Ashford Hospitality Trust Inc (AHT) 2008 Q4 法說會逐字稿

Good day, everyone. Welcome to the Ashford Hospitality Trust 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.

Welcome to this Ashford Hospitality Trust conference call to review the company's results for the fourth quarter of 2008. On the call today will be Monty Bennett, Doug Kessler, and David Kimichik. The results as well notice of the accessibility of this conference call on a listen-only basis over the Internet were released yesterday afternoon in the press release and were covered by the financial media. As we start, let me remind that you 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. Such forward looking statements are subject to numerous assumptions, uncertainties, and known or unknown risks which could cause actual results to differ materially from those anticipated. These risk factors are more fully discussed in the section entitled Risk Factors in Ashford's registration statement on Form S-3 and other filings with the Securities and Exchange Commission. The forward-looking statements included in the conference call are only made as of the date of this call and the company is not obligated to publicly update or revise them.

In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the company's earnings release and accompanying tables or schedules which have been filed on Form 8-K with the SEC February 26, 2009 and may also be accessed through the company's website at www.ahtreit.com. Each listener is encouraged to review those reconciliation provided in the earnings release together with all of the other information provided in the release.

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

Good afternoon, and thank you for joining us. Our approach to these unprecedented conditions is proactive. The steps we have taken to improve liquidity, enhance covenant compliance, reduce interest expense, stabilize operating margins, and link to debt maturities will continue. Despite deteriorating industrywide conditions, we are pleased with our efforts and believe several of our strategies will set us apart. Our strategies are varied because we know market conditions change, yet our discipline is constant in seeking ways to enhance long-term shareholder value.

Ashford's advantages in this cycle are we have a diversified portfolio of 103 hotels across many regions of the US that enabled our RevPAR to outperform the market by 19% for the full year. 96% of our brand affiliations are with the leading hotel companies. Approximately one-third of our hotel EBITDA comes from select service hotels, which historically outperform the upper upscale and luxury properties in the downturn. With one-third of our hotel EBITDA managed by a Ashford affiliate, we have been able to rapidly implement cost-saving measures to support operating margins. The recent restructure of our credit facility provides us with additional flexibility under our covenants. Our lender has approved extending our only debt maturity in 2009, and we have limited debt maturities in 2010 of approximately $104 million. Lastly, the interest rate swap reduces our interest rate to an average cost of 3.35%.

Our results for the fourth quarter are in line with the preannouncement we made in late January. We projected significant year-over-year and sequential improvements in AFFO and CAD per share, despite accelerated declines in RevPAR. AFFO for diluted share for the quarter was $0.36, and CAD for diluted share was $0.28, both of which were up significantly compared with the prior year and with the third quarter. Several key strategies contributed to this bottom line results, including better than industry RevPAR performance, reduced interest expense of nearly $4 million from the swap in the quarter, aggressive assets management and cost cutting to preserve margins, and reduced share count from opportunistic open market and block purchases.

For our portfolio, the [former] RevPAR for the hotels under renovation was down 7.4% compared to the prior year and with 110 point basis decline in operating margin. ADR was down 2.0% and occupancy was down 388 basis points. Our RevPAR yield in net to the quarter was was 121.9% compared with 119.8% a year ago for the hotels not under renovation and 120.7% compared with 119.5% for all hotels.

Operating margins held up due to proactive steps we took early and forcibly. The magnitude of this decline could have been worse without the aggressive cost-cutting and asset management plans we put in place with a number of the brands. We continue to pursue cost saving measures and seek more efficient operations.

Our capital allocation strategies focus on preservation, liquidity, and limited share buybacks. We suspended the common stock dividend effective with the fourth quarter of 2008. Although this was a tough decision, we determined it was absolutely necessary to position for the long-term success of Ashford, since it was a condition to our credit facility modification. At year end, we will assess our needs to distribute a 2009 common stock dividend to maintain REIT status.

Capital expenditure deployment remains very selective as well. Fortunately, we have consistently spent capital over time on our properties to maintain their high quality and gain market share. Our CapEx plan for 2009 is expected to be close to $117 million. We are having success in our [brand] discussions to postpone certain capital expenditures and [pips].

