Ashford Hospitality Trust Inc (AHT) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Ashford Hospitality first-quarter 2011 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 Monday, May 9, 2011. I would now like to turn the conference over to Tripp Sullivan with Corporate Communications. Please go ahead.

Good morning. Welcome to the Ashford Hospitality's Trust's conference call to review the Company's results for the first-quarter 2011. 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 evening 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 earning release and accompanying tables or schedules, which has been filed on Form 8-K with the SEC on May 8, 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'll now turn the call over to Monty Bennett. Please go ahead.

Thank you and good morning.

Continuing the trend of our out-performance through 2010, I'm pleased with our execution on all fronts during first quarter of 2011. We demonstrated once again the benefit of the diversity of our transactional and operational strategies to maximize AFFO and share price. We reported AFFO of $0.41 per share in the quarter, and an 8.8% increase in RevPAR for hotels not under renovation.

ADR was up 4.6% and occupancy was up 271 basis points. We exceeded the prior quarter's RevPAR growth performance and have gained momentum in driving ADR growth. Some of our markets that lagged RevPAR acceleration in earlier periods are now showing growth. This is typical in the first phases of recovery as markets vary, and the response time to economic stimulus. The addition to our platform of the 28 hotels and the $1.3 billion Highland Hospitality portfolio should help us increase our overall average RevPAR and growth due to the exposure to high quality markets, greater concentration in upper upscale hotels and strong brands.

While revenue increases are expected to continue for several quarters to come, we are keenly focused on driving operating results through cost control and flow-through. During the downturn, we minimized operating margin erosion. Similarly, we expect the same cost controls during the recovery to minimize increases in operating expenses. We believe that because 38% of our EBITDA is managed by our affiliate Remington, we are able to exert greater control over the rise and fall in operating expenses. For the hotels not under renovation EBITDA margin increased 280 basis points from a year ago to 30.1%, while for all hotels, EBITDA margin increased 219 basis points to 29.2%.

Regarding capital expenditures, we completed $13.9 million of projects in the quarter. Our 2011 CapEx budget is $131 million with approximately $40 million being our share of the total dedicated to the Highland portfolio and the balance to selective upgrades of hotels to improve their competitive position in their markets. Our capital structure remains a priority. We will continue to seek the right balance for us among equity debt, interest expense and leverage. We have clearly demonstrated discipline in minimizing equity offerings while still exceeding our peers in asset growth, mainly as a result of the Highland Hospitality transaction.

Our focus on opportunistic share repurchases was invigorated with the most recent agreement reached with our Series B-1 shareholder to buy back preferreds that were convertible into common shares. The $81 million Series E preferred offering facilitated this repurchase.

While overall leverage ticked up during the quarter with the completion of the Highland acquisition, we expect that percentage to come down as virtually all cash flow from that transaction is used to amortize the debt. For 2011, we have $203 million in Harp maturities, all of which matures in December. We have $167 million coming due in May of 2012, in addition to our April 2012 maturity on the credit facility, which had $45 million outstanding as of March 31.

As we noted before, our Board declared a dividend of $0.10 per share for the first-quarter 2011, and we provided guidance that we intend to pay at least this amount in subsequent quarters as well. Our solid operating performance combined with the significantly reduced share count has contributed to the dividend strategy. We are pleased to be able to reinstate the dividend to provide additional returns to our shareholders above and beyond the appreciation in our stock.

The most significant transaction that occurred in the quarter was obviously the Highland Hospitality portfolio acquisition. Given that we held a separate call during the quarter to provide specific details on that investment, I'd like to focus here on what we have been doing with this portfolio since the March 10, 2011, acquisition date.

First of all, due to the short period of ownership we did not see any material benefits so far in our reported results. Most of our work at this point has been of completing the transition of positioning our asset managers to implement more rigorous revenue and cost management systems in these hotels. We believe there are clear opportunities to improve cost controls and drive operating margin improvement.

As the year progresses, we will be able to provide more definitive assessments on how quickly we can drive improvement, and which assets may take longer to bring up to our standards. We believe there is a substantial cash flow opportunity with this portfolio, but I'll remind you that pursuant to the terms of the restructured financing, excess cash flow generated by these assets will go to reduce debt on the properties.

Looking ahead to the rest of the year, our focus remains unchanged; improving our balance sheet and liquidity, controlling costs, budgeting revenue, and generating improved operating results, while still pursuing selective yield opportunist capital market investment opportunities. All of these we will execute with our management team's commitment to outpacing our peers through superior here shareholder returns.

