Ashford Hospitality Trust Inc (AHT) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Ashford Hospitality third-quarter 2010 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded Thursday, November 4, 2010. I would now like to turn the conference over to Tripp Sullivan, Investor Relations. Please go ahead, sir.

Thank you, Myra. Welcome to this Ashford Hospitality Trust conference call to review the Company's results for the third quarter of 2010. On the call today will be Monty Bennett, Chief Executive Officer, 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 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 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 schedules, which has been filed on Form 8-K with the SEC on November 3, 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 will now turn the call over to Monty Bennett. Please go ahead.

Thank you, Tripp. Doug Kessler, our President, is on the road today and unfortunately couldn't dial in. I will offer some opening comments, then turn it over to Kimo for a review of the financial highlights. I will then discuss our capital allocation strategies at the end of the call.

As compared to our peers, we have at times taken a different approach to investment and capital market strategies. We continue to demonstrate that a platform comprised of a diverse portfolio, a relentless focus on maximizing operating results, capital markets ingenuity and management interests closely aligned with shareholders can produce strong returns that outperform the competition.

A clear indication of the success of our efforts is that our one-, two-, three-, four-, five- and six-year total shareholder returns exceed each of our peers'. In fact, for the most recent quarter, we continued our strong year-over-year growth pace with an 83% increase in AFFO per share to $0.33.

Once again, that is among the strongest growth record to date from among our lodging peers. It's also the highest per share we've earned in the third quarter since our inception and a direct result of well-executed capital market and asset management strategies.

Turning to the performance of our portfolio, we reported a 6.1% increase in RevPAR from hotels not under renovation in the quarter. ADR was up 0.7%, and occupancy was up 372 basis points. That reverses a 3.4% decline in ADR from the second quarter.

I think we can safely say the industry is beyond the recovery inflection point. However, we remain cautious with our strategies pending more clarity on the economy and job growth.

Strong topline performance has been accompanied by strong operating results. We are intensely focused on cost control and continue to impart this operating discipline on our managers and intend to keep flow-throughs above 50% and drive growth in hotel EBITDA margin.

For the hotels not under renovation, EBITDA margin increased 192 basis points from a year ago to 25.6%, while for all hotels, EBITDA margin increased 173 basis points to 25.4%.

Our affiliated manager, Remington, significantly contributed to these results, and we also had a strong contribution from the brands as we continue to work very closely with them to keep costs under control.

Throughout the third quarter and to date in the fourth quarter, we have actively worked to create liquidity, extend our maturities and reduce our overall leverage. As a result, we ended the quarter with a leverage ratio of just under 55% compared with 59% at year-end 2009.

During the quarter, we eliminated one of our upcoming maturities with a loan restructuring, had an asset sale and completed a consensual deed in lieu transaction. We have created $215 million of borrowing capacity on revolving credit line and currently have only $35 million drawn. As it stands today, we have only $209 million in hard maturities in 2011, most of which occurs in December, and $242 million in 2012, and are working to address these loans.

Although we have not made any recent share repurchases, our share buyback program since inception through the third quarter reflects the repurchase of 73.6 million common shares, representing a 50% reduction from our peak share count. These shares were acquired at an average price of $3.26 per share.

Based upon yesterday's closing price of $10.46 per share, this strategy has created an approximately $530 million in shareholder value, assuming a like kind amount of shares were to be reissued. We strongly believe that our share repurchase strategy is far superior in delivering immediate and longer-term accretion as compared to many of our peers, who issued equity at the worst possible time at low share prices.

Lastly, turning to capital expenditures, we completed $13 million of projects in the quarter. That leaves us on target to spend approximately $66 million for the year as we continue to selectively upgrade hotels to improve their competitive position in their markets.

Our priorities are unchanged for the balance of the year. We have an intense focus on improving our balance sheet and liquidity while controlling costs and leveraging off of improving trends.

