Ashford Hospitality Trust Inc (AHT) 2009 Q1 法說會逐字稿

Good morning everyone and welcome to the Ashford Hospitality Trust first-quarter 2009 earnings conference call. Today's call is being recorded and at this time for opening remarks and introductions, I would like to turn the call over to Mr. Tripp Sullivan of Corporate Communications. Please proceed.

Good morning, welcome to this Ashford Hospitality Trust conference call to review the Company's results for the first quarter of 2009. On the call today will be Monty Bennet, Chief Executive Officer; Doug Kessler, President; and David Kimichik, Chief Financial Officer. The results as well as notice of the accessibility of this conference call on a listen-only basis over the Internet were released yesterday afternoon and in a press release that has been covered by financial media.

As we start, let me remind you that certain statements and assumptions in this conference call contain or are based upon forward-looking information and are 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 this conference call are only made as of the date of this call and the Company is not obligated to public 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 has been filed on Form 8-K with the SEC on May 5, 2009 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. I will now turn the call over to Monty Bennet. Please go ahead.

Good morning and thank you for joining us. We are maintaining our consistent themes regarding the approach to these unprecedented market conditions. Our core objectives are prudent sustainability strategies and long-term shareholder value enhancement.

Most of our management strategies anticipated the high probability of if not the timing of this market downturn. We swapped our debt to slow floating rates, preserved diversification within our portfolio of hotels, sold hotels before the downturn, rapidly implemented aggressive cost cutting and renegotiated our credit facility.

To date, all of these strategies have been effective and yet in some cases unorthodox compared to our peers. No one could have predicted the magnitude of this downturn but few could have done more to survive and prosper. The proof is in our results for the quarter.

AFFO and CAD per diluted share for the quarter was $0.31 and $0.23 respectively compared to $0.29 and $0.22 for the quarter of 2008. Three factors contributed to our success in this very challenging market.

First our interest rate swap strategy of switching from fixed to one-month floating-rate LIBOR resulted in a significant year-over-year decline in interest expense. Second, our aggressive cost containment helped to soften the impact of RevPAR declines on operating margins.

Lastly, our share repurchase activity in the quarter resulted in share count reduction of 11.7 million common shares and 1.4 million preferred shares. For our portfolio, pro forma RevPAR for the hotels not under renovation was down 17.0% compared with the prior year.

ADR was down 6.5% and occupancy was down 796 basis points. Our RevPar yield index for the quarter was 122.2% compared to 119.8% a year ago, a gain of 240 basis points.

Our hotel EBITDA margin dropped year-over-year by 300 basis points for hotels not under renovation and 315 basis points for all hotels. Although our operating margins were down compared with the prior year, we continued to experience significant benefits in the cost control performance of our affiliates, Remington Hotels, who operates approximately one-third of our hotel EBITDA. We have and continue to work with all managers to mitigate the impact of the downturn and implement cost-saving measures.

In terms of capital expenditures, we are fortunate that we have historically spent sufficient capital to maintain the high quality of our hotels. This capital funding has enabled our RevPAR yield penetration index to consistently increase.

Going forward, we will be more conservative with the pace of expenditures as we monitor the opportunity cost of our capital. During the first quarter, we spent $19.8 million on CapEx.

Our significant projects for the year include the Hilton Rye Town, the Capital Hilton, the Hilton Nassau Bay Houston and the Bridgewater Marriott. Our loan portfolio has generally held up considering the security deteriorating market conditions.

Of the $235 million we have invested in our loan portfolio, we can report that as of the end of the first quarter, only our $7.1 million loans to the Hotel La Jolla was adding to our short list of hotels not current on our interest payments. A total of $30.5 million of hotel loans are not current and we continue to work with borrowers or otherwise pursue remedies in those situations.

During the quarter, we made a couple of promotions that recognized the contributions of two senior leaders to our growth over the years. First, we promoted Doug Kessler to President from Chief Operating Officer and Head of Acquisitions. And second, we promoted David Brooks to Chief Operating Officer and General Counsel from Chief Legal Officer and Head of Transactions.

