Ashford Hospitality Trust Inc (AHT) 2011 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Ashford Hospitality Trust third quarter 2011 conference call.

At this time, all participants are in a listen-only mode. Following the presentation, there will be a question-and-answer session and instructions will be given at that time. (Operator Instructions) And as a reminder, this call is being recorded today, November 10, 2011.

I would now like to turn the call over to Scott Eckstein with MWW Group. Please go ahead.

Thank you, operator.

Good day, everyone, and welcome to Ashford Hospitality Trust conference call to review the Company's results for the third quarter of 2011. On the call with me 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. At this time, 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. Those risk factors are more fully discussed in the section entitled Risk Factors in the (inaudible) registration 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 the Company tables or schedules, which have been filed on Form 8-K with the SEC on November 9, 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, sir.

Thank you and good morning.

Our third quarter results demonstrated the continued success of our operational strategies to enhance bottom-line performance and our capital market capability to mitigate risk. Our AFFO per share of $0.39 exceeded by more than 18% the $0.33 per share we achieved a year ago. We accomplished this with healthy RevPAR increases of 5.8% across our entire portfolio, along with stronger operating margins with an increase of 151 basis points.

From a macro perspective, we have observed that the global economic uncertainties have caused investors to pay less attention to the solid performance of lodging fundamentals. As a result, many hotel REITs are trading well below their 52-week highs. Our share price has declined significantly compared to the level attained earlier in the year. This has occurred despite our record trailing 12-month AFFO per share, strong ongoing operating performance, increased cash position, lack of recourse debt, and continued growth prospects with the recent Highland Hospitality acquisition. A look back in history would suggest that this is the right time in the cycle to be considering over-weighting allocations to hotels stocks.

Real RevPAR remains well below prior peak levels. For those investors that are concerned about inflation, hotels have historically been a great hedge against inflation, given the ability to adjust rates daily. Smith Travel Research expects the continuation of year-to-date trends for the rest of 2011 and projects full-year industry RevPAR growth of approximately 7.5%. Other industry sources agree, expecting continued improvement in lodging market fundamentals and strong RevPAR growth for the remainder of the year and into 2012. In its August lodging industry update, Price Waterhouse Coopers revised its forecast, expecting RevPAR growth of 7.5% and 6.2% in 2011 and 2012, respectively. While 2012 outlooks have been reined in somewhat due to the global uncertainties as compared to earlier in the year, they are still well above the industry's 1988 to 2010 average RevPAR growth of 2.5%.

There are several explanations for the lodging sector's robust performance in the midst of a sluggish economy. First, unlike prior periods of an early economic recovery, this one was not preceded by an oversupply of new hotel rooms. Consequently, demand growth has a more immediate impact on the ability to accelerate ADR. Furthermore, the forecast for new supply over the next several years is expected be well below historical levels, given the widespread lack of available debt. Another reason for the solid performance in the lodging sector is that corporations are now much more inclined to encourage travel to spur new business, given their strong earnings and cash positions, despite the recently announced cutback in government travel. While unemployment is unfortunately at 9%, the majority of these people employed appear not to be regular business travelers. Transient travel, which accounts for approximately 75% of our EBITDA, is already at prior peak demand levels. Our business mix is not highly dependent upon group travel, which is having a weaker recovery relative to transients. As the industry improves, our view is that corporate transient rates should continue to increase. Therefore, we will continue to focus our efforts here, as we believe this customer segment provides the greatest upside.

I'd like to move on to provide an update on our Highland Hospitality acquisition. We continue to benefit from the steady improvements from this investment and remain very bullish on future impact. As previously stated, we consider this a highly attractive transaction, due to the operational upside as well as the going in value. The purchase price of $158,000 per key and 2010 EBITDA multiple of 13.4 times is noteworthy, considering the high quality of its portfolio of 28 luxury, upper upscale, and upscale hotels. We remain very pleased with the purchase price discount to replacement cost of approximately 44%, and an approximate 41% discount to recent peer acquisitions at an average cost of about $269,000 per key.

We realized considerable improvement during the quarter, with RevPAR growth of 5.5%, which is a significant uptick on a sequential basis, compared to RevPAR growth of 3.4% for the second quarter. Even more impressive has been the 230 basis points increase in our hotel EBITDA operating margins to 25.1%, reflecting a 62% EBIT flow.