We will also continue to be creative and flexible in pursuing capital market opportunities. We will execute each of these with a commitment to improving shareholder returns.

In conclusion, we believe we have proven to be good stewards of our shareholders' investment during one of the most trying times in the lodging industry and remain closely aligned with their interests with insiders' ownership of 20% of the Company. The strategies we are executing and the moves we have made to capture value demonstrate our commitment to outpace our peers going forward.

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

Thanks, Monty. For the third quarter, we reported net income to common shareholders of $36,281,000; adjusted EBITDA of $47,959,000; and AFFO of $23,532,000 or $0.33 per diluted share.

At quarter's end, Ashford had total assets of $3.7 billion. We had $2.5 billion of mortgage debt, with a blended average interest rate of 2.9%. Including our interest rate swap, 100% of our debt was floating as of September 30. The weighted average maturity is 4.8 years.

After factoring in the new swap transaction we close on October 19 and the refinancing of the Gateway Marriott, 75% of our debt is now fixed, and our overall cost of debt is currently 3.08%.

Since the life 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 market value of these instruments must 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. For the third quarter, it was a gain of $382,000 and year to date is a gain of $30,824,000.

At quarter end, our portfolio consisted of 100 hotels in continuing operations, containing 21,392 rooms. Additionally, as of September 30, we owned a position in four mezzanine loans with total book value of principal outstanding of $69.1 million.

Hotel operating profit for the entire portfolio was up by $5.8 million or 11.7% for the quarter. Our quarter-end adjusted EBITDA as a fixed-charge ratio now stands at 1.83 times versus the required minimum of 1.25 times. Ashford's net debt to gross assets is at 54.9% versus a not-to-exceed level of 65% for our credit facility covenants.

At quarter end, our share count was 73.0 million fully diluted shares outstanding, which is comprised of 51.1 million common shares, 14.5 million OP units and 7.4 million shares of our Series B convertible preferred.

I'd now like to turn the call back over to Monty to discuss our capital market strategies.

Thanks, Kimo. There is an increasing amount of transaction activity underway in the lodging sector in terms of investments, loans and the broader capital markets. Investors are responding to the improving real estate fundamentals for the sector and are targeting more capital for hotel lending and ownership. As a result, we have worked productively to improve our balance sheet, enhance liquidity on favorable terms and take advantage of changes in the capital markets.

First, I would like to share with you some of our capital market activities. During the third quarter, we observed a reinvigorated preferred market and a tightening of strip yields on our preferred, and as a result issued 3.3 million shares of our Series B preferred stock that would raise $74 million.

Recall that during the downturn, we had repurchased 3.1 million shares of the Series A and B preferred stock an average price of $6.47 per share. Issuing the Series B shares back to the market at a gross price of $23.178 created a net gain in value of $55.1 million. We used the proceeds to pay down outstanding borrowings on our credit facility.

Regarding interest rate management, based upon the current terms available in the swap market, we announced late last month the conversion of our $1.8 billion interest rate swap back to a fixed rate of 4.09%, resulting in locked-in annual interest expense savings of approximately $32 million for the remaining term of the swap.

With this new transaction, we have locked in close to the maximum possible annual savings from the swap over the remaining term while eliminating the risk of potential LIBOR increases, all at no cash cost to us. Moreover, the existing flooridors for 2010 and 2011 may provide personal economic benefit. We are very pleased that this proactive strategy accomplished our objective.

With hotel pricing increasing, we believe it makes sense to explore selling assets -- certain assets, I should say. During the quarter, we sold the Hilton Suites in Auburn Hills, Michigan, for $5.1 million.

In the same month, we transferred the Westin O'Hare to the special servicer via consensual deed in lieu of foreclosure. We recorded a gain of $56.2 million to the level of nonrecourse debt on the property after having previously written down the book value to the estimated fair market value, which resulted in an impairment of $59.3 million at that time.

We are currently in the market with three full-service hotels, namely the JW Marriott San Francisco, Hilton Rye Town and Hilton El Conquistador, along with three select service assets.