Both are engaged in every phase of our business and will continue to put their skills and experience to work for Ashford in very meaningful ways. Overall, we're confident in the portfolio management and capital allocation strategies we are implementing to offset these challenging times.

The short-term gyrations of the market have our full attention and we have not lost sight of the long-term impact of our decisions will be on our shareholders. We have the advantages of an experienced team, a diversified portfolio and a much better cost structure than most which should help us manage through the near term.

We are unrelenting in our pursuit of creating long-term value for our shareholders. I'd now like to turn the call over to David Kimichik to review our financial results.

Thanks Monty. Good morning. For the first quarter, we reported net income to common shareholders of $6,827,000, adjusted EBITDA of $70,524,000 and AFFO of $31,031,000 or $0.31 per diluted share. We reported CAD of $23,727,000 or $0.23 per diluted share.

At quarter's end, Ashford had total assets of $4.3 billion including $240 million of unrestricted cash. We had $2.8 billion of mortgage debt with a blended average interest rate of 3.37%.

Including the $1.8 billion interest rate swap, 97% of our debt is now floating. During the quarter, we continued seeking ways to hedge the market's downturn.

We purchased the (inaudible) to work in concert with our interest-rate swap to lower the floor from 1.25% to 0.75% through December 2010 to benefit from the LIBOR trend. For the quarter, the interest-rate swap allowed us to save $10.7 million in interest costs.

Since the length 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 the changes in market value of these instruments must be run through our P&L each quarter as unrealized gains or losses on derivatives.

These are non-cash entries that will affect our net income but we added back for purposes of calculating our AFFO and CAD. For the first quarter it was a gain of $18,032,000. At quarter's end, our portfolio consisted of 103 hotels in continuing operations, containing 22,913 rooms.

Additionally we owned a position in nine mezzanine loans with total principal outstanding of $235 million at an average annual unleveraged yield of 11.4%. Pro forma hotel operating profit for the entire portfolio was down by $22.1 million or 26.3% for the quarter.

Our pro forma hotel operating profit margin decreased 300 basis points for the hotels not under renovation. Ashford is in good shape regarding our two major financial covenants for our credit facility.

Our quarter-end adjusted EBTIDA at a fixed charge ratio now stands at 1.73 times versus a required minimum of 1.25 times. Despite the continued industry downturn, this ratio equaled the same level it was at at the year-end 2008.

Ashford's net debt to gross assets is at 56.9% versus a not to exceed level of 65%. Additionally, Ashford has little refinancing risk ahead.

We extended our only hard-debt maturity for 2009 in the Hyatt in Dearborn, Michigan to April 2010. In 2010 we now have $104 million of debt maturities, certainly a manageable number.

I would now like to turn it over to Douglas to discuss our capital allocation strategies.

Thanks and good morning. Capital decisions in an uncertain and opportunistic environment are getting our full attention. Our focus remains sustainability first followed by an analysis of capital allocation opportunity costs. Our logic is straightforward.

We consider our possible capital needs and stress test areas including operating shortfalls, interest payments, debt maturities, capital expenditures, and contingencies pertaining to our loan portfolio. We then look at our balance sheet and sources of capital such as ongoing operations, asset sales, loan payoffs and refinancings.

We continued to maintain our liquidity in the quarter with $240 million of unrestricted cash on the balance sheet at quarter end, even after funding share buybacks and CapEx. Cash could be used for the following purposes.

First we want to preserve an appropriate cash level as determined by our management team and Board. Second, with our excess cash, we could reduce debt but with few near-term maturities and an extremely low cost of debt, this does not seem prudent.

Third, we could hold cash for future acquisitions (technical difficulty) value add CapEx. But we believe that the expected returns and performance uncertainty do not offer returns matching our best deployment alternative, namely share buybacks.

We have seen some firms raise common equity despite the dilution to their shareholders to address specific capital needs or goals. However, the accretion to our shareholders from common and preferred buybacks is significant both near-term and for the future as we position the Company for a recovery.