Revenue growth for the brand-managed properties in the Highland portfolio continues to reflect the strong industry RevPAR trends. Our asset management teams continue to work on finding even more cost savings. So far, approximately $2 million of annual ongoing expenses have been cut. The 17 Remington-managed hotels have achieved annual cost savings totaling more than $4 million. Revenue growth has been slower compared to the brand-managed hotels, given the number of open sales positions that needed to be filled upon takeover. With that task now completed, we were pleasantly surprised to find the Remington managed assets maintained yield index for the third quarter. Our expectations were that parity with market growth wouldn't occur until the fourth quarter.

So by comparison to our legacy portfolio, our RevPAR growth is slightly less on Highland at 5.5%, versus 5.9%. However, the Highland operating margin improvement of 230 basis points exceeds that of our legacy portfolio. This portfolio has quite a number of assets with great value-added potential. Each story is different and many involve CapEx, which began just in the fourth quarter. One asset without immediate CapEx requirements is the Hyatt Savannah. Our asset management team worked extensively with Hyatt over time to shave expenses. After several months of work, we finally have the asset closer to where we would like it to be. In October, the property achieved a 745 basis point increase in GOP per month, and we still have a good way to go before we are happy with the results. This is the kind of value creation stories we have coming out of this portfolio.

One last point on the Highland portfolio is that, pursuant to the terms of financing, all excess cash flow generated by these assets will go to reduce debt on the properties. This facilitates our efforts to modestly deleverage the overall Company, in conjunction with scheduled amortization and other debt pay downs.

Looking ahead, industry fundamentals appear to be staying strong. At the same time, our experience has taught us a few things. It is best to be prepared from a capital and liquidity standpoint to provide insulation against economic uncertainties, as well as to be in a position to make opportunistic investments.

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

Thanks, Monty.

For the third quarter, we reported a net loss to common shareholders of $28,632 million, adjusted EBITDA of $67,226 million, and AFFO of $32,161 million, or $0.39 per diluted share. At quarter's end, Ashford had total assets of $3.6 billion in continuing operations, and $4.6 billion overall, including the Highland portfolio, 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, 99% of our debt is fairly fixed-rate debt and the weighted average maturity is 4.1 years. Since the length of the swap did 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 will be added back for purposes of calculating our AFFO. For the third quarter, it was a loss of $18.2 million, and year-to-date it's a loss of $52.7 million.

During the quarter, we sold one hotel, the Hampton Inn Jacksonville, for $10 million. Year-to-date we've sold 4 properties, at a combined trailing 12-month EBITDA multiple of 24.5 times, which significantly exceeds our current trailing 12-month valuation multiple.

At quarter's end, our legacy portfolio consisted of 96 hotels in continuing operations, containing 20,340 rooms. Additionally, we own 71.74% of the 28 Highland hotels containing 5,800 net rooms in a joint venture. All combined, we currently own a total of 26,140 net rooms.

Regarding capital expenditures, we continue to focus on strategies to improve asset performance. In the third quarter, we completed $17.5 million of projects, and have completed $45.9 million of projects year-to-date. As of the quarter end, we own a position in just one performing mezzanine loan, the Ritz-Carlton in Key Biscayne, Florida, with outstanding balance of $4 million.

Hotel EBITDA for all hotels, including Highland, was up by $8.5 million, or 12.2% for the quarter, with a 151 basis point increase in EBITDA margin. Our quarter end adjusted EBITDA on a fixed charge ratio per our credit facility now stands at 1.72 times versus the required minimum of 1.35 times. Our share count currently stands at 84.3 million fully diluted shares outstanding, which are comprised of 68 million common shares and 16.3 million OP units.

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

Good morning.

In spite of our strong operations and the continued improvement in lodging fundamentals, we continue to seek out ways to be prepared for market uncertainties. Our efforts include mitigating risk as well as positioning for opportunistic investments. Regarding risk mitigation, I'd like to reinforce the fact that at present, we have no recourse debt obligations other than our undrawn credit facility. Over the next 20 months, we only have 2 loans coming due. This December, we have a $203 million maturity, followed by a $167 million loan in May, 2012. Both of these loans have been transferred to the special servicers and we have proposed restructures to extend the maturity. Although we remain optimistic, we anticipate some form of a pay down will be required. I can assure you that we will be practical with our cash in a restructure, and focused on the best long-term interest of our shareholders. We will continue to update you as we make progress, but would not expect any news until we get closer to maturity dates.