On the financing front, during the quarter, we restructured the loan on the JW Marriott San Francisco to fully extend the maturity from 2011 to 2013. Subsequent to quarter end, we refinanced the Marriott Gateway in Crystal City that provided $105 million in proceeds for a 10-year loan at a fixed rate of 6.26%, with 30-year amortization. This one replaces the $60.8 million loan that was set to mature in 2012. We used the proceeds to reduce amounts drawn on our line of credit.

Looking ahead to the balance of the year and 2011, we remain encouraged by the traction and fundamentals in trading activity. We have always exhibited an inclination to recycle our capital to find more accretive deployment opportunities utilizing, where possible, internally generated capital over external capital in order to maximize shareholder appreciation.

That concludes our prepared remarks, and we will now open it up for questions.

(Operator Instructions). Andrew Wittmann, Baird.

I just had a few questions this morning. First, I was wondering if you could provide any update on the Highland mezz that you bought in the venture last quarter, any update there?

Sure. As you will recall, some time ago, in a joint venture with Prudential, we bought a position in Mezz 6 of the Highland portfolio that was purchased by JER. Subsequent to that and about two or three months ago, we bought another piece, and that's a portion of the Mezz 4 position. And we did that both in order to realize what we thought would be great returns on that investment and a strategy also to help protect our other investment of Mezz 6.

We are currently in discussions with all the parties and continue to remain in discussions with them. I wish I had something to report, because I would love to have resolved something sooner on all this. But unfortunately, nothing has been resolved.

So we continue to have dialogue and hope that we can come to some type of arrangement so that nothing becomes contentious among all the parties. But that's, of course, dependent upon all parties involved. So nothing really new to report there other than that we are still in discussions.

Okay. And just any idea on timing of disposition of that? Is it this year still, or do you think it floats over into next year?

You know, I just don't know, you know? I just don't know. Like I said, it depends upon the other parties. And each party has got different agendas. And banks are involved, and so there's regulatory issues that I'm not even aware of.

So I think from our perspective, we would like it resolved yesterday, just because we'd like the certainty of it. But unfortunately, we just are dealing with folks that have different timetables. And so I just don't know.

Okay. Then just maybe this one is a little bit better for Kimo. Just with the gain for the, I guess for the deed-back of Westin O'Hare, does that force your hand for any sort of dividend payment to avoid paying tax this year? Or is there enough flexibility in your dividend policy right now where that gain does not force a dividend?

It does not force a dividend.

Okay. And just I guess kind of more broadly on the dividend, clearly with the cash flows being pretty strong, you just pointed out third-quarter FFO, highest you've ever reported -- are we getting to the point where you have to start contemplating taxable income or paying just a regular quarter dividend again? Can you just give us kind of what you're thinking on that?

This is Monty. For this year, it's not an issue. And the guidance that we gave last December was that, although each quarter we'd decide about the dividend, that we're inclined not to pay a dividend this year.

As far as next year goes, as you are aware, it's a very complicated calculation as to whether one is required to pay it or not. And we are in the process of looking at forecasts and going through that.

So we plan to have -- announce policy in December, as is our custom, about what our intent is for the upcoming year. And we will have all that announcement done by then. So unfortunately, I just can't give you -- we just haven't done all the work necessary in order to give you that answer. It's not forcing our hand right now, though.

Okay. That makes sense. Then just I guess kind of one final question. It's kind of just on the balance sheet management. If you look at a debt to EBITDA measure, clearly the Company looks very highly leveraged still, we would think in excess of 8 times. But cash flows with your lower cost of debt look strong. It looks like the credit facility is going to probably get paid back if you don't buy or sell anything here, probably sometime in first quarter, just through cash flow.

Can you just tell us how you're thinking about leverage, considering that cash flows are good, but leverage remains high? And as you continue to either sell assets with debt on it and can -- and actually build up more of a cash balance, what you plan to do with the cash balance? Do you go out and buy maybe unencumbered hotels and bring your net debt to EBITDA metric down that way? Or how do you go about and address that?

