Ashford Hospitality Trust Inc (AHT) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Ashford Hospitality second 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, August 5, 2010. I would now like to turn the conference over to Tripp Sullivan with Corporate Communications. Please go ahead.

Thank you, Sarah. Welcome to this Ashford Hospitality Trust conference call to review the Company's results for the second 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 risk 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 S3 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 the accompanying tables are scheduled, which has been filed on Form 8-K with the SEC on August 4, 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. We are pleased to report that our second quarter 2010 performance was our best ever in terms of AFFO per share with $0.46 in the quarter compared with $0.31 a year ago. This year-over-year growth of 48% are the strongest reported from our lodging peer group. The quarter's success was a direct result of our investment operational and capital market strategies, which set us apart from the competition. As a public Company we believe we are just completed one full cycle in the hotel industry.

From the beginning, our desire was to create a more stable earnings platform through a variety of strategies in a volatile industry. Our trailing 12 month AFFO per share troughed in the third quarter of 2009 at a level just 14% below our peak, despite the worst downturn in the industry since the Great Depression. It seems our peers, however, have yet to trough, and thus far are down an average of 78% from peak to trough on a trailing 12 month AFFO per share. Our one year, two year, three year, four year, five year and six year total shareholder returns exceed every one of our peers except solely for one peer's run up this year.

Specifically our share repurchases and debt strategies continue to accomplish the stated goals and distance us from a peer group. Loan extensions, modifications, and refinancings since January 2009 totaled $495 million, that contributed to our strategy of reducing near term loan maturities. We only have one $5.8 million non-extendible loan coming due between now and November of 2011. We are also benefiting from our floating rate interest strategies, with rates remaining near historic lows, with the Fed still indicating rates are likely to be low for an extended period of time. Based upon current LIBOR, we would expect to earn $62.1 million in 2010 from the strategies put in place beginning back in March of 2008. By comparison, all of our peers have a significantly greater percentage of higher cost fixed rate debt during this downturn, and have not capitalized on these unprecedented low rates.

Our share repurchases have been well timed and quite effective. The goal of the strategy has been to maximize current and future shareholder appreciation by using our cash to make the best possible investment at a deep discount to value. During the quarter, we repurchased an additional 2.1 million shares of our common stock and repurchased 519,000 operating partnership units. The total common share equivalents purchased since inception is 74.1 million shares, which is a 50.4% reduction from our historical peak fully diluted share count. Our average repurchase price since inception of the program is $3.26 per share for the common, $6.47 per share for preferred and $7.25 for common equivalent partnership units.

Based upon yesterday's closing prices, that represents approximately $500 million of shareholder value we have created thus far, assuming we were to reissue like amounts of the shares repurchased. By comparison our peers have raised large amounts of equity at a time when we see an excess amount of capital chasing transactions at low cap rates and high prices per T. We are extremely pleased with the success of our buyback strategy and forecasted capital appreciation for our shareholders.

Now turning to operations, the monthly improvement in RevPAR we cited last quarter has continued through the second quarter. Since reporting an increase of 2.9% for March, we've experienced a 3.5% gain in April, 3.8% in May, and 4.6% gain in June. For the entire quarter RevPAR for the hotels not under renovation was up 4.5% compared to the prior year and up 3.9% for all hotels. ADR was down 3.1%, while occupancy was up 502 basis points for all hotels. As we witnessed room demand increase, we expect to see an upward movement in ADR that should result in improved RevPAR growth. Although the trends over the past two quarters suggest the industry is past the inflection point in the cycle, we will continue to evaluate the trends for sustainability, and seek more definitive signs of a well entrenched recovery. There are still economic indicators such as consumer confidence, unemployment and GDP, that suggest the economic turnaround is not yet on firm footing.

Our RevPAR for the quarter was below the average for the industry. This was due primarily to our over concentration in underperforming markets such as Orlando, Dallas, Washington DC and Jacksonville, and our under concentration in outperforming markets such as New York, Boston, Chicago, New Orleans and Denver. Markets typically recover at different paces, and we hope our RevPAR performance will pick up given the diversity of our portfolio.