We believe the balance sheet remains strong with adequate liquidity. In terms of preserving capital, we believe we have demonstrated a strong commitment to setting aside the funds we will need to get us through a very challenging period. Our corporate unrestricted cash at the end of the quarter was $242 million. We are close to extending our one 2009 hard debt maturity into 2010. That will give us two hard debt maturities in 2010 for about $104 million. We are being proactive in working on extensions for our 2010 and 2011 maturities as well. I can assure you that we are monitoring and responding and rethinking unprecedented strategies for unprecedented times. As of year end, with management now owning 11.4% of the company, we are very much aligned with our shareholders to create value. Fortunately, our management team has experienced some downturns and are unrelenting in our pursuit of solutions. I would now like to turn the call over to David Kimichik to review our financial results.

Thanks, Monty, and good afternoon. For the fourth quarter, we reported net income to common shareholders of $135.126 million, adjusted EBITDA of $82.591 million, and AFFO of $40.533 million or $0.36 per diluted share. At year end, Ashford had total assets of $4.3 billion, including $311 million of cash. We had $2.8 billion of mortgage debt with a blended average interest rate of 3.35%. Including the $1.8 billion interest rate swap, 95% of our debt is now floating. For the quarter, the interest rate swap allows us to save $3.9 million in interest costs, which resulted in a $10.2 million savings for the year. Since the life of the swap does not match the term of the swap fixed rate debt, for GAAP purposes, the swap is not considered an effective hedge. The result of this is that changes in the market values of these instruments must be run through our P&L each quarter as unrealized gains or losses on derivatives. These are noncash entries that will affect our net income but will be added back for purposes of calculating our AFFO and CAD. For the fourth quarter, this gain was $118.5 million.

We believe Ashford is in fine shape regarding the debt on its balance sheet. We are in good standing with our two major financial covenants. Our year-end adjusted EBITDA to fixed charges now stands at 1.72 times versus the required minimum of 1.25 times. Ashford's net debt to gross assets is at 57% versus a not-to-exceed level of 65%. Additionally, Ashford has little refinancing risk in the near future.

At year end, our portfolio consisted of 103 hotels and continuing operations containing 22,913 rooms. Additionally, we owned a position in nine mezzanine loans with total principal outstanding of $232 million with an annual averaged unleveraged yield of 16.2%. With two notable exceptions representing a combined $23.6 million loan exposure, all of the loans are current. A loan is considered impaired when based on current information it is determined that it is probable they will be unable to collect all amounts due to the contractual terms. The amount of impairment, if any, is measured by comparing the recorded amount of the loan to the present value of expected future cash flow or the fair value of the collateral. During the fourth quarter, we experienced such an impairment in the amount of $5.5 million.

Pro forma hotel operating profit for the entire portfolio was down by $11.3 million or 13% for the quarter. The 96 hotels not under renovation, pro forma operating profit decreased $7.1 million or 8.7%. Our pro forma hotel operating profit margin decreased by 110 basis points for the hotels not under renovation. For the fourth quarter, we reported CAD of $31.065 million or $0.28 per diluted share and announced we were suspending our dividend for 2009 in conjunction with our credit facility modification. I would now like to turn it over to Doug to discuss our capital allocation strategies.

Thanks and good afternoon. Our capital allocation strategy is a balanced view of sources and uses. The primary sources are existing cash on the balance sheet, cash flow from operations, asset sales of [mezzanine] payoffs, and refinancing proceeds. Main uses of cash are operating expenses, capital expenditures, interest expense, share buybacks, and debt repayment. Fortunately, we are in good shape on the sources and uses of cash. This gives us an opportunity to seek long-term value creation with the excess cash. We evaluate market conditions, assess liquidity needs, and determine the highest and best use of excess cash.

In terms of our capital allocation strategy, we were ahead of the game in most respects. We were early in the market with asset sales and finished the year with $437 million in sales, with a trailing 12-month NOI cap rate of 6.6%. We have a number of assets still on the market, and in addition oftentimes receive unsolicited interest in our other properties. But we will remain a very disciplined seller.