During the quarter, we acquired 11.7 million common shares at an average price of $1.36 plus 1.4 million shares of our preferred at an average price of $7.41. We will continue to be disciplined and opportunistic with our capital options and will engage in strategies, taking into account changes in Company performance and the [lodging] capital markets.

Meanwhile, despite persistent concerns about the lack of hotel financing capital, we were able to close on two loans on very distinct asset types totaling $67.8 million and resulting in $19.5 million of excess proceeds. We completed the refinancing of the Marriott Crystal Gateway in the first quarter with [a major life company] for $60.8 million at a rate of 400 basis points over LIBOR for a five-year term including extensions.

We followed up that transaction with the financing of the Residence Inn in Jacksonville, Florida with a regional bank for a rate that equals the greater of 6% or prime plus one and a 25 year term pre-payable. We continue to be proactive in discussing with each lender every one of our loans coming due in 2010-2012.

Although there is no immediate pressure to refinance, we want to obtain extensions where we can and have already agreed to document terms to extend one of our fully extended 2012 maturities to 2013 totaling in excess of $50 million. We do not expect to be active buying hotels or making loans at any time in the foreseeable future given our better home grown capital allocation alternatives.

However, we continue to mind the market for external capital sources away from the public equity markets to find capital while preserving shareholder value. For instance, there is an increasing appetite in the market for structured finance transactions and we intend to see if there are accretive applications within our portfolio with outside capital partners.

As you have seen in the past, we're a disciplined seller and you should expect the same from us going forward in spite of growing bid-ask spreads in the market. Given that management and insiders own 12.8% of Ashford, we are aligned with our shareholders and are not hesitant to do things that at times may look different than some of our peers but which we believe will add value.

We have a very focused and proactive approach in our operations and capital markets activity with an eye on today's events, but stressing the long-term decisions that will favorably impact the value of our shareholders investment. That concludes our prepared remarks and now we will open it up to any questions you may have.

(Operator Instructions) Will Marks, JMP Securities.

Question on just transaction market. I know it's well known that the transaction markets are dead. But are there -- have you seen any deals? Can you talk about cap rates at all based on maybe rather than trailing on 2009 operating income?

Yes, we're seeing a little bit of activity, it's just not much. But as far as cap rates -- we haven't experienced, we haven't sold any property. But what we are hearing and what we are seeing is that if you look at 2009 numbers -- and they're realistic 2009 numbers -- and take a good haircut along the line of what all the analysts think is going to happen in the marketplace, then the cap rates could still be in the high-single digits for those kinds of assets.

So that's what we hear. I can't say we have seen a lot of traits in that period. But it seems like the market is starting to loosen up on those lines right now.

Great, okay then different subject on supply. Can you -- I have seen conflicting studies on US supply growth that show this year anywhere from 2.5 to 3.5% and next year it's still even in the high 2% range and for the US as a whole. But any thoughts on those numbers and what you are seeing?

You know, we have relied usually on Smith's travel supply numbers and that's what we have found to be the most reliable. Randy Smith the other day said that on a monthly year-over-year basis, the last two or three months, we have peaked at 3.3% and it's starting to come down and I think he said something like by the end of the year, it will be on a month-over-month basis of 1.8 or something like that which would mean that for the year it would be in the mid twos or so.

But then that trend should continue so according to that data, next year it should be below 2%. But again, this is Smith Travel's data and that's what we generally find to be the most reliable.

Okay and then I have a couple of modeling questions. One -- and you may have hit on these or they may be in the press release and I missed it. But can you give us a sense of where -- assuming rates hold, where your interest expense would be for the year?

Sure, it straightforward is $2.8 billion times 3.3% [Kimo]?

Yes, it's about $100 million.

Okay and then what about -- what would you say the run rate for G&A is. Can we annualize the first quarter?

Yes.

Okay, great. That's all for me. Thank you.

(Operator Instructions) Patrick Scholes, FBR.

Just a couple of questions here. When I look across the RevPAR performance by your brands, it's certainly quite a bit of variability in there. Some of that may be due to location.