We continue to excel at managing our cost structure to maximize operating results. Our aggressive cost cutting resulted in our hotel EBITDA margin increasing year-over-year by 195 basis points for all hotels. This is the first year-over-year gain in EBITDA margin we have reported in over six quarters. Our affiliated manager, Remington, contributed consistently to these results. Given how hard won these gains have been we intend to manage our operations very tightly and keep cost increases under control as the economy recovers.

Regarding capital expenditures, we completed $15.3 million of projects in the quarter. We remain on track for our targeted spend of $87 million for 2010, as we continue to selectively upgrade hotels to improve their competitive ranking in their markets. Given the level of investments in our portfolio over the past few years, we believe we are well positioned to take advantage of the continued improvement in the economy. When we factor in the lack of new supply in our markets, we are very opportunistic about our long term outlook.

Looking ahead, we remain focused and disciplined on our top priorities. We continue to manage our business with strong operational practices in capital markets ingenuity that delivers bottom line results, and positions the Company for maximum shareholder appreciation. I'd now like to turn the call over to David Kimichik to review our financial results.

Thank you, Monty. For the second quarter, we reported net income to common shareholders of $1.969 million, adjusted EBITDA of $59.147 million and AFFO of $33.742 million or $0.46 per diluted share. At quarter's end, Ashford had total assets of $3.9 billion, including $174.9 million of unrestricted cash. We had $2.8 billion of mortgage debt with a blended average interest rate of 2.97%. Including the $1.8 billion interest rate swap, 98% of our debt is now floating and the weighted average maturity is 4.9 years. Since the length of the swap does not match the term of the underlying fixed rate debt, for GAAP purposes, a 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. The second quarter it was a gain of $16.534 million, and year-to-date it was a gain of $30.442 million.

At quarter's end, our portfolio consisted of 101 hotels in continuing operations, paying 21,917 rooms. Additionally as of June 30th we owned a position in four mezzanine loans with a total book value of principal outstanding of $56.7 million with an average annual unleveraged yield of 7.1%. We own positions in other mezzanine loans, with zero book value and no current yield. Hotel operating profits for the entire portfolio was up by $7.5 million or 12.2% for the quarter. Our quarter end adjusted EBITDA fixed charge ratio now stands at 1.76 times versus the required minimum of 1.25 times. Ashford's net debt to gross assets is at 58.5%, versus a not to exceed level of 65% for our credit facility covenant. At quarter end, our share count was 73.1 million fully diluted shares outstanding, which is comprised of 51.1 million common shares, 14.6 million OP units and 7.4 million shares of our Series B convertible preferred.

Regarding assets in special servicing, on the Westin O'Hare, we've been working with the special servicer on the loan to arrange a consensual deed in lieu of foreclosure. Based on the status we're required to write down the book value in the fourth quarter last year 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'll then record a gain of approximately $53 million to the level of non-recourse debt on the property, for a net impairment of approximately $6.3 million.

Another asset with special servicer is our Courtyard in Manchester, Connecticut, that secures a $5.8 million loan maturing in January 2011. We're currently in discussions regarding possible loan modifications. In May, we received settlement on our mezzanine loan on the Lane Meridian hotel in Dallas for $1.1 million. The loan had previously been fully written down, and we recorded a credit of $1.1 million to impairment charges.

Also, our Hilton Suites in Auburn Hills, Michigan is currently under contract to be sold . This hotel is located in a non-strategic market, and requires near term capital expenditures. Although the contract is not yet hard, we elected to write the asset down to the estimated fair market value, and took an impairment charge of $12.1 million. I'd now like to turn it over to Douglas to discuss our capital market strategies.

