Ashford Hospitality Trust Inc (AHT) 2011 Q4 法說會逐字稿

Welcome to the Ashford Hospitality Trust fourth quarter conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions) This conference is being recorded today, February 23, 2012. I would now like to turn the conference over to Scott Eckstein with Financial Relations Board. Please go ahead, sir.

Good day, everyone and welcome to Ashford Hospitality Trust conference call to review the Company's results for the fourth quarter of 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 distributed yesterday afternoon in the 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 and uncertainties and known or unknown risks which would 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 had been filed on Form 8-K with SEC on February 22, 2012, 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. I'm pleased to report on our record-setting performance. Our AFFO per share of $0.42 was our strongest fourth quarter in our history, and our eighth consecutive quarterly AFFO per share increase. For the full year, AFFO per share of $1.86 was also our highest ever reported and reflects 24% growth over last year. The 2011 AFFO marks seven out of the eight years of record AFFO per share performance and demonstrates that our strategies to maximize returns while mitigating risk continued to create shareholder value. Given our record performance and forecast, in December, we increased Ashford's 2012 dividend guidance by 10%. We expect to distribute a quarterly cash dividend of $0.11 per common share, or $0.44 per common share on an annualized basis.

Since our last conference call in November, the US economy has continued to show resiliency despite persistent global market concerns. US hotel demand can be continues to increase, with RevPAR growth well above historical average growth rates. Meanwhile, new room supply remains extremely low for the foreseeable future. Clearly, the fundamentals exist for continued improvement in the performance of lodging REITs. Even moderate US economic growth should result in higher than average RevPAR growth. The recent forecast from PKF suggests that national RevPAR growth for the next couple of years to be 6.1% to 7.3%. These levels are well above the industry's 1988 to 2010 average RevPAR growth of 2.5%. On a historical basis, real RevPAR still remains far below prior peak cycle levels. Given that with each recent cycle, the new real RevPAR peak exceeded the prior peak and it's expected that the same could occur in this cycle.

Since the hotel industry is still in the early stage of this recovery, it remains a very good time to invest in lodging REITs. In particular, we strongly believe that our combined strategic benefits of financial leverage and solid operational performance should position us to outperform our peers over the long run in terms of total shareholder return. We are pleased with the EBITDA flows of 55% and margin improvement of 143 basis points for our legacy portfolio. While the total US hotel market RevPAR grew at 7.9% in the fourth quarter, our legacy portfolio RevPAR grew at 5.4%. The reason for this discrepancy lay in the fact that our MSAs modestly underperformed the national average with 7.2% growth but in these particular MSAs, our Upper-Upscale comp sets further underperformed. Our assets' RevPAR growth matched that of our comp sets though.

Similarly, in the Highland portfolio, we are very pleased with our EBITDA flows of 97% and margin improvement of 114 basis points. Nationwide, airport and urban locations underperformed, which is where the Highland assets are concentrated and accounts for most of the difference in performance. We do not see this under performance as a long-term trend. There was also modest impact due to renovations. Lastly, the conversion of the Hilton Boston Back Bay and the Hyatt Windwatch from brand-managed assets to franchises had a temporary impact. While these changes created a short-term revenue disruption during the fourth quarter, this management shift is part of the continuing integration of the Highland portfolio. We expect these newly franchised hotels to generate long-term value accretion through enhanced revenue realization and additional cost savings.

We believe there's also the added property value created through lower cap rates by having hotels that are unencumbered by long-term brand management contracts that are also terminable upon sale. Since closing the Highland's portfolio acquisition in March 2011, the portfolio has achieved trailing 12-month increases of 8.7% in the EBITDA and 10% NOI. To date, we are in line with our original under running performance for the investment and anticipate that the operational changes in capital expenditures will continue to drive performance. We expect both the revenue and EBITDA performance of the Highland investment to demonstrate continued improvement as the hotels in the portfolio benefit from Ashford's proactive asset management practices. We still have work to do to optimize all of the value-added opportunities we seek from this portfolio but we are pleased with our progress so far.

Looking ahead, we expect US economic conditions to improve gradually. However, we maintain a very watchful eye on sovereign financial and other event risks. The markets are still responding to global headlines that appear to be decoupled from the strong US lodging fundamentals. The risk on and risk off market gyrations are creating volatility. Considering the ongoing global uncertainties, we believe this (inaudible) Ashford to take a very measured approaches to our capital utilization. You should expect us to pursue strategies as we seek to balance risk mitigation and shareholder return maximization. With that, I'd now like to turn the call over to Dave Kimichik to review our financial results.

