Ashford Hospitality Trust Inc (AHT) 2010 Q4 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to the Ashford Hospitality fourth quarter 2010 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 Friday, February 25, 2011.

It is now my pleasure to turn the conference over to Mr. Tripp Sullivan of corporate communications. Please go ahead sir.

Thank you. Welcome to this Ashford Hospitality Trust conference call to review the Company's results for the fourth quarter of 2010. On the call today will be Monty Bennett, Chief Executive Officer; Douglas 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 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 February 24, 2011 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 and good morning. Even though the industry is accelerating into recovery, let's not forget that the most recent lodging downturn has been unprecedented. In the midst of the Great Recession, it is worth noting how lodging REITs reacted differently.

Some issued equity at historically low prices. We, however, bought back half of the Company shares. Some companies inadequately managed debt and interest expense, whereas since the beginning of 2008 we refinanced $671 million and carefully constructed various interest rate strategies that saved $126 million since inception.

Some companies appeared gridlocked with regards to operating margins, whereas we excelled at minimizing the impact. We did suffer losses associated with our mezzanine investment portfolio. But as a percentage of our gross assets, the total amount of the impairments equal to a relatively small amount of 4.7%.

When looking at our total investment in our mezzanine lending platform of $356 million, we anticipate that after all cash flow and return to principal is considered, we will have recovered approximately all of our initial investments -- which is quite an accomplishment considering the depth of the downturn.

Our involvement in the mezz lending business has also led us to opportunities that we otherwise would not have been involved in. Our management team recognizes the intertwined and complex relations among lodging debt and capital market variables. With this expertise we will constantly strive to excel at minimizing losses in the downturn and maximizing the benefits of an upturn.

We believe the steps we took and will continue to take separated us from our peers and will continue to contribute to substantial shareholder value creation.

We continue to demonstrate that our platform is adept at transacting across all segments in equity and debt, both directly and via securities. These strategies have allowed us to outperform the peer average in terms of total shareholder returns since our IPO for the past seven, six, five, four, three, two and one years.

Our results for the fourth quarter of 2010 were strong. We finished with a record AFFO of $0.40 per share in the quarter and a record of $1.50 for the year, reflecting for the year one of the best year-over-year growth rates of 34% for our lodging peer group.

We've spoken before of our differentiated capital market and asset management techniques.

Contributing to this performance were our operating performance, share buybacks and interest rate strategy. The fourth quarter was another good example of these strategies that worked on our hotel portfolio.

We reported a 7.5% increase in RevPar for hotels not under renovation in the quarter. ADR was up 0.5% and occupancy was up 429 basis points. The industry is heading in the right direction now, with the opportunity to drive ADR as an increasing component of RevPar growth.

As in most cycles, some markets accelerate faster out of the downturn and this recovery is no exception. Although we see our portfolio diversity as an advantage, to date our RevPar trend has lagged some of the growth in certain cities such as New York, Denver, New Orleans and Detroit where we have little exposure.

As the lodging industry continues to improve broadly across the US, we would expect to see more of that pricing power come our way. Until then, we will remain keenly focused on driving operating results through cost control and flow through.

That focus was evidenced once again in the fourth quarter results. For the hotels not under renovation, EBITDA margin increased 384 basis points from one year ago to 27.2% while for all hotels EBITDA margin increased 256 basis points to 26.9%.

Our affiliated manager Remington significantly contributed to these results and the brand managers performed well as we continue to work very closely with them to keep costs under control. As ADR growth gains momentum, we anticipate that our operating margin improvement will remain strong.

Regarding capital expenditures, we completed $15.7 million of projects in the quarter, bringing us to $62.2 million for the year. Our goal even during the downturn was to say at ahead of CapEx and maintain high-quality assets.

During 2011 we will continue to selectively upgrade hotels to improve their competitive position in the market.

Another priority for us has been with our capital structure -- namely creating liquidity, extending out maturities and reducing overall leverage. We were successful on this front with our leverage ratio finishing at 55.0% compared with 59.0% at the end of 2009. We also eliminated a 2012 maturity with a more attractive fixed-rate loan that provided excess proceeds to pay down our credit facility.