Thank you. There is an increasing amount of domestic and offshore capital seeking investments in the lodging sector for several reasons, including expected outperformance compared to other real estate segments, inflationary hedge, discounted values, and anticipated favorable demand supply and balance for several years to come. Buyers are now adjusting to seller expectations, which is resulting in cap rates for recent transactions ranging from 2% to 6% on current income for all hotel types.

While we have recommenced looking at transactions and analyzing the dry powder we have for such opportunities, it is likely that any potential investment will have to be very strategic and unique in nature for us. Recall that through our share repurchase strategy, we've been essentially acquiring hotel assets at significantly better value over the past couple of years than what we see today. We're extremely pleased with the growth forecast for our buyback strategy, along with the immediate and longer term impact this will have on shareholder stock price appreciation.

We continue to access capital in an environment that is showing increasing signs of liquidity. As we've discussed before, our goal is to push out loan maturities to better coincide with the recovery and market values to facilitate future refinancings or sales. During the second quarter, we restructured a loan for $156.2 million, secured by the Hilton LaJolla and the Capitol Hilton, that extended a 2011 maturity to 2013, eliminated coverage tests, and reduced our cash management provisions. We also restructured a $52.5 million loan secured by the JW Marriott San Francisco, that was set to mature in 2011 with a full extension to 2013, eliminated the coverage test, and kept the rate at 375 basis points over LIBOR, in exchange for paying down the loan by $5 million.

Even though we have few loans coming due over the next several quarters, we continue to engage with lenders and servicers to restructure and extend loan maturities to add to the $500 million of loans we've modified or refinanced since early 2009. For example, we commenced discussions on our credit facility that does not mature until April 2012, just to see if an early restructure makes economic sense with the goal of adding maturity in a way that also could benefit the banks in the line.

As Monty mentioned earlier, our interest rate strategy is clearly having a positive benefit to our results. On a trailing 12 month basis we have been able to save $61.6 million in interest expense. Based on the structure of our hedges, rates could increase by another 45 basis points from today, without any significant change in the benefit we receive. As long as LIBOR remains below 3.2%, an almost 11 fold increase from its current level, we will continue to receive positive benefits from the strategy through March 2013.

As of June 30, the market value of our swap and related financial transactions is $124.9 million. It is important to keep in mind that our interest rate strategy was initiated to offset the weakness in the economy, by capitalizing on the correlation between RevPAR and LIBOR. Today, we're experiencing the positive benefit of both trends, with RevPAR increasing and LIBOR remaining at historic lows.

We are monitoring the Fed's comments and economic projections closely. Recent Fed and economist indications suggest the timing of rate increases could be extended, resulting in added benefits from our strategy. We still expect that when interest rates increase over time, it is highly likely that RevPAR would similarly move upward. The strategy will then have accomplished the objective of providing a cash flow hedge.

Lastly, subsequent to quarter end, we participated with Prudential Real Estate Investors in a discounted purchase of a partial interest in an existing mezzanine loan tranche associated with JER's 2007 privatization of the Highland Hospitality portfolio. Ashford's investment was $15 million. This new investment, which is more senior in the capital stack, is a strategic compliment to our existing joint venture investment made with Prudential in 2008.

In summary, we believe we are executing well operationally and financially. We remain proactive and strategic in our efforts, and even more so now, we're completely aligned with our shareholders to enhance our share price, given that Management and insiders own 20% of the Company. That concludes our prepared remarks and we will now open it up for questions.

Thank you. (Operator Instructions). Our first question comes from the line of Patrick Scholes with FBR. Please proceed with your question.

Hello, good morning. I wonder if you could give us a little more color on, you did 195 basis points of hotel EBITDA margin increase on basically 4% RevPAR growth, which on the surface sounds impressive. How was that accomplished? Was there any sort of comparable issue that made that number, that 195 basis points look inflated at all?

