Ashford Hospitality Trust Inc (AHT) 2010 Q1 法說會逐字稿

Welcome to the Ashford Hospitality first quarter 2010 earnings conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question and answer session. (Operator Instructions). As a reminder, this conference is being recorded Thursday, May 6, 2010.

I would now like to turn the conference over to over to Tripp Sullivan, Corporate Communications.

Thank you. Welcome to this Ashford Hospitality Trust conference call to review the company's results for the first quarter of 2010. On the call today will be Monty Bennett, 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 in a press release that has been covered by the 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 that 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 this 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 schedule, which has been filed on Form 8-K with the SEC on May 5, 2010 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'll now turn the call over to Monty Bennett. Please go ahead.

Thank you. The most recent quarter continues to demonstrate the benefits of our strategies to maximize operating performance, manage our debt, and enhance shareholder value. Our AFFO per diluted share for the quarter of $0.32 compared to $0.31 a year ago and exceeded consensus estimates by 33%.

We believe that this increase over last year's AFFO is a significant accomplishment given intervening market turbulence. This consistency of earnings validates our investment, operational, and capital market strategies.

Over the last three months we've seen a significant improvement in the lodging industry. For instance, in our portfolio we experienced a RevPAR decline of 11% in January, a decline of 5% in February, and an increase of almost 3% in March. This is a fairly rapid recovery and a very positive trend.

For the entire quarter, pro forma RevPAR for the hotels not under renovation was down 2.6% compared to the prior year and down 4.1% for all hotels. ADR was down 9.4%, while occupancy was up 371 basis points for all hotels.

We believe the industry has moved beyond the inflection point in the cycle but are still cautious about the trend.

Regarding operations, our asset management team continues to focus on bottom-line results. Our hotel EBITDA margin dropped year-over-year by 145 basis points for hotels not under renovation and 200 BPS for all hotels.

Our affiliated manager Remington contributed consistently to these results.

Turning to capital expenditures, we completed $18.2 million of projects for the quarter, of which $3.1 million was owner-funded. We remain on track for our targeted spend of $87 million for 2010, as we continue to selectively upgrade hotels to improve their competitive positions in their markets.

The diversity of our assets in major markets, the strength of our brands, and the amount of capital we spent to maintain the competitiveness of our hotels have positioned our portfolio to benefit from the market recovery. We also expect to benefit from a very limited new supply in our markets, which should be a positive catalyst for years to come.

We also made progress on our debt strategies by extending maturities and restructuring loans. Our goal is to push out loan maturities to better coincide with the recovery in market values to facilitate future refinancings or sales.

Our interest-rate strategy implemented in March 2008 to swap to floating rate debt continues to have a significant positive impact on our results, as interest rates remain near historic lows, and recent comments by the Fed have indicated the possibility of lower rates for some time to come.

This strategy sets us apart from our peers and has contributed to our positive cash flow.

During the quarter we repurchased 5.1 million shares of our common stock. We suspended preferred share repurchases several quarters ago. Our fully diluted share count as of the end of the quarter is [62.7]% of our peak share count. This reduction is substantial and we believe compares very favorably to our peers, most of whom raised equity at significantly lower share prices than current trading levels and have been challenged to deploy capital for hard-to-find hotel transactions.

Given our average repurchase price of $3.15 per share for the common and $6.47 per share for preferreds since inception, compared to yesterday's closing prices, we've created almost $0.5 billion of shareholder value, assuming we were to reassure like amounts of the bought-back shares today.

Now that our company has experienced a full cycle in the hotel industry, beginning with the downturn in 2003 when we went public, to the current situation today, we've noted that our total shareholder return performance over one-, two-, three-, four- and five-year periods has exceeded our peer group.

We also believe the combination of several factors position Ashford to exceed the performance of its peers, assuming equivalent EBITDA growth percentages. Because we are more leveraged and have substantially reduced our share counts, the incremental EBITDA growth leads to superior per share metrics, which when applied to market multiples may lead to better share price performance.

Looking ahead to the rest of the year, our top priorities remain unchanged. We will allocate capital to generate the best returns for our shareholders and deploy our debt market strategies to coincide with improving hotel EBITDA trends. We will continue to eliminate maturities ahead of the curve where possible and maximize operating performance with an emphasis on GOP margin and cost reductions.

I'd now like to turn the call over to David Kimichik to review our financial results.

For the first quarter we reported net income to common shareholders of $305,000, adjusted EBITDA of $49,268,000, and AFFO of $24,481,000 -- or $0.32 per diluted share.

At quarter's end Ashford had total assets of $3.9 million, including $172.2 million of unrestricted cash. We had $2.8 billion of mortgage debt with a blended average interest rate of 2.94%. Including the $1.8 billion interest rate swap, 98% of our debt is now floating, and the weighted average maturity is 5.1 years.