Lastly, we've announced that we are hosting an analyst institutional investor conference in New York this Wednesday, May 11. This will be an opportunity for to us provide some very interesting insights into our investment capital markets and asset management strategies. If you haven't RSVPed yet, please let us know if you're coming.

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

Thanks, Monty.

For the first quarter, we reported net income to common shareholders of $31.278 million, adjusted EBITDA of $58.356 million, and AFFO of $32.476 million, or $0.41 per diluted share. At quarter's end, Ashford had total assets of $3.6 billion in continuing operations, and had $4.5 billion overall including the Highland portfolio assets, which is not consolidated.

We had $2.4 billion of mortgage debt in continuing operations, and $3.2 billion overall including Highland. Our total combined debt has a blended average interest rate of 3.2%, clearly one of the lowest among our peers. Including our interest rate swap, 61% of our debt is now fixed rate debt. The weighted average maturity is 4.6 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 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, will be added back for purposes of calculating our AFFO. For the first quarter, the unrealized loss was $16.8 million.

At quarter's end, our portfolio consisted of 97 hotels in continuing operations, containing 20,458 rooms. During the quarter, we sold out of discounted operations 3 hotels; the JW Marriott San Francisco, the Hilton Rye in New York and the Hampton Inn Houston for a combined net gain of $2.8 million. Additionally, we required 71.74% of the 28 Highland hotels containing 5,800 net rooms in a joint venture. All combined, we currently own a total of 26,258 net rooms.

As of quarter end, we own a position in just two mezzanine loans with total book value outstanding of $20.9 million. Subsequent to the end of quarter, we see the slightly discounted payoff of the Tharaldson mezz loan. We will realize a gain of $4.2 million since in the previous quarter, we took a partial write down of $7.8 million on this loan as it was coming due with no clear resolution. With the exception of one small loan of $4 million on the Ritz Carlton Key Biscayne, we effectively closed out our mezzanine loan portfolio.

Hotel operating profit for the entire portfolio was up by $8.3 million, or 15.3% for the quarter. Our quarter end adjusted EBITDA to fixed charge ratio now stands at 1.70 times versus a credit facility required minimum of 1.25 times. Our share count currently stands at 76 million fully diluted shares outstanding, which is comprised of 61 million common shares and 15 million OP Units.

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

Good morning.

This has been a very active transaction period for us. In addition to the Highland Hospitality investment, we also completed 3 asset sales, purchased a unique but relatively small hotel asset, negotiated a loan payoff and executed on a value-add capital market strategy. The transaction environment remains extremely competitive.

While more properties are coming to the market for sale, a significantly greater amount of capital continues to seek hotel investments. The depth of the buyer market is increasing and includes REITs, investment funds, insurance companies, pension plans, private equity and offshore buyers. We continue to underwrite potential new investments that have not yet seen opportunities as favorable as the returns we are expecting from the Highland portfolio transaction.

We're not pressured to deploy capital and are disciplined in seeking accretive transactions for our shareholders from an EBITDA and FFO per share standpoint. Subsequent to the end of the quarter, we completed a transaction that resulted in a 5.9 million share reduction, and our fully diluted share count to a level of 76 million shares.

We accomplished this in 2 steps. First, we negotiated a stock repurchase agreement with a Series B-1 holder of convertible preferred shares. We then completed our Series E preferred stock offering, which with the greenshoe, resulted in the issuance of 3.35 million shares at $25 per share with a 9% yield. We then used $73 million from the $81 million Series E net offering proceeds to complete the repurchase transaction per the recently negotiated agreement.

As a result, only 1.4 million shares of the outstanding 7.2 million Series B-1 shares were converted to common from this transaction, and the remainder was repurchased. Since the inception of our buyback program we reduced our peak share count by almost 50%, and removed the Series B-1 convertible preferred. We confidently expect that these share repurchases will provide additional near-term and longer-term benefits in our reporting metrics in total shareholder returns.

Regarding asset level transactions, in March we acquired 96 units at the 238-unit WorldQwest Resort, located about 1 mile from Disney's Magic Kingdom in Orlando for $12 million cash. This is a small, but unique opportunity that also includes developable land that would allow us to build additional units.

Remington Lodging, who had been previously managing the asset, provided us insight on the Mediterranean style resort containing 2 and 3-bedroom suites, and enabled to us acquire it essentially off market. We expect to derive benefits from the hotel operations, ownership of common areas as well as the future sale of units.