Sure. Our belief as a company on the debt front is different than our peers. We think running a company, a real estate company with 35% debt is harmful to the equity returns of the shareholders. It's just too low. We are happier with something closer to a 50% or even 60% debt to cost.

So our EBITDA to debt numbers are high, but that's because we went through the worst recession in history. And that's why you have a debt level that's much lower than 100%, in order to make it through those tough times. And so we did, and we seem to have done so very well.

So taking your question and turning it just a little bit, instead of our focus on reducing debt, our focus is more on reducing risk. And we have some -- just a few recourse liabilities to the Company. The credit facility is one, and the debt on the JW Marriott out in San Francisco is, I believe, our only other recourse obligation.

So, as you can see from our moves here recently, we are looking to reduce that exposure of recourse, because, regardless of what your overall debt level is, unless it's recourse to the Company, you can let that group of properties go back to the lenders.

And so, in real estate especially, I think it's not a total debt load that's important. It's is all the debt crossed; is it nonrecourse? And so we have paid down our revolver substantially, and we are in the market to sell that JW Marriott, which, if we do, then it will pay off that recourse debt. So our inclination now is to reduce the amount of recourse debt, not really the overall amount of debt.

Now, as we accumulate cash, there's a few uses for it. One is to acquire properties. The challenge that we've got, and our peers have, but they don't seem to be as focused on it as we are, is that there are some great opportunities to be had out there to buy and to make some nice equity returns on, but the cost of equity is high.

And so you really have to compare how well do you think an asset you are buying is going to perform against your existing portfolio, because you have to go use equity or raise equity in order to go buy it. And that's a hard call to make.

So, as we accumulate cash, what we will probably be doing is looking for acquisition opportunities or additional CapEx or some of the other many potential uses that are out there, but not necessarily to pay down any nonrecourse debt. We'd rather just keep the cash on our balance sheet.

Great. That's a good answer. Thank you very much.

(Operator Instructions). Will Marks, JMP Securities.

A question on -- you guys are nice to give the breakdown toward the end of your note on page 15 of how the margin changes during the quarter. I noticed that the rooms margin declined a little bit, and yet you had good RevPAR growth. Can you just comment on that, and maybe what it takes for that number to move up?

What it takes for it to move up is ADR growth instead of occupancy growth. Just about all of our RevPAR increase was in occupancy, and that treats more room expenses. And so it makes it tough to hold those rooms' margin when it's occupancy only. As that switches to ADR or just even more of a balance of ADR, we expect that to hold a little more firmly or improve.

Okay, thanks. And Kimo, on the model, I know you don't give guidance, but maybe you can give some thoughts on these expense items. I noticed that on the property tax line and the corporate G&A line, it seems like the run rate declined a little bit. And I know there are some seasonal issues, but do you think third-quarter numbers are maybe indicative of what we should see in future quarters?

Let me jump on property taxes and let Kimo talk about corporate G&A. The property taxes are numbers that we book based upon -- we approve based upon what was last year or what the taxing authority has issued us notes on. It's only when we actually get property tax abatements and actually able to reduce our rates do we credit, then, against that accrual.

And so we have been getting some reductions in property tax expenses over -- in the past few quarters, largely from our appeals that we put in from 2009. This doesn't show very many 2010 appeals yet.

So what you have in that property tax number is really two numbers -- one, kind of the existing ongoing rate, but then some accrual reversals for those two, three, four, five, where we have gotten some substantial reductions in the past quarter.

Now, going forward, that ongoing rate will be slightly lower, but then we will have some more, hopefully, of these reductions. And unfortunately for you guys that are trying to forecast, it's hard for us to know if we are going to get those reductions, and if so, which quarter we are going to get those reductions. Our hope is that that property tax number will continue to come down, which means we will get some more reductions. Kimo?