During the quarter, we monitored the sudden shifts in the financial markets and the apparent change in investor perception of lodging sector risk. On multiple fronts, we implemented strategies to strengthen our balance sheet and improve liquidity. As of the end of the third quarter, we had $180.9 million of unrestricted cash on our balance sheet, plus the ability to draw on our $105 million credit facility. In July 2011, we reissued $7 million of the Company's Treasury shares at $12.50 per share and received net proceeds of $83.3 million. We used to the cash in part to repay our former credit facility as well as for general corporate purposes. This stock issuance compares favorably to the 73.6 million common shares that we repurchased over time at an average price of $3.26. We are very pleased to have executed well on the share buyback and reissuance strategy.

More recently, this October we priced a public offering of 1.3 million shares of our existing 9% Series E cumulative preferred stock at $23.47 per share, including accrued dividends. This generated net proceeds of $29.1 million after underwriting fees. We intend to use the proceeds for general corporate purposes, as well as the possible pay down of upcoming debt maturities, financing future hotel-related investments, share buybacks, capital expenditures, and working capital. We also established an add to market structure of the issuance of our Series A and D preferred that we can elect to turn off or on as another method to access capital.

As part of our preparedness strategy, and given the success of our well implemented share repurchase program previously, our Board of Directors authorized the reinstatement and increase of our stock repurchase program. The $200 million plan provides for the repurchase of our common stock, preferred stock, and discounted purchases of outstanding debt obligations. We did not purchase any shares during the quarter, yet we are fully prepared to do so depending upon market direction, share price, our liquidity position, future cash needs, and a comparison of accretive alternative uses.

Also, we announced a three-year $105 million unsecured senior credit facility, which replaced the Company's previous credit line that was maturing in April, 2012. The timing of the closing of this new revolver could not have been any better, given the increase in the global banking risk and pullback in liquidity that had subsequently occurred. The new credit facility features many similarities to our previous facility, with respect to fixed charge coverage ratio and leverage covenants. It also contains the same pricing, at 275 to 350 basis points over LIBOR. The new line may be expanded by up to $45 million, for a total of $150 million.

As previously announced, our Board of Directors declared a dividend of $0.10 per share for the third quarter 2011, which represents an annual rate of $0.40 per share, or a yield of 5% on yesterday's closing price. Our Board typically revisits our dividend policy each December, and will do so again next month for 2012.

Lastly, our focus subsequent to the Highland transaction has mainly been on operations and capital market strategies. We believe the proceeds we have successfully generated from our capital market strategies have provided us with ample cash on hand to address upcoming maturities and given us the financial flexibility to consider accretive investment opportunities. We continue to seek out investments that enhance our financial returns. We would rather not chase after the widely marketed hotels at current pricing. Our interests continue to coincide with our shareholders, given our high insider ownership of approximately 19%. As always, we are focused on providing our shareholders with the maximum near-term returns and long-term shareholder value.

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

Thank you very much. (Operator Instructions) Patrick Scholes, FBR Capital Markets.

Good morning. Two questions. First is, can you give a little bit more color on what the weather impact on your results, specifically from Hurricane Irene in the third quarter? Is it possible to quantify what, if any, was the hit to RevPAR and margins? And then secondly, on your upcoming renovations for the fourth quarter and for next year, can you give a little bit more color on what the scope of those are, and how 1 should think about any hit to RevPAR or margins from those renovations? Thank you.

Sure. Thanks, Patrick. This is Monty. A couple of comments. On Irene, on the RevPAR side, we don't think the revenue impact was more than $1 million or so. In fact, we think it is less. We don't think that the impact was very large with Irene. On the loss fronts, we do have some uninsured losses that were booked because of Irene. Maybe $0.5 million dollars. We just had a few other random uninsured loss events throughout the legacy and the Highland portfolio that affected us. A couple of sprinklers went off in a couple of properties and a couple of other things. All told, we have uninsured losses of about $1 million for the quarter that was unusual and obviously affected the numbers. So, while Irene did 't affect us a lot, that combined with some other random events hit our numbers a bit.

Regarding CapEx, we are ramping up some CapEx here in the fourth quarter and the first quarter. These are the slower quarters of the year, and this is where we like to do the renovations. We also have relatively more CapEx going in for the Highland assets and are very excited about that. When we list the properties under renovation on that last page, we list those properties whether those renovations are just for the lobby or for the guest rooms or wherever they may be. So, we probably need to provide you a little more detail about where it might provide some disruption. Right now, we are not planning on a significant amount of disruption from these renovations even though they are heavier, because a number of the renovations are in a public area and a number of the renovations are -- or, all the renovations are during these slower periods. Let me try to get some information for you on how much or where it actually affects rooms. And in fact, maybe we should modify our schedule so that it speaks just to room displacements. Sometimes renovation is just replacing a fan-cooled unit, in which case the room is out for a day, maybe two, and in some cases the renovation is a whole room's renovation, which the room can be out for a couple weeks. So let us dig into that for you.