Thanks Monty. For the fourth quarter, we reported a net loss to common shareholders of $18.332 million; Adjusted EBITDA of $71.010 million; and AFFO of $34.930 million, or $0.42 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 3.4%, clearly one of the lowest among our peers. With the maturing of some of our swap positions, we currently have 62% fixed rate debt, and a 38% floating rate. The weighted average maturity is 4.1 years.

Since the length of the swap does not match the term of the underlying fixed-rate debt, for GAAP purposes a swap is not considered an effective hedge. The result of this is 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 non-cash entries that will affect our net income but will be added back for purposes of calculating our AFFO. For the fourth quarter, it was a loss of $17.5 million, and for the year, it was a loss of $70.3 million. During the quarter, we converted our 89% interest in a triple-net lease at the Courtyard in Philadelphia to a 100% ownership position, and a long-term management contract. At quarter's end, our legacy portfolio consisted of 96 hotels in continuing operations. It contained 20,395 rooms. Additionally, we owned 71.74% of the 28 Highland hotels, containing 5,800 net rooms in a joint venture. All combined, we currently own a total of 26,195 net rooms.

As of quarter end, we owned a position in just one performing mezzanine loan, the Ritz-Carlton in Key Biscayne, Florida, with an outstanding balance of $4 million. Hotel operating profits for all hotels, including Highland, was up by $7.8 million, or 9.9% for the quarter. Our quarter-end adjusted EBITDA to fixed charge ratio for our credit facility now stands at 1.70 times versus the required minimum of 1.35 time. Our share count currently stands at 84.3 million fully diluted shares outstanding, which is comprised of 68 million common shares and 16.3 million OP units. I'd like to turn the call over to Douglas to discuss our capital market strategies.

Thank you and good morning. We remain cautiously optimistic about the near-term US lodging performance but there are still risks with the general economy and abroad. We are closely monitoring trends and drawing comparisons to the outcomes from similar historical events to assist in our strategic decision making. Therefore, we're moving forward on parallel paths, taking steps to ensure that we have sufficient capital and liquidity to be prepared for economic uncertainties while simultaneously positioning the Company to have the resources to deploy capital strategically for opportunistic investments that arise.

In 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 $28.9 million after underwriting fees. Also subsequent to the end of the quarter, we upsized our currently undrawn credit facility to a $145 million borrowing base per our pre-existing accordion feature. As part of this modification, we also added the option to further expand the facility to an aggregate size of $225 million. There were no other changes to the terms of the loan. In the process, we added Deutsche Bank to our lending group, which already consists of KeyBank, Credit Suisse, Morgan Stanley, and UBS. We believe that having this added access to capital is worthwhile, whether for defensive or investment growth purposes. All of our other property debt is non-recourse.

Turning to risk mitigation, in December, we successfully restructured our $203.4 million mortgage loan and extended the maturity date from December 2011 to March 2014 with an additional one-year extension option subject to certain conditions. We paid down the loan by $25 million to $178.4 million. Additionally, 85% of the excess cash flow after debt service, working capital, and approved capital expenditures will be used to pay down the debt balance and thereby further deleverage the portfolio.

In 2012, we only have one non-extendable maturity in May on a $167 million loan balance. We're in discussion with lenders to restructure or refinance this loan. We believe that with market conditions improving and available loan allocations for the start of the year, that we will be able to obtain a new or restructured loan on this portfolio. While it will likely require some debt paydown, we believe we have adequate reserves. We will provide updates as available. But typically, we would not expect to share any specific news until we get closer to the maturity date.

Regarding transactions, we're beginning to see opportunities that meet our investment return criteria. Our financial resources well position us to selectively pursue accretive investment opportunities that may arise. Our clear goal of maximizing shareholder returns remains in line with our investors given our high insider ownership of approximately 19%. That concludes our prepared remarks and we will now open it up for your questions.

(Operator Instructions) Dave Loeb, Robert W. Baird

I have two. Doug, first kind of a housekeeping. Notes receivable went up just over $8 million this quarter. What was that? What accounted for that increase?

This is Kimo. I'll answer that. In the quarter we converted our triple net lease at the Courtyard Philadelphia to a 100% ownership position, and in conjunction with that, Marriott had a TIF note receivable that they assigned to us for $8.1 million. So that accounts for that.

Great. So it's really just that TIF note, no other investments.

No.

And then, Monty, just to follow up on your comments about the Highland portfolio, how much longer do you think that disruption goes on? Specifically, Boston and Long Island, are those hotels now kind of running at a normal rate? Or is there longer and are there other hotels some disruption aside from the renovation work as the year progresses?