The lack of acquisition financing and ever-increasing bid as cap rate spreads between buyers and sellers is freezing the transaction market. While liquidity remains a market scarcity, there are pockets of capital for the right deal and borrower. Subsequent to the end of the quarter, we completed the $60.8 million refinancing of the Marriott Crystal Gateway with a major [light] company at a spread of LIBOR plus 400 basis points for three years with two one-year extensions. The excess proceeds from the refinancing amounted to approximately $12 million.

We were proactive as well in working with the lenders in our credit facility to give us more breathing room on our covenants. The facility expires in 2012 after extensions. The changes we agreed to include reducing the fixed charge coverage ratio to 1.25 times until March of 2011, reducing the commitment level from $300 million to $250 million, reducing the maximum leverage ratio from 75% to 65%, and adjusting the grid to a spread of 275 basis points to 350 basis points. We made a few other changes as well, but these were the main provisions. Given the further deterioration in the hotel and banking industry since December, we are very pleased we secured these revisions.

At year end, we had one hard debt maturity in 2009, a $29 million loan secured by the Hyatt Regency in Dearborn, Michigan. In January, the lender agreed to general extension terms for one year to April 2010. Regarding other near-term hard debt maturities, we have a $75 million loan coming due in March of 2010, which is secured by four Hilton and Embassy Suites hotels. We are already in discussion with the lender and other prospects to either extend or refinance.

In 2011, we have $295 million of hard debt maturities. Although this is a couple years out, we are proactive in seeking extensions of this debt with each lender. With only 14% of our total debt coming due in the 2009 to 2011 timeframe, we are in relatively good shape.

Given the current and long-term returns, our primary use of excess capital has been share repurchases. We repurchased during the quarter 23.4 million shares of common stock and 1.7 million shares of series A and D preferred stock. We ended the quarter with 86.6 million common shares outstanding. When added to the 7.4 million series B convertible preferred shares outstanding and the 14.4 million OP units issued, we ended the quarter with a total share count of 108.4 million, which is is a 25% reduction from our maximum share count of 144 million shares. We'll continue to look opportunistically at debt and share repurchases, but we must be sensitive to the need to preserve capital in light of uncertainty in the market. This uncertainty calls for tough, quick decisions and a sound capital allocation strategy.

That concludes our prepared remarks. We will now open it up to any questions you may have.

Thank you, sir. (Operator Instructions). Our first question comes from Patrick Scholes with Friedman Billings Ramsey. Go ahead, please.

Good afternoon. I don't know if you mentioned in your prepared remarks -- so far in the first quarter this year, have you made any share repurchases?

We have made share repurchases. We just haven't disclosed the details of it. But I can tell that you our inclination for share repurchases is more measured than in the fourth quarter. The fourth quarter, there was a temporary restrictions lifted by the SEC where you could buy more than 25% of your share counts on a daily basis. And so we took advantage of that, and that doesn't exist anymore. And also our inclination is just to buy shares more slowly.

Okay. I have two more questions here. The next one is, I wonder if you could shed some light on what your LIBOR expectations are for the remainder of the year and for 2010?

My expectation is that LIBOR will be low, low for quite some time. Fed Chairman Bernanke, his direct quote is for some extended period of time or something like that. The only fluctuation that may occur is the difference that has emerged between the Fed funds rate which I expect to be low, and LIBOR, which is the perceived health or the opposite of these banks out there. If you noticed, the 30 day LIBOR, has crept up over the past month or so as the question of the banks have come up. So it might spike here and there as people furious about the banks get elevated, and then come back down, but generally we expect it to be quite low for some time.

Okay. Thank you. Then one last question has to do with your fourth-quarter results. I saw that other general administrative was down substantially year-over-year. Is the $2.1 million a fair run rate to use going forward?

This is Kimo. Yes, a good number. We are budgeting actually down 5% for A&G year-over-year, so that is a pretty good number.

Okay. I guess a little more color on the year-over-year dramatic drop-off. Was that mostly -- could you give a little more color on what drove that down?

We have some accruals that we had throughout the year that didn't materialize, so we just wrote those off.

Bonus accruals for one.

Okay. Thank you very much. That's all.