But I would like to hear -- because you have a number of different brands and managers, what are you seeing as sort of the best practices of the brands or the managers that seem to be outperforming in this environment as far as -- along lines of say revenue management?

Sure, you know, most of that variability that you see is driven more by locations than by the brands (multiple speakers) country. So as far as the brands themselves, I would say that some brands are better at holding penetration in our portfolio than others.

I can't say that generally that's the case across the brands because again, for example, the Marriott properties, the Hilton properties generally have been better about holding share than say compared to Hyatts or Starwood. But that may be unfair to those two brands because we have got just one -- when I say Starwood, I meant the Westin. We've got one Westin product and just two Hyatt products.

So that may not be fair because of the lack of the number of those. One of those Hyatts is in Dearborn, Michigan. You can imagine what is happening there. Does that answer your question?

Yes, two more modeling questions. What was your ending share count for the first quarter?

It was 96.7 million shares fully diluted.

And have you purchased any shares so far in the second quarter?

Yes, we are still in the marketplace, but more modestly so.

Last question. On your -- income from your loan portfolio was approximately 8.5, 9 in the fourth quarter dropping down to about 6 in the first quarter. Just reconciling the difference, how much of that is due to the drop in LIBOR from the fourth quarter to the first quarter and how much is that due to some of the loans no longer being current?

All of it is the drop in LIBOR.

It's LIBOR. Thank you. That's all.

Nap Overton, Morgan Keegan.

The unsecured credit facility, when is its expiration reset? When is that expiration currently?

It is -- after all of its extensions, it is March or April of 2012. I think (multiple speakers) 2010 and two one-year extensions. Is that right, you guys?

And those extensions are based on meeting certain covenants -- could you give us some color around that?

Sure, they're based on meeting certain covenants and those covenants are also required to be maintained while the (inaudible) outstanding. There's not another covenant that jumps up that we don't have to be meeting right now.

There's several covenants but the ones to really watch or focus on is the fixed charge coverage ratio and that's 1.25 is the minimum. We finished 2008 at 1.72 and finished the first quarter at 1.73 and that's on a trailing 12 basis and that's how it's measured.

So we are about flat with where we were at the end of last year and still about 50 bips head of the minimum. Actually that covenant for the last year of the credit facility jumps up to 1.35. It's 1.25 now until then.

The other major covenant is that our net debt to equity ratio -- net debt to total assets ratio needs to be 65% or lower. We finished the quarter at 56 and change, I believe. And so we see that there is a considerable amount of room between that. I think that's about where we finished 2008 as well.

Okay and you may not want to answer this because I know you don't give guidance. But based on your internal reviews, will that debt -- will that expiration in 2010 be extendable?

Well, you're right. That would kind of imply guidance on it or so. But let's say that it's not. We would be working right away to make sure that it was. So, we -- that is our aim certainly to make sure that that is extendable.

Smedes Rhodes, KBW.

Along those same lines, could you talk about the key tests for the loan secured by the JW Marriott and the La Jolla and Capital Hiltons I guess which are extendable but also based on certain coverage tests? Are there any kind of key metrics there at those properties?

There are some key metrics for extending those loans. I would probably rather not go into the details on a loan by loan basis because number one, I don't think I've got those right here in front of me. But number two, we can't get into a lot of detail. But that JW Marriott loan I think is due next year. It was extendable for I think three one-year terms and then the loan on the Capital Hilton, did you say?

Yes, it looks like you have about $119 million secured by the La Jolla Hilton and the Capital Hilton due 2011.

Right, right.

What would you expect to be able to extend them at this point?

It's just too far away to say.

And then the other thing I wanted to ask you, the South Atlantic region kind of outperformed on a relative basis relative to your other regions and just sort of within that mix of properties, could you maybe just give a little more color? I think there were some that probably benefited from renovations but did inauguration in DC help a lot or just maybe kind of maybe what was sort of driving that relative outperformance?