As of year-end we had $135 million of remaining borrowing capacity on a revolving credit line with only $115 million drawn. Looking ahead to our maturities, we have $209 million in hard maturities in 2011, most of which occurs in December, and $167 million in 2012 in addition to our credit facility. Our strategies to restructure or refinance these loans should benefit from improving operating fundamentals and greater debt availability.

We also demonstrated our discipline in the capital markets. We succeeded in our goal not to issue equity during the worst recession in the industry, while virtually all of our peers completed follow-on offerings and diluted their shareholders. Instead we repurchased during that same time approximately 73.6 million common shares at an average price of $3.26 per share.

The benefits of cutting our share count in half should enhance the appreciation of our shares for some time.

The hard work earlier in the year to improve our balance sheet and enhance liquidity positioned us to take advantage of the improving fundamentals in the lodging sector. Near the end of the fourth quarter we completed a small equity raise. Based on the $9.65 per share price from our December common share offering and subsequent overallotment exercise, we created $50 million in shareholder value through that offering alone.

Our Board has declared a dividend of $0.10 per share for the first quarter of 2011. We've provided guidance that we intend to pay at least this amount in subsequent quarters as well. However, each quarter's specific dividend, if any, will be announced towards the end of each quarter.

Coming off a record year of $1.50 per share AFFO, we believe the dividend will be well covered and has the potential to grow in the future. The record date of the dividends will be March 31 payable on April 15.

Looking ahead to 2011 we will remain focused on what has worked so far for us. Improving our balance sheet and liquidity, controlling costs and generating improved operating results while still pursuing selective yet opportunistic capital market investment opportunities. All of these we will of course execute with commitment to outpacing our peers through improved shareholder returns.

Lastly, we plan to host an analyst and institutional investor conference in New York at the Palace Hotel on May 11. This will be an opportunity for us to provide more details on our industry views as well as our competitive advantages in the lodging and REIT sector. We will be sending out more detailed information in the near future and hope that you will save this date and plan to attend.

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

Thanks Monty. For the fourth quarter we reported a net loss to common shareholders of $111,489,000, adjusted EBITDA of $53,630,000 and AFFO of $29,462,000 or $0.40 per diluted share.

At quarter's end, Ashford had total assets of $3.7 billion. We had $2.5 billion of mortgage debt [in] continuing operations with a blended average interest rate of 3.02% -- clearly one of the lowest among our peers.

Including our interest rate swap, 74% of our debt is now fixed rate debt. The weighted average maturity is 4.8 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 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 add it back for purposes of calculating our AFFO. For the fourth quarter it was a loss of $18,540,000 and year to date it was a gain of $12,284,000.

At quarter's end, our portfolio consisted of 97 hotels in continuing operations containing 20,458 rooms. We moved three assets to discontinued operations in anticipation of sales and we wrote down the Hilton Rye, New York by $23.6 million and the Hilton Tucson, Arizona by $39.9 million.

Additionally, as of year-end we owned a position in three mezzanine loans with total book value of principal outstanding of $35.9 million with an average annual unleveraged yield of 4.6%. In the quarter we took a full write down of $21.6 million on our JER-Highland mezz loan 6 and a partial write-down of $7.8 million on our Tharaldson portfolio mezz loan, as it is coming due in April with no clear resolution.

Please note that we can no longer capitalize transaction costs and must expense them in the period. Since these costs as well as contract termination costs are one-time costs, we have elected to add them back for purposes of calculating our AFFO and our adjusted EBITDA. For the fourth quarter they were $7 million.

Hotel operating profit for the entire portfolio was up by $7.8 million or 14.7% for the quarter. Our quarter end adjusted EBITDA to fixed charge ratio now stands at 1.70 times, which is a required minimum of 1.25 times. Ashford's net debt to gross assets is at 55.0% (inaudible) not to exceed a level of 65% per our credit facility covenants.

Our share count now stands at 80.8 million fully diluted shares outstanding which is comprised of 59.3 million common shares, 14.2 million OP units and 7.2 million shares of our Series B convertible preferred.