Thanks, Patrick

Thank you. Our next question comes from the line of Celeste Brown with Morgan Stanley. Please go ahead, please. Ms. Brown, go ahead. Ms. Brown has accidentally disconnected. Next question comes from the line of Andrew Wittmann with Robert W. Baird. Go ahead, please.

Good afternoon, guys. Welcome back, Kimo, great to have you back. Doug, I guess a question for you on the swap. Assuming the balance sheet number of $88 million for interest rates derivatives, a majority of that value is for the swap, and with the run rate of interest savings being about $16 million a year based on the fourth-quarter number -- that would assume that it pays itself back in about 5.5 years. Can you talk about the value of that swap and if you think about unwinding it maybe? And how that may relate to the fixed charge covenant test as an offset, as a trade-off?

Sure, this is Monty. I will address part of it and let Kimo address the balance of it. As far as unwinding it, we have no plans to unwind it right now. Having offset our quarterly results is exactly what it was designed for, not as a hedge, not as a financial instrument play. That is not our specialties. Kimo, why don't you hit the rest of them?

Well, I think the overriding question is the number on our balance sheet a good number, and I think the answer is no. I think it's a contrived number that they come up with and they try to estimate what the balance is as of the end of the month or the end of the quarter. I think it will be probably significantly different if you try to measure it today. And so I don't think you should use that in your equation on the swap.

Okay. So just in terms of materially different, is it half of that number? What kind of orders of magnitude do you think the fair market value of that swap might be today?

I am not even going to go there.

It has a lot to do with the volatility in the marketplace, and the volatility has gone up since the end of the year fairly significantly. And so that changes the value and can change the value, and that number is not just the swap. It has to do with the floor and the caps as well. But in fact I think the swap is more than $88 million and net of the others brings it down a little bit. But it's hard to say exactly what we would get if we went out there and sold it in the marketplace. Also what is changing every day is expectations of the curve change -- the yield curve of LIBOR changes. I think what Kimo is saying is that to sit and look at what the calculation was at the end of the year and think that is what is worth today, it is not. It moves around a decent amount.

It seems like it's got a purpose is that it's netted against your interest expense for the fixed charge coverage, and clearly it's providing some fairly nice cushion in that sense.

Exactly, and it's netted against interest expense for the fixed charge coverage, although it's not netted as interest expense in our P&L. It's in EBITDA. The benefit's in the EBITDA, and we record interest as our interest expense.

Right. Okay, good. I just have one other question. Just on the Extended Stay America loan, and basically, I was just curious as to what tests it did or did not pass that gave you confidence in the present value of that and recognition at the tail end that you will be paid back in full?

Sure. First I want to point out something that you hinted at, Andrew. When you go to impair an asset, especially a note receivable, it is not what you sell that note in the open market for today. It is not the current market value of it. It is a calculation of based upon a number of factors. And in our earnings release in our script, we kind of laid that out. We said a loan is impaired when based upon current information and events it is probable that we will be unable to collect all amounts reported on assets on the balance sheet according to the contractual terms of the loan agreement.

We don't like to get into individual situations very much, but I will comment on the ESA since it is a largest part of our portfolio that it is being covered through our [piece], I think, 1.7 times through the end of the year. And with the drop in LIBOR, the coverage still remains -- seems to be pretty strong for us, even with the downturn. So to look two years out or 2.5 years out and say that it is probable that we won't get paid off, it's just too much of a stretch for us to look too far in advance and say it is probable that it won't get paid off. We do believe very strongly the value of the portfolio at our last [dollar per piece] about $83,000 does exist, and the portfolio is worth more than that and will be worth more than that. That also doesn't necessarily mean that you're going to get paid off in full, but the test is do we think it is probable that we won't get paid off in 2.5 years, and we are just not prepared to say that.

Okay. That's fair. Thank you.

Thanks.

Thank you. Our next question comes from the line of Jeff Donnelly from Wachovia. Go ahead, please.

Good afternoon, guys. I guess -- I am not going to doubt I guess Bernanke and what his view is on interest rate, but the concern is inevitably you could see inflation creeping into the system and drive long-term rates higher. Does that mean you will likely want to keep your debt pegged on the short end of the curve if the government's plan is to keep, I guess, the rights they can control low?