Sure. This is Monty. If you look at our earnings release, the second to the last page details exactly what part of the P&L those benefits came from and there was I'd say some of each, some savings that are kind of consistent over time and some pops if you will. For example, in the leases and other section which is 56 BPs of the 195, we had a couple of items in there. On the leases side, we had a equipment leases at one property that stopped and we're fully paid off, so that was favorable year-over-year. We also had two ground leases that last year at this point were over-accrued, and so the comparison this year is favorable, and we also had some expenses in the first quarter that were run through the financial statements that should have been capitalized and so those were reversed, so those were kind of I don't know, one-time pops.

If you look at property taxes, there's a good benefit there. How we generally book our property tax expense, is we put in an amount that's consistent with say the prior year or with what we're assessed, and only upon the actual return of cash dollars after our appeals do we adjust the numbers, and so we've got some positive impacts here in this quarter because we received some refunds for 2009 taxes. Now, while that's in some sense kind of a one-time pop, we do hope that over the next several quarters as we continue to get results back from 2009 appeals and 2010 appeals, that we'll have those sprinkle into our results for a number of quarters but you just don't know until it happens. So I'd say that those were some of the one-timers.

Okay, great. I appreciate the color, thank you.

You bet.

Thank you. (Operator Instructions). The next question comes from the line of Andrew Wittmann with Baird. Please proceed with your question.

Good morning guys. I guess Doug or Monty, I just had a couple questions on the mezzanine loan here on Highland. I guess kind of starting out with some of the economics and maybe moving into strategy questions on that. Can you just talk us through on the economics what the coupon is that you're currently incurring, maybe define it as on the face value, and then I assume you bought this at a substantial discount to par, kind of what that means on an income today?

Sure. This is Monty. We did buy it to a discount to par and as you can imagine with the season with which this loan was originally made, the current pay out is quite thin. We are in a joint venture there with Prudential and out of respect to the joint venture, I'm just not going to get into too much specifics on that part of the note, but it is a position senior to our existing position, and we bought that note as kind of a defensive and offensive play. We had been in some note positions where we were wiped out and that's not going to happen on this situation. When I say that, I mean that we're going to fight and do everything we can to make sure it doesn't happen, because it was a good size investment for us the first time around when we invested $17 million to $18 million in mezzanine 6 and I think we said we put in another $15 million. So it's a nice portfolio and we want to make sure that we get all of our money back.

Okay, I think you mentioned in the prepared comments that you had a partial interest. Is that partial interest describing the venture -- that your a partial interest in the venture, or is there other people besides the venture in your mezzanine 4 position along with you?

Both.

Okay, so there's other partners so out of the mezzanine 4 position, how much does your venture own? Are you a majority owner as the venture in mezzanine 4?

We are a majority owner. Our venture is a majority owner.

Okay, that makes sense. Can you give us a sense about, just on the LBO, I guess in 2007, where your last dollar was in the capital stack at that point in time, or maybe where your last dollar would put you on a per key basis?

I don't have that information right here in front of me. Why don't you call back David Kimichik and he will dig up that information for you.

And I want to do one more on this one. Just understanding how, and this is just trying to understand how these things work. Because this is mezzanine and there's secured debt in front of you, if this is an offensive move, you alluded to this being an offensive move, how does that work when there's secured debt and presumably some of those loans go bad, how does the mezzanine holder fall in when you've got a position on a portfolio of assets, how does one bad secured loan allow you to get access as an unsecured claim on a portfolio?

Well, I know you probably don't like this answer, but it depends on almost every financing. Typically there's a first mortgage lender and then there's several tranches of mezzanine lenders, and in this case there's eight tranches, so its had a lot to do with what the value of the portfolio is. We feel very strongly that the value of this portfolio is at or above the mezzanine 4 tranche, and the questions you ask depend a lot upon what's written in the intercreditor agreements among the mezzanine players, between the mezzanine players so it can get pretty technical and complicated but everyone generally is different. So we feel very positive about our position and I think that we're going to come out very well.

Okay and one final question. On Auburn Hills, are you expecting any net cash proceeds on that sale?

We are. The property is currently unincumbered, so what we sell it for is what we will put in our pocket.