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

The transaction environment is clearly heating up as additional hotel assets come to market and financing is more readily available on better terms than during the past couple of years. REIT peers who raised equity are motivated to deploy capital and are competing against well-capitalized funds that also see upside in lodging market fundamentals.

As a result, bidding is very competitive. However, our strong preference is to be selective and disciplined by avoiding the widely marketed transactions and utilizing whatever competitive advantages we have to succeed in achieving substantial EBITDA and FFO growth.

We have two full service hotels currently on the market Hilton Rye Town and Hilton El Conquistador, and two select service assets. We continue to make progress on our sales efforts.

The JW Marriott closed yesterday and resulted in net cash proceeds of $43.6 million based upon the sales price of $96 million, equating to a TTM cap rate of 3.7% and $285,000 per key. We will report on other sales as they follow. We intend to use the proceeds to pay off property level debt and pay down the credit facility.

During the fourth quarter we received a discounted payoff of $4.4 million on our La Jolla mezz loan resulting in an 87.5% of par payoff in total from all payments received from the borrower.

Lastly, we described on the prior call a couple of transactions we completed during the fourth quarter that highlighted our ability to create value in this improving environment. Most notably, the conversion of a $1.8 billion interest rate swap to a fixed rate that locked in approximately $32 million of interest rate savings, at no cost to us through the term of the original swap, and the refinancing of the Marriott Crystal Gateway that generated $44 million of excess proceeds.

Clearly 2010 was an eventful year for Ashford. By implementing several unique but very well-thought-out strategies, we navigated the downturn and our shareholders have benefited.

Given the substantial ownership position of insiders equating to 18.2%, we're significantly aligned with our shareholders in creating near-term and long-term value and dividends. That concludes our prepared remarks and we will now open it up for questions.

(Operator Instructions) Patrick Scholes, FBR Capital Markets.

Good morning gentlemen. I've got three questions here. I'll go to the first one here. What are your CapEx plans for this year roughly? Can you tell us roughly dollar amount? And with any CapEx, can we expect any types of disruption?

Sure, hey Patrick. We plan to spend approximately $86 million in 2011. And there is $50 million that are escrow funded and the balance will be [order] funded.

And just to make a note on that, Patrick, is that those are on our capital plans. Many times the capital plans will overlap over into next year. So usually of that number we get about 75%, 80% of it spent actually in the year and the rest of it hanging over.

As far as disruption, probably the best guidance is that last page on earnings release that talks about where we think there will be significant renovations to individual properties, and how much each quarter. And we update that quarterly.

Okay, thank you. My next question just concerns property taxes. It looks like, similar to a couple other REITs that reported, your property taxes were down year-over-year. How should we think about those going forward?

We continue to have success with our property taxes. Our methodology for booking is that as soon as we get a bill in from the property tax authority, whatever that amount says, that is what we put on our books. And that's what we record until we actually received dollars back, based upon whatever we have appealed or the lower rate.

And so you will get these surges that come in and a number of those came in this past year. And right now we have quite a number of 2010 property tax appeals that are outstanding that we could still get rebates back from, and maybe even some from 2009 that are still out there. So it is always hard to predict, but we are hopeful that we will get some other additional significant savings this coming year.

Great, thank you. And then just -- I'm curious on the demand for the hotel you sold in San Francisco, about how many bidders were there on that?

It was fascinating. This is something we took to market last November, I think, or about. And we think we had 99 CAs signed to look at that asset. So it was quite an asset that garnered a lot of interest.

What was interesting, though, is that towards the end -- or even at the beginning -- not too many of our REIT peers were involved. I think that's just because of the market perception of a REIT selling to a REIT. Lots of our analyst friends, if you buy from another REIT, will try to figure out who got a good deal and who got a bad deal. So it's just something that people don't need.

But we're very happy we got it sold and got a lot of interest.

Great. Thank you for the color on the questions.

Ryan Meliker, Morgan Stanley.

Good morning guys and congratulations on a solid quarter. I just -- a couple of quick questions.