Sure, good question, Jeff. We have a lot of discussion internally about that. The concern of inflation does affect the long end of the curve. But short end of the curve is governed almost entirely by what the Fed keeps the Fed funds rates at, and that is what our loan is tied to. So it would have to take for us to have some exposure. It would have to take the Fed to raise rates significantly in order to ward off this inflation and put us potentially in a deeper recession. And so we just see that as remote, number one.

Number two, hotels are a great business that are an inflation hedge. And unlike other real estate types, if there is inflation out there, then we will be the first to benefit with being able to raise room rates, and to be able to offset that. Now our peers won't be in the same situation. In that situation, we wouldn't do as well as our peers, but we wouldn't face trouble in meeting debt service and the like because of it. And, again, the purpose of this was as a hedge against RevPAR, not as a financial instrument play.

And lastly, we do have caps on it. We have caps on the full $1.8 billion through October of this year, and then caps on half of it for another couple of years. And then after that, we are exposed. And we are constantly looking at the cost of putting caps on the rest of that $1.8 billion, what is outstanding the future years. And weighing it against when is the best time to do that. So we do look at it. It is something that we want to monitor closely. But at least right now, we would rather like to start to see the Feds start to move or something start to happen before we went out there and buy those caps, because they can be expensive. We just think the greater risk right now to the industry is further deterioration of RevPAR and that's what we are focused. And at some point in time they will shift and our greater risk that we perceive will be related to interest rates.

I would say not just Ashford, but effectively for your investment in Extended Stay as well, because LIBOR is clearly helping them. In that vein, just to clarify something you said earlier, was the 1.7 times cash flow coverage you mentioned specific to your tranche, tranche 6? And is that cash flow coverage for -- your forecast for 2009 or trailing in 2008?

Trailing and just through our piece.

Okay. And then are you able to share with us any details specific to Extended Stay and really what their -- what the mood was maybe in their EBITDA and what the debt services that -- in tranches 7 through 10 north of you guys?

We rather not get into all of those details. The only comment is that in some of the more subordinate pieces are concerned about their ability to get repaid and are wanting to talk to the other lenders about what to do about it. But other than that, really nothing is going to be done until some of those subordinate pieces can't get paid, and we will see what they do.

I can't remember if you disclosed it before, but does Ashford effectively control tranche 6 or do you have partners in that? Or have you named them?

Jeff, it is Doug. We do not control the mez 6 tranche. There are other participants in the tranche, as there are in many of the tranches, and we believe that some of that is still held by financial institutions that originated that debt.

A few other questions to wrap up on some of the margins and mortgages. I am not asking for guidance in 2009, but I am curious in your perspective of how you are thinking of managing EBITDA margins? Some of your competitors are strongly convinced that margin declines can be contained to roughly 250 basis points under nearly every RevPAR scenario, whereas others seem to feel it's much more of a range, much more fluid. Which camp to you tend to fall into? Is it possible to have the agility to manage margin deterioration so finely when visibility is poor and revenues are so volatile day to day?

Sure, good question. It is much easier to control margins with Remington, our affiliate manager, than it is other third parties and especially the brands. So that has an impact on it. But no, we don't think that one can hold the margins to 250 regardless of revenues. The more revenues drop, the more margins are going to drop. And we think for our portfolio, if revenues are down 10% to 15% say, then margin drop-off could be anywhere between 350 to 550 bips.

That is helpful. On mortgages -- for the $55 million mortgage due in 2010 on the JW Marriott in San Francisco, I think you said the extensions are available if certain coverage tests are met. Where is coverage? And I guess where do you need to be?

We don't even have those in front of us here, Jeff. And probably wouldn't want to get into that level of detail if we did, but suffice to say that Doug is spearheading our refinancing efforts, and he's all over it to make sure that our maturities in '09, 2010, and 2011 are adequately covered.

One last question, I guess maybe I will get the same answer -- but you refinanced the Gateway Marriott in DC. Does that new loan carry any recourse to Ashford? And I guess how are you thinking of accelerating that maturity versus maximizing proceeds?