Great. Thank you. That's it for me. Thank you.

Thank you. Our next question comes from the line of Smedes Rose with Keefe, Bruyette, Woods. Please proceed with your question.

Hello. Is this $5.1 million of assets held for sale on the balance sheet, is that the Auburn property or is that related to something else?

No, that's it.

Okay, and then I guess you mentioned in your remarks, Monty, that you have some overexposure to underperforming markets, and I'm just wondering now that the transaction market seems to be picking up a little better, firming up. Is there any interest for Ashford over some period of time to try to shift this portfolio out of some of those markets? It seems like you have a lot of Southeast exposure and maybe into kind of the unfortunately the markets that everyone else seems to want to be in, or are you happy with your portfolio right now?

That's a good question and one that we've been ticking around here. In the past, we found that our portfolio has very closely mirrored the national stats. One month will be above, the other month will be below, but over time just right on. This is the first time that I can recall that we've had several months where its been below and so that's been troubling for us because we by design want our portfolio to track some of the national stats. So now we're sitting here thinking well, if we work on just our portfolio we don't want to adjust our portfolio and the minute we do adjust it, then it starts to revert back to the mean and the markets that we're over concentrated in outperform, and so then we're shooting ourself in the foot. So really what we've got to try to understand is how much do we think those markets that were underrepresented in are going to outperform going forward if at all, and again, our experience is that it snaps back, so it's kind of a complicated question for us and then as you can imagine, there's getting rid of existing properties in this market is not so attractive

And then generally on the buy side, when we buy, you have to raise equity to buy, and our stock price is not as attractive when we would want it to be in order to raise equity to go buy, and then we also don't want to overpay when we jump into these new markets so it's an excellent question. It's an answer though that kind of confounds us because we don't want to jump out there and do something and be worse off, so I'd say we will probably just wait a few quarters and see if this is something that we think is longer term and if it is, then we'll devise a strategy to go rebalance our portfolio, and in the meantime we'll hope that it's just a short-term blip.

Okay, and then could you just also comment on your interest in continuing to repurchase stock and also maybe some color on the dividend or a potential dividend?

Sure. Regarding repurchasing stock, well you never say never. We don't think that we're inclined to be out there buying stock. The price has run up to a level that at least the way we look at it, we don't see it as accretive so at these levels, I'd say that it is very unlikely that we'll be buying back any stock. Regarding dividends, we're just going to stick to our pattern. In December of each year we outlined our dividend policy for the coming year. This past December we said that we would most likely not be paying any dividends this year, and in December this coming year, we'll talk about 2011.

Okay, thank you.

Thank you. Our next question comes from the line of Will Marks with JMP Securities. Please proceed with your question.

Thank you. Hello, everyone and as a follow-up to I think the first question that was asked, on the roughly 4% RevPAR turning into really good margin expansion of 200 basis points almost, how should we, you gave some indication of some one-time issues, and I can see that in the press release. But how should we look at that for the second half? Do you think you can achieve a 200 basis point margin improvement in the second half?

I'd just probably repeat my first answer in that some of those are one-timish, especially the ones in the leases and other categories. On the other section, the property taxes, we hope to be receiving more refunds going forward which would provide a positive benefit there but we just don't know it until it comes and you could probably handicap it as well as we could. You just don't know with these taxing authorities what they will do, so I'd say probably with the property tax variances, I'd like to think that there are going to be some more positive variances but I just don't know. And most of those other expenses in the operating side, when we were really cutting back expenses last year because of the downturn, as we worked with some of our Managers, some of our properties, we were having a challenge with one of our Managers on the Select Service hotels in order to get their cost in line and it took a while to get them there.

Maybe to the third quarter or so, and therefore, some of the cuts that were put in place were put in place in the third quarter, in the fourth quarter, and so now we're still seeing some of the benefits of those cuts, so those will, and again these are generally but I would hope to still see some of those benefits in the third quarter, but they should start to cycle out as we anniversary past those initial cuts.