I think the first one is -- can you give us some color on kind of where you guys are in the mezz stack for the Highland portfolio with JER? And obviously there's been a lot of media sources speculating on your involvement in that portfolio going forward. Is there any color you can give us in terms of where your expectations are in terms of how those investments might play out?

And then the second thing was, obviously you guys announced dividend of $0.10 per share. Can you give us some idea on how the Board came to that price point for the dividend? Obviously it looks to be on an annual basis materially above taxable income, but on an FFO basis it seems to be a great deal of coverage. Just some color on how that number came about would be helpful. Thank you.

Sure. On Highland, on the mezz positions, we've got a position in mezz 4 and mezz 6. The mezz 6 position was the one that was just recently written down for this past quarter.

We still have our position in mezz 4 not written down and at its original value.

Regarding the Highland transaction we continue to work with the borrower and the lenders on a restructure. As soon as something is worth announcing, we will announce it. But there's really just not much to say until then.

On the dividend, we did have a lot of discussion on the dividend. This was the first time that we started it up since the crisis. We're in a unique position that we have a lot of potential coverage. We have a lot of cash flow per share and especially compared to our REITs -- other REITs, so we have a lot of capacity to pay dividends.

And so the discussion back and forth was -- how much do we have the ability to pay, which is a lot more, versus how much should we pay considering that there we're only two or three quarters out of this terrible, terrible downturn. And so it was just a discussion between those two ends of the spectrum that we came to the dividend announcement that we did.

Bryan Maher, Citadel Securities.

Good morning. Quick question regarding acquisitions and dispositions. Would it be safe to say that you're, in this current market, more of a seller than a buyer? And if not or in conjunction with that, what target markets are you looking at where you feel you are underrepresented?

You know, I would say that we are probably -- or we have been more of a seller than a buyer. That will probably start to move the other way. But I think as we shared with you, Bryan, we view our cost of capital as pretty expensive.

And if you take our existing portfolio and assume certain performance that most of the experts in the industry assume, then that means incredible stock appreciation over the next number of years. So when you're buying asset, you've got to raise equity at current prices in order to -- and achieve incredible returns to make it accretive. So that is just a hard formula to make.

So when it comes to acquisitions right now, we are looking to find acquisitions that can beat that, that can outperform what we already have. And if it can't outperform the assets we already have, then we're just treading water by raising equity and going and buying them. So that is the kind of asset we're looking for.

As far as markets, we would love some exposure to some of these other bigger markets such as in New York and Boston and even Washington, DC. But assets are priced pretty, pretty strongly in those markets -- place. So we continue to seek opportunities where we have some kind of edge in order to make an acquisition.

Okay, thanks.

(Operator Instructions) David Loeb, Robert W. Baird.

I fear I know what you're going to say about this, but can you give us some idea about when you think the Highland process will be completed?

You know I really can't. We've been working on that for quite some time, as you know. And if I'd given a prediction before, then I would have been wrong every single time because it just continues to take more time than we would like in order to get it done.

The reason is that we have quite a few players involved and very sophisticated players involved, and it's just taking more time than we hoped. So, like I said, whatever time I give you I'm sure it's not going to be right, because it will get pushed back farther. But we're working internally on trying to come to some resolution as soon as we can.

Well, at least you didn't say no comment, so I appreciate that.

(laughter) I don't know if I said anything worth more than no comment, but.

No. But you didn't say no comment, so I appreciate that. One other; who is operating those hotels today? Are those still operated by Crestline?

A number of them are operated by Crestline, most of them are operated by Crestline, Davidson operates one or two, McKibbon operates one or two. Marriott operates I think seven, eight. Hyatt operates a couple and the Hilton operates one.

The management contracts are staying in place until this is resolved?

No comment.

(laughter) Thank you. I was waiting for that one. Okay. Thank you very much.

(Operator Instructions). And there appear to be no further questions at this time. Mr. Bennett, please continue with your presentation or closing remarks.

Thank you for your participation on today's call. Don't forget to mark your calendar for the morning of May 11 in New York for our institutional investor day and analyst day. We look forward to speaking with you again on our next call.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day everyone.