On the G&A, Will, I think the quarterly number is probably consistent with the year-to-date number on a run rate basis. So I would go ahead and just forecast that out.

Okay, great. And a final question, I guess big picture for you, Monty, I think you touched a little bit on it. But in terms of locking in rates, big-picture view, you guys have done a great job, I guess, of predicting in this regard. What you think is going to happen to rates in the next year? It's a big question, but you've been right in the past.

Well, we think rates will continue to stay very low, outside some type of major market financial crisis. I don't think we are through this financial crisis. I think there's still some danger in the financial markets with the amount of debt that the country is running on, the basing of the dollar and what that does to exchange rates.

So the financial markets are dicey and scary, at least to me, right now. So outside of what might happen there, I think the Fed is going to keep those rates low. But there's always the wild card of some other crazy event in the financial markets which could make rates spike, like they did -- I think it was in December of -- October? Was it October of 2008?

So when we saw that we could lock down these rates very close to maximizing our maximum potential benefit, well, then the risk-reward just shifted. And we said, well, why not lock it in? I think we gave up maybe like 9 basis points, was the most we could have otherwise gotten if rates do indeed stay low, which we think they're going to be. And in return, we eliminate the risk of some type of financial market crisis again. So for that 9 basis points for two-and-a-half years, we just thought it was a good trade for our investors to go for certainty.

Okay. Thank you very much.

Smedes Rose, KBW.

I wanted to ask you, from the proceeds from your issuing the preferred during the quarter, was there a reason why you couldn't retire -- I guess it's the Series B that are included in your fully diluted share count? It just seems like that would have been more, I guess, accretive to FFO. And also, I think there's a required dividend on those shares. Would that have been an option?

It would have been, and it was an option. And we talked about it a lot here internally amongst the management team and ultimately with the Board. And we just thought that reducing our recourse exposure at the time was probably the best way to go.

And we thought we would have more time to retire that Series B. Since then, our stock has run up -- the whole industry has run up more than I would have anticipated. And so that is still on our list, something that we want to do, and maybe a use of that additional cash that was asked about earlier. But it was a tough call.

So you have the right to, I guess to call that, I guess, whenever you want, essentially? Is that how that works, or--?

Well, I'm not sure of exactly what our rights are right here, because I haven't -- maybe Kimo knows offhand. But we are in a constant dialogue with those folks, and we do know that there's always an opportunity to take them out, depending upon what the stock price is and the like. So (multiple speakers)

I wanted to ask you, too, on the JW Marriott in San Francisco, is your primary reason for selling it because you want to not have the recourse debt? Wouldn't there be an option to put nonrecourse debt on it and to pay off the recourse debt? Or do you just feel like the pricing is so good right now it's a good time to sell, or--?

Just think of it as a two-fer or as a three-fer. By selling it, we get rid of that recourse debt that's on it. By selling it, there's a substantial amount of equity in the property. We can use those proceeds to turn around and pay off our credit facility line, which is recourse debt, and perhaps use it towards retirement of security capital, B.

And there's a lot of equity in the property because there's a lot of people out in San Francisco chasing assets. And we saw what a couple of other assets traded for out there for substantial prices. And so we thought we'd take advantage of that and sell it.

We see that some of the prices that are out there bank on some really strong growth. And so if we can kind of lock in that expected growth out there today, and accomplish these two or three other objectives, then why not?

Okay. And then I just wanted to make sure I heard correctly. You are also in the market with the Hilton Rye Town and the Hilton El Conquistador; was that right?

Yes.

Okay. And then also three -- did you say limited-service assets?

Yes.

Okay. Okay, thank you.

Thank you. And Mr. Bennett, there are no further questions at this time. I'll turn the conference back to you for closing remarks.

All right. Well, thank you, and thank everyone for their participation on today's call. We look forward to speaking with you again next time.

Thank you. Ladies and gentlemen, that concludes our conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a good day.