Great. I appreciate it, Monty. Are you able at this time to give us a rough estimate of what the CapEx budget is for next year?

We have not finalized our CapEx plans. We are still in the process of developing them. Right now, we are just not prepared to release that information.

Okay. I appreciate it. That's all. Thank you.

Ryan Meliker, Morgan Stanley.

Good morning, guys. Just a couple of questions. As we think about the debt maturities that are coming due, it sounds like both of the near-term maturities have been put into special servicing. Can you give us any color as to what the expectation is in terms of having to pay down, or when we might get some resolution, particularly with the one that's maturing next month? That seems pretty close. And then also, is it possible for you to let us know which properties are in each of those portfolios? I know there's a 5 hotel portfolio and a 10 hotel portfolio that are backing those loans. Thank you.

Sure, Ryan. It's Doug. How are you? The plan is that we are in discussion with the special servicer. As you know, when it moves over to the special servicer, things sort of move at its own pace over there. The dialogue is active, but generally, resolution typically doesn't occur until you get much closer to the maturity date. And we're going to be very practical about what we agree to do here, in terms of possible extension of term, possible amount of a pay down, possible changes in rate. So we have active proposals in front. But on the other hand, we have to recognize that cash is a precious commodity, and we're going to exhaust alternatives. One of them certainly on the table is that if we don't like any of the alternatives, that bankruptcy of that portfolio is certainly an option for us.

Okay. That's helpful. Can you give us some color in terms of where these assets are at book value, relative to the loan valuation? I guess I'm wondering if it would require a write-down if you were to hand it back.

Let us look into that. I know you asked which assets were in the portfolio as well. Let us see if we want to release that information, which I don't see why we wouldn't, and then get that information to you off line, if we could, Ryan.

Okay. That would be great. And then just one last question. Obviously, you guys have been rather active in shoring up your balance sheet, making sure that you have the capital. It certainly seems like you have the cash and capacity to, in my opinion, pay off these loans entirely over the next few months, if you opted to do so. When you think about your preferred issuance and whatnot, and your ability to access those markets, have you ever thought about what you consider the optimal level of preferred equity within your capital structure is? Is it materially higher than it is right now?

We think we've got some more room for preferred in our capital structure. And for me to comment about what that optimum might be, we just really haven't spent a lot of time focusing on it. We know there's more potential. So I don't want to say anything that might -- then I've got to go back on. We just haven't focused on that very much.

One thing to think about there is that we do view the cost of capital trade-offs, and preferred capital is less costly today for example than mezzanine debt capital.

Sure. Okay. Thank you guys very much. I appreciate it.

(Operator Instructions)Will Marks, JMP Securities.

Thank you. Good morning, everyone. I just wanted to ask about data by market or forecast by market. Forecast is the wrong word for you guys, but where you are seeing strength going into 2012, and potentially weakness?

Will, you are right. We don't give forecasts or jump out there on the forecasts. But before I answer that question, I just want to follow-up on what Doug said regarding the preferred. You can get a first mortgage -- you used to, about three months ago, at the 60%, 65% level. Now that's backed up a little bit. And so anything in between is going to be with mezzanine capital. And even secured mezzanine capital is in the 13%, 15%, 17% range. So,9% preferred capital, unsecured, is much more appealing and attractive to us. Regarding the markets, here for the past quarter, we continue to see the West Coast remain strong. Our out performers are out on the West Coast.

DC has been soft for us. In fact, without our DC-related assets, our RevPAR would've been up for both portfolios to about 7.5% for the quarter instead of just under 6%. So, DC is affecting us. There's not a lot of new supply coming into DC. Unfortunately, the new supply that came in recently was right across the street from a couple of our assets, three of our assets, so that's affected us here in the short term. But longer term, we believe in the DC market, and notwithstanding some of these short-term government cutbacks and the like.

Okay. Thank you very much.

And at this time, there are no further questions in the queue. I would like to turn the call back over to Monty Bennett for any closing comments.

Thank you. Thank you all for your participation on today's conference call. We will be hosting a property tour on Monday, November 14 in Dallas, just prior to this year's NAREIT annual convention. If there's anyone that has not registered for this event and has an interest in attending, please contact me or our Investor Relations staff and we will be happy to assist you. We look forward to speaking with many of you again on our next call. Thank you.

Ladies and gentlemen, this does conclude the conference for today. We thank you for your participation. You may disconnect your lines at this time.