During the quarter, we completed the sale of the Hilton Rye Town, JW Marriott San Francisco and Hampton Inn Houston Galleria. The Hilton Rye Town traded for $35.5 million, and all the proceeds were used to reduce borrowings under the credit facility. The Hampton inn Houston Galleria generated proceeds of $20.3 million that were used to pay off a $2.7 million mortgage secured by the property as well as another $2.7 million to our joint venture partner with the balance used pay down our credit facility.

Combined with the JW Marriott San Francisco sale we discussed on last quarter's call, we produced $152 million in gross proceeds from dispositions during the first quarter. On a combined basis, these 3 asset sales traded for a very low trailing 12 month cap rate of 2.5%, and also kept us from having to spend future CapEx dollars. We will continue to think strategically about asset sales given the market demand for high quality hotels in our portfolio. For those assets we may identify for sale, our decisions will be based mainly upon a share price accretion analysis, pricing, CapEx needs, alternative uses of sales proceeds and impact on leverage.

Subsequent to quarter end, we negotiated a $22 million payoff on our $25.7 million mezz loan secured by interest in the Tharaldson portfolio resulting in an 86% of PAR payoff. We were very pleased with the outcome of this payoff for several reasons.

First, the debt yield was 6.9% on our last dollar of investment in the capital stack, which can be equated to the cap rate. Second, this loan was secured by mainly mid-scale hotels some of which were on leases in secondary and tertiary markets. Lastly, the decline in operating performance due to the economic downturn put in question the recovery in value. As David previously mentioned, the favorable execution relative to our prior write-down will result in a reported gain next quarter.

Just recently, we completed the restructuring of debt secured by the Manchester Courtyard, a $5.8 million loan that had matured in January 2011. We were able to secure a new 3 year term on this loan. As we look to our upcoming debt maturities, the next of which is in December of this year, we are working on restructuring solutions.

In conclusion, all of our acquisition, disposition, financing, capital market and balance sheet decisions have a unilateral focus, namely, near-term and long-term dividend and shareholder price appreciation. We are very much aware of the qualitative and quantitative aspects of our decision making. Given that insider ownership is approximately 20%, we can assure you that we are closely aligned with our shareholders and focused on continued success in Ashford's overall performance.

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

(Operator Instructions) Bryan Maher, Citadel Securities.

Quick question on the Highland portfolio. Have you identified any of the assets in there that you think you might end up selling?

Good question. Right now, we probably won't be selling too many of the assets. The structure of that debt is such that almost all, if not all of the proceeds will be used to pay down debt, debt that we think has pretty decent pricing on it. Since we generally think that assets will be improving in value over time, and those proceeds will be used to pay off relatively inexpensive debt, there's just not much of a motivation to sell any of those right now. So, maybe in future years, but not right now.

Okay, and then as it relates to your relationship with Prudential, I'm assuming that at some point you do have a right to buy them out. Is that correct?

Well, we've got traditional mechanisms in there about buy/sell under disputes, and that kicks in after a few years, but our long-term plan would be to hopefully buy them out if all the conditions are right. They're operating this on a fund, and so, at some point they'd be seeking liquidity. So, I'd say that we're the natural buyer for their interest at some point in time. When or where that happens is yet to be determined.

Okay. Thanks. We look forward to hearing more on Wednesday.

Ryan Meliker, Morgan Stanley.

I just had 2 quick questions. First 1, can you talk a little bit about SG&A? It looks like it was up materially. I think a lot of that had to do with some litigation costs. I was wondering if you could give us any color on if the bulk of that is already through, or if we should be expecting those types of costs recurring throughout the year. Thanks.

Ryan, this is Kimo. You're right. In the first quarter, the G&A had a $5.5 million 1-time only cost associated with some legal fees on a contingent settlement of a lawsuit. It's just an accrual, and it will ultimately be paid out of the proceeds of that settlement, but it's a 1-time cost. If you net that down to about $6.5 million, that's really our run rate.

Okay. Yes, that's helpful. That's what I figured. I just wasn't sure if it was going to be recurring or not. Then the second question I had, which is just minor, asset management fees from affiliates went up slightly. I'm assuming that has to do with the Highland portfolio acquisition. Is that just $338,000 in this quarter a run rate, or should we expect that up materially given you only owned Highland for a portion of the quarter?

This is Kimo again. It includes a little bit more for the 20 days that we owned the WorldQwest Resort. That's included in there, as well. I don't think we have a clear handle yet on what the run rate's going to be on that, but it's immaterial I think to the overall, but there's an additional component in there now. It's a WorldQwest Resort income.