Since the length of the swap does not match the term of the underlying fixed rate debt, for GAAP purposes the swap is not considered an effective hedge. The result of this is that the changes in the market value of these instruments must be run through our P&L each quarter as unrealized gains or losses on derivatives. These are noncash entries which will affect our net income but will be added back for purposes of calculating our AFFO.

For the first quarter it was a gain of $13,908,000.

At quarter's end our portfolio consisted of 102 hotels in continuing operations containing 22,141 rooms.

Additionally as of March 31, [going to a] position in four mezzanine loans with total book value of principal outstanding of $56.2 million with an average annual unleveraged yield of 7.1%.

[Now, on] positions in other mezzanine loans with zero book value and no yield.

Hotel operating profits for the entire portfolio was down by $7.7 million or 12.2% for the quarter.

Our quarter end adjusted EBITDA to fix charge ratio now stands at 1.69 times, versus the required minimum of 1.25 times.

Ashford's net debt to gross assets is at 58.8%, versus the not-to-exceed level of 65% per our credit facility covenant.

At quarter end our share count was 75.7 million fully diluted shares outstanding, which is comprised of 52.9 million common shares, 15.4 million OP units -- and 7.4 million shares are series B convertible preferred.

Regarding the Westin O'Hare, we have been working with the special servicer on the loan to arrange a consensual deed in lieu of foreclosure. Based on this status we were required to write down the book value in the fourth quarter to the estimated fair market value, which resulted in an impairment of $59.3 million. Once the deed in lieu of foreclosure is finished, we will then record a gain of approximately $53 million, the level of the nonrecourse debt on the property, for a net impairment of $6.3 million.

Our Courtyard in Manchester, Connecticut secures a $5.8 million loan maturing in January 2011. We recently elected to stop making payments. After several attempts to have this asset moved to special servicing, we felt this was the last remaining option to facilitate what we hoped will be a constructive dialogue for an extension.

I'd now like to turn it over to Douglas to discuss our capital market strategy.

For several years now we've been talking about building and maintaining an investment platform that could withstand an economic downturn and deliver results. I believe this quarter is a great example of the benefits of this platform as well as our ability to differentiate ourselves from the peer group.

We have also demonstrated a strong access to capital during the downturn. Since January 2009 we have financed, refinanced or modified $441 million of loans. These transactions netted us an additional $16.5 million in gross loan proceeds and unencumbered two of our hotels.

At a time when hotel financing was virtually nonexistent, we are extremely pleased with our success in modifying our loans.

During the first quarter we restructured a loan for $156.2 million that extended a 2011 maturity to 2013, eliminated coverage tests, and reduced our cash management provisions.

As it stands today, we have no remaining hard maturities in 2010, with only $209 million left for 2011, of which $203.4 million matures in December 2011. We are working with lenders to extend these and other maturities.

Turning to our interest rate strategy, we continue to benefit from the combination of swaps and floor doors. Over the last 12 months we have been able to save $57 million in interest expense.

Given the current structure of our interest rate hedges, rates could increase by another 45 basis points without any significant change in the benefit we receive. As we've noted before, as long as LIBOR remains below 3.2%, an 11-fold increase from its current level, we will continue to receive positive benefits from the strategy.

As of March 31, the market value of our swap and related financial transactions is $108.4 million.

Recall that our intent of this strategy was to offset the weakness in the economy by capitalizing on the correlation between RevPAR and LIBOR. While the Fed has indicated they intend to keep rates low for an extended period of time, we fully anticipate an increase in rates in the not-too-distant future and are closely monitoring the relationships among economic data, Fed funds rate, and RevPAR.

A sustainable improvement in the overall economy will likely bring rates up, and presumably lodging performance too. With improved RevPAR and a recovery, our capital markets and interest rate strategy will have accomplished our desired results of providing shareholders more consistent earnings in up and down cycles.

In terms of investments, we've not seen much change since our last call, except there is even more capital now on the sidelines from private buyers, as well as from recent lodging IPOs.

With the overall lodging market improving and the risk-free rate still low, we expect cap rates will remain low and generally unattractive to us as a buyer. We believe we made the best investment possible by acquiring ourselves, mainly a 102 asset diversified hotel portfolio with positive cash flow, well-maintained assets with plenty of CapEx funding. We did so through the repurchase of our common stock at an average share price of $3.15, 40% of current value.

Regarding the availability of hotel debt, we continue to see increasing appetite among lenders at more reasonable LTVs of 60%, with debt yields in the low double digits at rates with 8 handles.

We are encouraged by the incremental improvement in both the capital and debt markets and, as in the past, are consistently mining the market and reviewing public and private opportunities to access capital that is consistent with our long-term objectives.

In conclusion, you will continue to see us remain very disciplined.