We've got a disruption potential due -- let me back up and give the whole Highland story. In the second quarter of this year, which is our first quarter of ownership, we had some RevPAR drops compared to our competitive sets. A lot of that was due -- most of it was due to the change in management. We changed management in 17 hotels. In third quarter, we made up much of that difference, same in the fourth quarter. So as far as the RevPAR performance due to that issue, the hotels are maxing their competitive sets. In the fourth quarter, we had some -- a little bit of disruption from CapEx. Not much. But in the first quarter of the coming year, we'll have more disruption from CapEx because a number of our renovations that were going to occur in the fourth quarter got pushed out for a number of reasons into the first quarter. So we've gotten more properties and more things going on in the first quarter than we had originally planned.

As far as that management change, those occurred in late November and early December for those two properties. That's a little bit of disruption. You're going to see some disruption in those assets for at least another quarter. We'll see if we get it all settled down by the second quarter. Sometimes when you go to these properties, you find that the business on the books is not real business on the books as these management teams that were in place before we got there knew for some time that there was a good chance that they weren't going to stay and so funky things happen. I think you'll see a disruption in the first quarter and, hopefully, that will be the end of it for those two properties.

Sounds like for the portfolio overall, legacy and Highland, once you get past the first quarter, you have a smoother run rate for potential for growth starting in the second quarter. Am I reading you right on that?

The legacy portfolio we've got some more CapEx -- aside from CapEx that's the case. We'll see how CapEx turns out for the Highland portfolio and whether it gets pushed into the second quarter and whether we can [guess] to be disruptive or not.

Great. Thank you.

Operator. Patrick Scholes, FBR Capital Market

Good morning. Just a couple questions on the RevPAR results in the most recent quarter. I wonder if you could give a little more color on the 177 basis point margin increase for the Highland portfolio not under renovation. It seemed very impressive on 3.3% of RevPAR growth. Is it fair to assume a lot of that margin increase was from head count reduction?

It was. When we change the management a number of these properties, there was a good amount of head count reduction. Also, our asset management team, working with the brand managed assets, put in place some head count reductions. And you've seen those very strong flows on the Highland portfolio since we took over the portfolio in March of this past year. That's what's happening. That's why we're very happy with those results. We just are looking forward to when our RevPAR results will pick up so those flows mean even more margin improvement.

Good. And two more questions here. One thing that struck me a bit odd in the most recent RevPAR result was your pro forma RevPAR for hotels and legacy portfolio was up 5.4% but the ones not under renovation only did 4.6%. It seems a little counterintuitive. Is that just a reflection of the markets they are in?

That is counterintuitive. Let's explain that.

You know, Patrick, I think it's an anomaly. Historically, the groups of properties total portfolio versus not under renovation have had about a one to $1 to $2 RevPAR discrepancy between the two. It was just unusual that this past year we had that reverse, but I don't think that will continue going forward.

What happens sometimes is when we classify a property as under renovation, generally how we use that is if there's a room with renovation going on or if there a pretty significant lobby renovation going on. Sometimes with those lobby renovations, they can affect you tremendously, and sometimes they don't. And that had lot to do with what business you've got on the books and the transit nature of the business going on. The rooms with renovation obviously affects you a lot because you've got rooms out of service. That's what happened this past quarter. But that's unusual as Kimo said.

Thanks you and last question. When I count up the little Xs on your last pages of your releases to get the CapEx, number of properties under CapEx, it looks like for the coming fourth quarter the expected number of properties jumped quite a bit from what you had predicted last quarter. What's going into the thinking there of why the large increase?

We -- at the end of this -- of third quarter we made our announcements. We didn't have our budgets finalized or approved for Highland. And so that's some of the difference there. And in the interim, we've made decisions to up some of the CapEx and some of the assets to better position them and to take advantage of them. We think there's some -- potentially some great opportunity in some of these assets. And instead of letting them tread water to put more capital into them. I'm not sure if it's reflected there.

But, for example, the Renaissance in Nashville is one. That's an asset where, when we took over the portfolio, we were concerned. Because it's attached to the existing convention center which is quite modest. And there's a nice brand new convention center being built down the street with a new Omni being built. We're in discussions with the city and we're becoming more excited about the prospect of being able to take over the existing convention center, renovating it and renovating our hotel, and it being a great performing asset as its own kind of mini convention center hotel despite what's going on over there. That's a capital decision that right now we're hoping we'll be able to spend when it comes to the fourth quarter. We'll see if that actually happens. There's a number of opportunities that jump up like that where we think it makes sense to continue to invest even more than we originally thought.

Okay. And then one last question. Did you provide any guidance as far as expected CapEx spend this year? I think last year was for $131 million. Any rough estimate for this year you can give?

