening with some of our competitors and their margin improvement for the first quarter, it may be a surprise to the market.

I thought the color was great. Thank you for it. Kimo, maybe you can give me some color. Looking at the renovation schedule and some of the assets that finished up in the first quarter, did any finish early enough in the quarter where you had it could provide some color on kind of the improvement in those assets or maybe some of the improvements that you saw in April and early May from some of those renovated properties, if you can give some color?

You know what? I will comment on one of them, and it was already mentioned in the press release, which was Fort Worth. We were renovating that. We converted it just about exactly on April 1 to a Hilton Hotel, and its RevPAR increase has been phenomenal. I think we quoted 82%, and that is through the end of last week. So we are very very pleased with that.

Now in modeling realize that that RevPAR is compared to the old hotel, which is about five undergrounds and the new hotel is about 300 rooms. So the other 200 rooms are now dark, and we're in the process of marketing that as an office building. But the RevPAR has gone up substantially, so. But there were no effects of that in the first quarter at least positively, just negatively due to the renovation. We should see those positive results going forward. Kimo, you got a few other -- ?

It is really too early to give you some color on those assets coming out of renovation. The majority of the assets came out mid-quarter or towards the end of the quarter. It usually takes another quarter for getting some traction and getting some improvement. So I really don't have good color on the other assets, but the Fort Worth asset and the brand change, that was immediate. That is why we wanted to share those results with you.

Josh Ray, A.G. Edwards.

As far as the increased credit card use, what kind of trends are you seeing there currently? What are the reasons why you're seeing the increased trend? Maybe you can quantify just what you were seeing before this boost as far as payment options?

Sure. What we're seeing is increased credit card use, which is also linked to increasing corporate transient business. That affects another line item on the statements because most of our managers classified in the franchise fee line, which is part of that breakout, the fees that the hotels have to pay to the brand's point loyalty system. Those fees, not that the fees themselves are going up --in some cases they are -- but usually not. But also the usage is going up, which again is also generally corporate transient type business.

So those two factors are driving the growth. We are seeing even more meeting planners paying for their events with credit cards so that they can get the points. They pay for it and get their employer to pay them back. So those are a few of the trends that are happening that are increasing credit card usage.

It appears we have no further questions at this time. Mr. Bennett, I will turn the conference back over to you.

Thank you for your participation today and your interest in Ashford Hospitality Trust. We look forward to speaking with you again on our next conference call.

And that concludes today's conference. We thank you all for joining us.