Will now open it up to any questions you may have.

(Operator Instructions). Will Marks, JMP Securities.

I had a question on -- well first of all, you may have mentioned this. But April, have you -- did you give any RevPAR stats for April? Or would you?

We have not given the RevPAR stats for April. And we don't like to give that kind of guidance and outlook.

We are hearing some of it from other counties -- not to apply the pressure, but is there any change with March? Or can you give us just some feedback in terms of how business is going maybe month by month for the year?

We can for January, February and March. In fact, I think I read it in my script. But beyond the first quarter, we just had a policy of not jumping out there, so I'd like to step back and not do that. We were down 11 (multiple speakers) in January -- have you got that?

Yes, I've got that, so that's no problem. I guess moving on to -- in terms of brands, how do you -- are you seeing much of a difference -- I guess once again this is kind of an outlook question. But how do you feel you're positioned versus maybe the overall lodging sector? I've seen the travel stats. Should we keep looking at an upscale and upper upscale as your comp set?

Yes. We have -- most of our properties are -- about half are in upper upscale and about half in upscale. And we've tried to geographically diversify our properties so that we track the industry pretty close. And we normally do, so there is not big changes from that.

As far as brands go, we've had the Marriott that starts to roll out over a few quarters now of [Salesforce One]. At least so far it is impacting us negatively. Now, they tell us that it should help us after it gets implemented, but we have yet to see those results and are very, very nervous about it. Extremely nervous. So we will see if that initiative of theirs is as successful as we all hope it to be.

Just one final big-picture question on valuation metrics. Do you look closely at price per key? And where do you feel like you are trading right now? I guess I could make the calculation myself, but maybe I'll let you state it.

I haven't done the calculation right now. Maybe the guys here can sit and calculate it while we are talking. But clearly us -- and all our peers for that matter -- is trading at significantly below placement costs.

Anybody know that number off hand?

I want to say it's in the $130,000 per key range, roughly, but I don't have the exact number.

And where do you think replacement cost is?

Replacement cost of our portfolio is -- we've got some mix of select service and full service. And so we've always thought that placement cost of ours is in the 200 -- (inaudible) of 200 (inaudible).

Kimo, sitting here says he thinks a little on the positive side of 200, so in that range at least.

Have you seen -- obviously your stock has moved up, but in terms of other cycles, the last couple of cycles, have you seen this type of discount before?

By discount, you mean in values?

Yes, in terms of value, price per key versus replacement cost.

This is one of the worst the industry has seen since the Great Depression. Now, my father was in the industry, just located in the southwest during the '80s. And that was really, really bad. In fact, Kimo was working here at the time as well. And I would say it's probably nationally about as bad as it was regionally back then. So we saw huge drops in values -- again, just in the southwest with the oil bust during the '80s.

But on a national scale, that is the biggest we've ever seen. I imagine private market values have dropped maybe about 50% from the highs in late 2006, early 2007 to what they are trading at today. 40% to 50%, I should say. The values are now 50% to 60% of what they were at.

Great, that's all for me. Thanks.

Smedes Rose, KBW.

I was just wondering -- I guess two questions. Are the results of the Westin O'Hare still in your numbers, or have you removed them?

They are still in our numbers, and we haven't removed them because, although we are working to hand that asset back to the lender, it's not handed back yet, nor is it with the receiver. So therefore it -- they are still in our numbers.

And could do you -- can you give your thoughts on share repurchases going forward? Are you in the market now, in the second quarter? Or do you feel like you're sort of done on that side? Or what is your (multiple speakers)

Sure. We are hesitant to give too much details on it, because we don't want the marketplace to take advantage of what our strategies are. But I can give you kind of general outlook, and that is that as our stock price approaches the high single digits, what we find is that alternative uses of capital match the returns of our share buybacks. And then as you get into the low double digits, you get into a range where other uses of capital exceed the economics of buying back shares. So as that price goes up, then it definitely becomes less attractive for us.

Now, those metrics that I just laid out are dependent upon a couple of things. They're dependent upon how many shares we've bought back, because the more we buy back, then the more that number -- those ranges will change. And also our outlook on what the future holds for the hotel industry. So the more bullish we think the future will be as far as our underwriting will have an effect on that price compared to how negative we think the outlook turns out to be.

So we have suspended the preferred buying, several quarters ago. So that's not something we have been involved in or anticipate buying any time in the foreseeable future. But the common is something we still take a look at, depending upon what the stock price is.

Okay, thank you.

(Operator Instructions). Andy Wittmann, Robert W. Baird.

I just wanted to ask a question starting out with I guess the mezzanine loan portfolio. Maybe I missed this, but could you just give an update on maybe the coverage to the loans that you have in there, maybe an average coverage number, I guess mostly just the (inaudible) loan is the biggest slice of that, and I just wanted to get an understanding of how that's performing.