We haven't given that, but I will give it to you. For the year, we plan on spending about $135 million. And I'll break that down for you. $42 million of that is our portion of the Highland properties. And that's all coming out of the reserves that were funded at closings and the reserves since then. And then the balance is coming out of our legacy portfolio. And we expect to spend probably $40 million to $45 million of owner funding to supplement those CapEx plans.

Great. I appreciate the color.

Robin Farley, UBS.

Great, thanks. I wonder if you could tell us what the RevPAR change would have been at the Highland portfolio if you exclude the two properties Hilton Boston Back Bay and the Hyatt Regency Windwatch -- what the RevPAR would have been for the other -- for the rest of the Highland portfolio?

I don't have that specific number but let me try to give you a little more color on that. The performance of the Highland portfolio compared to the overall market was a little bit due to renovations, not much -- maybe 50 BPs or so. And then a moderate amount due to what went on in these two assets, the Hilton Boston Back Bay and Hyatt Windwatch. Hilton Boston Back Bay is our number one producing EBITDA property. Those two combined probably accounted for another point or point and a half on average. And in the balance just happened to be the sub markets that we were in. The overall MSAs that we were in are doing fine. But the individual upper upscale sub-markets of urban and airport locations under-performed.

And, usually, we find in our portfolio that you have about 50% of the properties kind of above the line the average and about 50% below and so it averages out. But we just had a disproportionate -- this quarter and we're trying to see if there's any reason why that should continue, or if it's a bad roll of the dice. And we can't come up with any reason why we think there's a long term trend. The upper upscale segment in urban and airport across the country under-performed, and that's where we have a good amount of exposure.

Okay. And so I guess then as follow-up have you seen that abate so far in Q1?

We don't like to give guidance going forward so I'll dodge that question.

Okay. I'm trying to figure out a way I can ask it. Rather, not so much giving guidance but just what you've seen historically year-to-date in the last six or seven weeks if you are still feeling concerned about those individual upper upscale segments you were talking about.

Maybe what I can offer is that throughout much of 2011, that held true, right? The upper upscale and the airport and urban markets didn't do as well as some of the other segments.

Right.

For our legacy portfolio, we had to offset by the out-performance of our upscale and mid-scale assets. But in the fourth quarter, those segments didn't out-perform. They kind of did average. And that's why it pulled the whole average down. I can give you a little color and history. But, again, I like to step aside from future guidance.

Okay, sure. And then just lastly on the Highland portfolio, are there other -- it sounds like so far you've changed managements at 19 of the hotels in the Highland portfolio. Have you made all the management changes that need to be made at this point in the Highland portfolio?

No, there may be a couple more this year. But there'll be for select serve properties so it won't be as significant. Sometime later in the year we think it might occur.

Okay, great. Thank you very much.

(Operator Instructions) Smedes Rose, Keefe, Bruyette & Woods

I was just wondering on the $167 million loan coming due in May, would you expect to have to pay that down at all? And is that included in your CapEx guidance, I guess?

It's Doug. We've commented in the past on pay downs in the market -- typically, are 10 to 20% of the outstanding loan balance, and I think that is a good range here -- in the midpoint of that seems pretty realistic. We've demonstrated in doing that in the past with the $203 million loan that we ended up restructuring. In terms of capital for that, we have circa $25 million that has been reserved for this already. So we think that we are in pretty good shape. There is a fair amount of investor -- or lender interest both in discussions with the existing lenders as well as an engagement that we have with Jones laying out there in the market right now. So, we are in dialogue with lenders regarding this and, based upon what we know today, we believe that we'll have a good outcome on this.

Thanks. And just wondering as you think about your portfolio, are there potential dispositions that you might like to make this year? Or what is the sort of market look like on that front?

Sure. We have two properties listed in the market currently. The Doubletree in Columbus and the Hilton El Conquistador in Tucson. And we're in the early stages of that. If we obtain prices that we deem acceptable we'll proceed. If not, we will not sell. So more to come in our next earnings call or thereafter. Okay. Thank you.

Thank you. This does conclude the question and answer session. I would now like to turn the call back to Monty Bennett for closing marks.

Thank you all for your participation on today's conference call. By now, many of you will have received a save the date notice for our 2012 investor day, which we will be hosting on Tuesday, May 8, in New York at the Mandarin Oriental. If there are institutional investors that have an interest in attending and have not yet registered for this event, please contact our investment relations teams and we'd be happy to assist you. We look forward to seeing many of you at our investor day and speaking with you again on our next quarterly call.

Ladies and gentlemen, this concludes the Ashford Hospitality Trust fourth quarter conference call. You may now disconnect.