Okay. In terms of the top line, so appreciate that input on the margin. On the top line if we look at third quarter and fourth quarter, it seems like July has been a fairly strong month with decent RevPAR growth and almost mirroring I think the second quarter. How should we be looking at, what are you seeing from your portfolio in the third quarter so far?

Well we just don't give guidance, so we're not going to comment on the results so far in the third quarter. But I think the overall macro view holds true, which is you can see that we're over concentrated in some markets and under concentrated in other markets, and generally we keep up with our competitive sets in those markets, so a decent proxy is to look at where our properties are located and see how those markets are performing.

Do you see a similar breakdown in terms of seasonality in 2010 as 2009?

We've got a seasonality table in our release as well, and we don't see any reason why seasonality would be different.

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

Sure.

Thank you. (Operator Instructions). Our next question comes from the line of David Loeb with Baird. Please proceed with your question.

We're double teaming you this morning, thank you for that.

I noticed that.

And I really do appreciate your candor on Andy's question. I know it's a complicated topic. I wanted to go a little deeper on what Smedes asked, about really just capital allocation broadly. You've got a lot of cash on the balance sheet. You've got cash flow coming in. You'll have some select asset sales that will produce some proceeds. How do you look overall at capital allocation? It sounds like the stock is not necessarily something you're going to focus on, but as you look at the line balance or other uses of cash flow, how does that enter into the whole thought about the line renewal issues and things like that and just kind of the overall how you look at capital allocation today?

Sure. As far as use of proceeds I'd say that the biggest items on our list as far as use of proceeds is our line and paying that down as, well as maybe acquisitions under the right circumstances, with probably more emphasis but definitely more emphasis on the line pay down as far as use of capital. And then also sprinkle in there we've got CapEx which we skinnied up just a little bit over the past couple of years and would probably want to start loosening the reins on that. Again we didn't get very far behind at all but we've got a little bit of catching up to do on the CapEx side, so probably some use there as well.

Well it does sound like a little bit of a shift relative to the line because you drew that all down and have held on to a lot of cash. Are you thinking of using your existing cash to reduce that? Does that enter into the discussions with the existing lenders about renewal or new line?

There is a shift. We're through a period where we think that it seems like at least, that we've hit the bottom as far as an industry and are starting to come back. So our concerns about the banks being able to provide the cash when we call it, those concerns have abated. And when you're out there and you don't know where bottom is, it can be very scary. So it seems like the industry has hit bottom and things will be going up from here so we definitely feel a little bit more relaxed and our attitude toward that has changed.

Okay, and Doug, just in terms of options for the lines, I promise this is my last one, as you look at secured versus unsecured, I guess you have unencumbered assets that you really can't encumber because of the limits on the current line. What's your thought about secured versus unsecured going forward, or is it really just too early for you to be making that call?

Obviously, we have a very attractive line that has a maturity date in April of 2012, so we have the benefit of extended period before we actually have to address it. But as I mentioned in my comments, we believe as you've seen us to be very proactive in looking at opportunities with our line. The current lending environment is one that is more focused on securitized assets. We have the ability to pledge some of our unincumbered hotels. We have three such hotels, so I think most lines today that are being extended, encompass some form of a pledge of unincumbered assets, some form potentially of a pay down. So we're going to evaluate what we think is in the best economic interest for the shareholders, bearing in mind that we have time, but we also want to do something that we think is in the best interest of the banks that we are close to, so it's a fluid dialogue. We've commenced those discussions as I suggested, and we'll hopefully have more to say about this perhaps in the coming calls.

Okay, great. Thank you.

Thank you. And there are no further questions at this time. Mr. Bennett, I'll now turn the conference back to you to continue with your presentation or closing remarks. Thank you.

Thank you. Thank you, everybody for joining the call today and we look forward to talking with you again on our next quarter's call.

And ladies and gentlemen, that concludes the conference call for today. We thank you for your participation and ask that you please disconnect your lines.