Sure. That old loan was a situation where it was effectively into a cash trap. And so in order to get the cash out of it, we wanted to refinance it. We were able to get more proceeds and it is not recourse. And that is a very important provision us is to maintain our loans at nonrecourse, and almost all of our loans are recourse. I think there's just one loan -- JW Marriott has got a partial recourse that burns off at some levels, but I think it's only 20% of that balance. That is important to us to maintain.

Thank you, guys.

Thanks, Jeff.

Thank you. Our next question comes from the line of Michael Salinsky with RBC Capital Markets. Go ahead, please.

Good afternoon and welcome back, Kimo. With the -- just with the Extended Stay America, the Four Seasons -- both of those are current on payments, correct?

Which properties?

With the -- you mentioned -- you had the write-off during the quarter and then you had the Extended Stay and Four Seasons Nevis properties which you had mentioned before were having issues. Both of those are current on payments, correct?

The two loans that are not current on payments are the Westin loans and the Nevis loans. Everything else is current.

The Nevis one is being covered by insurance, correct?

Well, it -- hopefully. The way we have calculated the claim and the business interruption insurance that we think that ultimately the insurance company should pay us off. But I say that hesitantly because there is just a lot of work to get there and a lot of it. So we don't book it in anticipation of it happening. I should say we hope it will happen, but if someone's not paying, we don't book it as an accrual until it comes in. So those two aren't paying, so they are not being booked.

No concerns about any of their mez notes, correct?

There's concern about every mez note. It's a tough market out there. So far so good.

Okay. That is helpful. Second, in terms of dispositions. I know you guys mentioned you are out there marketing additional ones. Do you expect to close on some transactions this year or are spreads just too far apart at this point?

We don't expect to close on any transaction any time soon. Whether we can close on some later in the year, time will tell. We hope so, and spreads are very far apart.

Okay. And the fourth quarter, you had pretty -- very good margin controls and you implemented a lot of cost controls in the third and fourth quarter there. How much more is there left to wring out on the expense side?

I don't -- I am not sure how to answer that exactly, but we are doing as much as we can. And working with our -- with Remington and the other managers to constantly cut back, and at one point every cost is variable at certain levels. So we are trying to be very, very proactive to do that. Again, we have better luck with Remington and with our independent managers than with brands -- although to give those brands credit, they are being as flexible as they ever have been in cutting back on costs. So -- in other words, I think in the quarter we were down 8.8% for all of our hotels in RevPAR, and industry continues to get worse or so it seems. If RevPAR is below that, we would anticipate to have more cuts. But they are harder coming, no question.

Okay. And in the press release also you talked about CapEx above and beyond your reserves. What do you expect for total CapEx including reserves in 2009?

Including reserves, our CapEx plan for 2009 is $117 million. But if you are putting that in for your model, be careful because our 2009 plan gets spent in 2009 and 2010 because of carryovers. So it is a decent amount of CapEx, but I think the most important figure is the one in that release that talks about the amount of cash out of pocket for 2009, which is that $37.8 million is what we anticipate. And again, that is part of '08 hangover plans and '09 plans.

Okay. And finally, since it's almost the end of February here. This isn't forward-looking. What were the trends in January and February across the portfolio? What benefit did you see from the inauguration in DC.?

It's tough out there in January and February. Clearly we have got a benefit for the inauguration in DC. We got a few DC assets. And so they fared well in January. We are not giving specific information on performance of January and February, although we are considering whether to give a prerelease for the first quarter in the first part of April as we did in the fourth quarter. We haven't made that decision for sure yet, but we are considering it.

Okay. Thanks, guys.

Thank you. Next question from the line of (inaudible).

Is the moderator still on the phone?

Mitch, are you still on the phone? I can barely hear the moderator but I think he is asking for me, Will Truelove. All of our questions have been answered. Thanks.

Thanks, Will. We can't hear the moderator at all here. Well, since we can't hear the moderator, we will just conclude the call, but if you guys have questions, then as usual please feel free to call us and we will do the best we can to address them. So thank you guys for participating on today's call, and we look forward to speaking with you on our next call.

Ladies and gentlemen, this does include the Ashford Hospitality Trust conference call. You may now disconnect and thank you for using ACT Conferencing.