Okay, but there's no asset management fees on the Highland portfolio?

It actually is a net credit to our A&G.

Okay. Great. That's helpful. Thanks a lot.

Dave Loeb, Robert W. Baird.

Monty, I wonder if you could just comment a little bit about group bookings and group demand in your markets, particularly interested, there's been a lot of conversations about Marriott and sales transformation. You're both a franchisee and an owner of Marriott-managed properties. I'm interested in hearing your view on whether there's any difference by brand or between franchise or owned hotels, and how that's going. Is that something you can give us some insights?

Sure. Group bookings overall are good. They're improving. They seem to be continually improving. I don't know if the rates of improvement is any more this quarter than the past few quarters. I should reverse that, and say that the rate of improvement is not any greater. They're just picking up. Windows are still short, but group bookings are definitely picking up.

Regarding a Marriott sales transformation system, some of our Marriotts didn't perform as well as we had hoped this past quarter, and what we're trying to get a handle on is, is that underperformance due to just natural variation? Because, you can take a look at all of our 100 and some properties, and every quarter a good portion of them will underperform for 1 reason, while some will overperform. Or is that because of sales transformation? And that's really hard for us to get a handle on.

So, we went up and visited the folks at Marriott, and have got some follow-up meetings in order to determine is this sales transformation specific, or is this our portfolio specific? We just don't have that answer yet, but Marriott is a sales and marketing machine. So, if it is sales transformation, then I imagine they'll rectify it very quickly, or even if it just happens to be natural variation, then that should come around. The short answer is we just don't know yet, but I know that our people in-house are working on it fast and furiously, as are the Marriott people, just to understand what the issue is, and then to correct it if there is an issue.

So, looking forward are you seeing group demand pick up a bit and do you expect that to be stronger as you go through the year?

We do, but I think what's more significant is that while group demand is picking up, is that a big chunk of our business is transient corporate. Maybe 25% of our overall business is group and 75% is transient, and then most of that, the good majority of that is business transient. That business coming back, with their higher associated rates, is what we're very excited about, and what we think can move the needle across the industry going forward.

Great. That's very helpful. Thank you.

(Operator Instructions) Will Marks, JMP Securities.

Hello, Monty, Kimo, Dave -- or Doug. Question on Highland and the RevPAR growth, can you talk about how that portfolio did in the quarter, and do you expect it to outperform the rest of your portfolios looking ahead?

Sure. We're digging up those stats right now as far as its performance in the first quarter. I believe it was around 5% RevPAR growth, so, it's not as good as our core portfolio. I'd say that what you're going see in that portfolio is some of the cost controls that we put in that place can take place immediately, while some of the revenue generation is going to take some time in order for to us get our feet on the ground and to get those sales efforts focused.

Prior ownership was understandably focused on debt maturity and the like and restructuring, and so, we think there's some opportunity there. But, when we take over a portfolio like this, that's usually the order of events that we see. Cost controls can start to come first, and then revenues come a little bit later. When I say later, maybe a few months later. Let's see, the number for Highland for the first quarter was 5.4% RevPAR increase.

Okay, and in terms of what that does to the blended quarter RevPAR of your portfolio, can you just give us some sense?

Sure. Let's see if I've got that stat right here.

We just have total revenue broken out by the legacy portfolio, and the Highland portfolio for the total first quarter as well as the 3 previous quarters. So, if you go back to the second to last table attached to the earnings release, pro forma seasonality table, I think you can get a good handle on the portfolio revenue-wise and hotel EBITDA and margin-wise.

Okay. All right. Okay. That's fine on that subject. One other question. You talked in your comments about the mezzanine portfolio going away. Is your strategy now -- looking ahead if you were to make more acquisitions, is it more on the equity side? You, for years, had talked about your clock on when to buy different parts of the structure, and the capital structure and where are we now?

Sure. Let me give you a long answer to that question. When we launched this, we had hoped to do a good amount of mezzanine investing, but very quickly the market's moved away from us and the pricing on mezz got pretty thin. So, our mezz platform was only like 3% of our portfolio.

We underwrote those mezz returns and those mezz investments to approximately having 9/11 being the worst case scenario, and then with this great recession worst case is about 3 times as worse. As a result, we got beat up pretty bad in our mezz portfolio.

That being said, if you look at all the income and return of capital we received from the mezz portfolio compared to how much we put in, we about broke even, and that doesn't take into account the benefit from being in a position to take over the Highland transaction, which we think is an extraordinary benefit.