We have a concentration or mini concentration in DC and that's what it is. If you look at our portfolio, we're pretty evenly distributed about the country and our ratios of a number of our rooms as compared to total is about the same if you looked at the total inventory of hotel rooms in the country. They match pretty well up by region except in the South Atlantic. Specifically in DC, we have a little bit of an overconcentration there. DC has just been performing better than the other markets, the inauguration for one and just in general.

(Operator Instructions) Will Truelove, UBS.

I don't know if you touched on this, but could you tell us what kind of interest rate caps you might have on your floating-rate debts? Is there a limit to -- should interest rates rise where it maxes out at? Thanks.

Yes, on our floating rate debt itself, the caps are all over the place. So it would be tough for me to go into that.

As far as our swap, we've got a cap on about $1 billion of the $1.8 billion and that cap we put in place last year for three years. So it's for two more years for $1 billion of the $1.8 billion. The other half is -- the other $800 million is uncapped and that cap is at a strike of 3.6-ish or so, LIBOR at 3.6.

3.6% on LIBOR, right?

That's right.

Nap Overton, Morgan Keegan.

Just one other thing. So, do you -- you said your RevPAR decline was a little bit better than the industry numbers for the quarter. A, do you think you will be able to continue to edge out industry average numbers through 2009? And B, ST -- you said you use STR numbers for supply. Well their RevPAR decline number is a little bit more optimistic than some of the analysts are using, including myself. I'm just wondering if you could provide any color on your thoughts about -- I think they're estimating about a 10% decline in annual 2009 RevPAR right now, if you care to comment on that?

Sure, as far as the STR, as you very well know, the RevPAR depends upon a number of factors including the supply. Their supply numbers I think are right on.

As far as RevPAR for the industry, I'm probably personally a little more pessimistic about how the industry is going to perform for the year than the down 10% RevPAR than Smith Travel is and as far as how we're going to perform. It's hard to say because you know if you look our individual markets, we clawed out another 2, 2.5 points of share over those hotels in our individual markets.

But sometimes those individual markets themselves perform a little bit better than the industry or a little bit worse than the industry. But I think it's reasonably fair to say that since as a Company we try to pursue a broad-based strategy and have our assets represent the industry in general, that we are not going to be too far away from what industry trends are.

Smedes Rose, KBW.

Can you just remind us what the total authorization remaining is on your buyback which I guess covers your common and the preferred?

Right, that authorization was $200 million, so (multiple speakers)

$200 million --

$200 million to authorize both -- originally in January, it's common preferred and debt buybacks and through the first quarter, the amount of money we spent is in our release. I think it's -- 20, $25 million or so.

Okay so there is plenty left on that?

(inaudible) KeyBanc.

I was just wondering if you could just maybe give a little bit of color of the pace in April and maybe the beginning of May and also talk a little bit about the cost cuts that you have implemented. Are these cuts going to be sustainable?

Sure, as far as April or May, we are loathed to give much guidance. I can just say that we are seeing signs of hope out there. But you know, I'm such a cynic. I won't believe it until I see it. So we will see what happens out there.

As far as the sustainability of the cuts, we certainly hope so. And it depends upon how long are they sustainable. Some of them are wage caps or we wages salary freezes. Those are going be sustainable through the year. They won't be sustainable forever.

And that's -- but some of them are position eliminations which are sustainable until business picks up. So I guess your question would be are they sustainable as long as business is down and generally I would say for the most part that they are and that was the whole focus of them.

We weren't interested in trying to just save some money and save linen supplies that we have to turn around and buy a bunch of the next quarter. I want to comment on the last question about the cap.

In addition to that, last year we had gone ahead and capped all of the $1.8 billion of our swap through the -- I think October or November of this year. So that kind of half cap that we've got going for two more years really for the next six months is fully capped.

Thank you. Mr. Bennett, I will now return the conference back to you for your concluding remarks.

Thanks everybody. Appreciate you guys being on the call and look forward to our next quarterly call.

Thank you. Ladies and gentlemen, that does conclude today's conference call. We thank you all for your participation and ask that you please disconnect. Thank you once again. Have a great day.