Well, overall they are performing poorly. But I'll let Kimo here opine.

We didn't give an average coverage, we just quoted the rate of return. We are currently receiving a 7.1 unleveraged.

That's on the ones that we have not written down. So as you know, there's a number of loans that we've written down and a few that we haven't. So that's the return we are receiving on the ones we have not written down.

So 7.1%. I'm trying to understand if that's full coverage or if that's a haircut from what you should be receiving, if you're getting paid out in full.

Oh, so you're asking if we are getting paid in full on those loans?

Yes, in terms of are they covering debt service today? Whether or not the backend gets there, that will be determined in the future. But I just want to understand the coverage today.

I see. Well, they are paying -- every one of the loans that are -- have not been written down are paying their full contractual payments. Now, right here offhand I can't tell you whether the owner on each one of those is having to come out-of-pocket each month or not. But if not having to come out-of-pocket, it sure is close I know on a couple of them.

And then I guess just wanted to touch on capital allocation a little bit. You mentioned that you're probably not a net buyer today. Are you a net seller? If cap rates are low, are you trying to market a few properties to find other uses for that capital?

Sure. Let me just modify what I said a minute ago, and that is that we have one of our mezz loans that is not paying current that we have not written down. And we have not written it down because we've got some personal guarantees on it. But one of our mezz loans is not paying current.

And could you repeat your question again?

The desire to potentially sell assets in a low cap rate environment?

We are not too inclined to sell assets in this environment. It's a great -- from a low cap rate standpoint, but it's also low EBITDA, and low NOIs. That doesn't mean that we won't sell any, but generally we don't think it's a great time to sell assets and would rather not do so.

Doug, have you got any comment on that?

No. There's clearly a lot of market on the sideline looking, but just if you run any sort of NPV analysis, we believe we will be better off considering sales with more -- stronger cash flows coming from the assets. So not really motivated.

We do get a fair amount of unsolicited interest given the quality of our assets though.

We are marketing one asset. We haven't decided whether to sell it or not. But we are marketing one asset for sale. That's the Hilton Suites in Auburn Hills. And that's a noncore asset, of course.

That makes sense. A little bit on the interest hedges. Is there a possible capital allocation you think there? I know this year you're kind of -- you got a notional value of like $5.4 billion kind of outstanding. I know you've bought some forward starting hedges in the future. Next year is not as hedged as this year. Is that something that is in your consideration?

It is in our consideration. We haven't decided if we want to change anything about that or not, but this year is more hedged than next year as far as the notional amount out. We're taking a look at it. We see the recovery happening, and the point of the hedge, as you know, is to do just that, is to hedge. If we see the recovery well underway, then probably inclined not to do anything. If we are still concerned, then we might go out and buy some more hedges. But we'll probably be looking at that sometime late summer, early fall, I would imagine, for next year.

Then just in terms of the value on the existing loans that you have, I know they're on the balance sheet for $108 million. In the past you've kind of commented that to unwind them you don't necessarily think that would be a market where you could do the transaction. Do you have an estimate of market value to unwind if you were to do that?

Sure. We think that $108 million is the market value or the right value. But I guess what we're trying to relay is that there's friction costs in trying to get someone to buy that from you. So I think we'll probably have to give up 5%, 10% or something on that in order to put that amount of cash in our pocket. That's what we wanted to do.

And we've been approached by a number of people, banks looking to transact and to take that off our hands. And while it would be a great cash flood for us, as we've explained to them, then we lose our hedge. And this strategy was not so much to make a whole bunch of money, it was to hedge our performance. So making that money would be nice, but we want to stay hedged. That's relatively much more important to us.

That make a lot of sense. I'm going to keep going here if you don't mind. I just wanted to get a reminder on the credit covenants. Was it April 2011 where the covenant ratio in terms of coverage ratchets up a little bit? Or can you just reminder us what that was?

That's right, it's 1.25 now, and in April of 2011 it goes up to 1.35. At the end of the first quarter this year, we ended at 1.69.

Have you been in discussions about refinancing the credit line? And can you just give us any color on that?

Not too much color, other than we are always in discussions about refinancing the credit line. We are just trying to figure out what the right time is.

While on the one hand we want to go out and address that and take care of it, for obvious reasons, on the other hand, every day the marketplace gets better and the terms get better. So we are kind of still walking along that tightrope of trying to balance those.

But we'll -- we're going to probably go talk to them, pick up discussions with them here over the summer. That doesn't mean that we will necessarily do something.

Great. That's all I have, thanks guys.

There appear to be no further questions at this time. So I'll now turn the conference back over to you.

Thank you, and thank you for your participation on today's call. We look forward to speaking with you again on our next quarter's call.

Thank you. Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.