So, it was a net add for us. Going forward, though, we're already starting to see pricing to be pretty thin on mezz loans, and so it's just tough for us to get too excited about the opportunity to make mezz loans or to buy mezz loans because of the risk reward tradeoff.

Regarding of where we want to be in the capital structure and the time to buy and time to sell, that's still a very strong focus of our internal thinking. As you can see right now, we're not buying very many assets outside of the Highland transaction, and that's because not that it's a bad time to buy for the industry overall, but it's a bad time to buy for us because of cost of equity is too expensive, in our view, in order to go out and to buy hotels.

So, that's a very important part of our thinking. Over time, we'll be selling hotels, but we'll also engage in some other techniques and strategies in order to continue to hedge our positions. This has included some adoptive strategies during the course of our existence such as share buybacks, such as swaps and straight swaps, such as floor doors and other mechanisms in order to better manage what can be a volatile hotel cycle.

Okay. Thank you for the thorough response.

Darnell Bentz, KeyBanc.

Yes. I just had a couple quick questions. First, around the current mortgage environment, what you guys were seeing as far as rates and LTVs. Then, if you could give more specifics on what you're thinking you're going to do with the upcoming maturities in December, and spring of next year.

Hi. This is Doug. In terms of where we're seeing the market, obviously the perception of lodging has improved dramatically in the eyes of lenders, and there is increasingly more liquidity for hotel lending. That's all the good news.

The pricing is continuing to improve, and we're seeing that the first mortgages, at least in terms of a CMBS-type transaction, that part of the cap stack structure is being priced to about 10.5 debt yield with the ability to layer in some mezz tranches that can take it to 9%, and perhaps for higher quality assets maybe just a tad bit below 9%, in terms of the debt yield. Some of the LTV comparisons, it's a more stringent market in looking at LTVs, obviously, than what it used to be.

Getting financing into the 70% to 75% range is certainly still achievable today. The balance sheet lenders are also active. Their underwriting criteria is a little bit more conservative, I'd say, from the loan to value standpoint, but to the extent that you can partner up with a group that might allow some mezz in the capital stack will enable one to achieve slightly higher LTVs.

So, the market is definitely improving. Fortunately, we don't have a significant amount of debt coming due. We have 1 loan that's coming due in December of this year. That's all that we have for our 2011 debt maturities. We are looking at various alternatives. I think our core objective here will actually be to try to restructure with the existing lenders. We are also looking at other prospects, but at this point, we would say that's our preferred outcome.

Okay, great. Thanks.

Bryan Maher, Citadel Securities.

Thanks. Quick question on the WorldQwest property. Is that a property that's re-brandable? Can you convert that to like an Embassy Suites or Doubletree Guest Suites?

This is Monty. That would be difficult to do. So, probably not. It will probably stay as an independent hotel.

Okay. And is that like a condo hotel where owners own the unit, and then they rent it out in any way?

It is a condo hotel, and this is an opportunity that we jumped on because we bought about 100 of the units for $120,000 a key. Those are units that sold for about $400,000 during the peak per unit.

So, right now kind of on an adjusted basis after we do some improvements, an equivalent NOI basis, that portfolio is pulling off around $1 million a year. It's equivalent to NOI, and after we sell those 100 units, we think it will still be throwing off $1 million a year based upon the revenue splits with the future owners.

So, as long as we can sell those units for what we paid for them, which we think is pretty easy to do, then we'll have a big income stream for free, which is great. So, it's got great dynamics to it, but it's something that we're just dipping our toe in the water on. Condo hotels are more complex.

We do have a lot of experience with it because Remington has been managing that complex for maybe 4 years now or so, but we just want to be cautious. It does have return potentials much higher than just going out and buying straight hotels in this marketplace. You can almost get to the point where you can get the same cash flow from it without having to own it, and those economics, those dynamics are pretty compelling.

Thanks. That's some pretty good color. What kind of rate and occupancies does the property run?

Oh, I think offhand, if memory serves, it's about a 70% occupancy, 72% occupancy. I don't have that rate here offhand for you.

Thank you.

You bet.

And, Mr. Bennett, I'll turn it back over to you for your closing remarks, or continue with the presentation.

Thank you for your participation on today's call. We look forward to seeing you the morning of May 11. That's this Wednesday in New York for our institutional investor and analyst day, and we also look forward to speaking with you again on our next call.

Ladies and gentlemen, that does include the conference call for today. We thank you for your participation, and ask that you disconnect your line.