Ashford Hospitality Trust Inc (AHT) 2014 Q2 法說會逐字稿

Good day, and welcome to the Ashford Hospitality Trust and Ashford Hospitality Prime second-quarter 2014 conference call. Today's call is being recorded.

At this time, I turn the conference over to your host, Scott Eckstein. Please go ahead, sir.

Thank you, operator. Good day, everyone, and welcome to today's conference call to review results for both Ashford Hospitality Trust and Ashford Hospitality Prime for the second quarter of 2014, and to update you on recent developments. On the call today will be Monty Bennett, Chairman and Chief Executive Officer; Douglas Kessler, President; Deric Eubanks, Chief Financial Officer; and Jeremy Welter, Executive Vice President of Asset Management. The results, as well as the notice of the accessibility of this conference call on a listen-only basis over the Internet, were distributed yesterday afternoon in press releases that have 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 certainties, and known or unknown risks which could cause actual results to differ materially from those anticipated. These risk factors are more fully discussed in both Companies' 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 Companies are 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 Companies' earnings releases, and accompanying tables or schedules, which have been filed on form 8-K with the SEC on August 7, 2014, and may also be accessed through both Companies' websites at www.AHTREIT.com and www.AHPREIT.com. Each listener is encouraged to review those reconciliations provided in the earning releases, together with all other information provided in the releases.

I will now turn the call over to Monty Bennett. Please go ahead, sir.

Thank you, and good morning. During the second quarter, the performance of both Ashford Trust and Ashford Prime demonstrated our continuing ability to capitalize on the positive lodging industry fundamentals we are currently seeing. We continue to focus on finding innovative ways to create near-term and long-term shareholder value for our two platforms. Our outlook for the Hotel sector remains positive, and we are confident that these initiatives are adding value for our shareholders.

As a team, we at Ashford have always employed a methodical, analytically driven approach when making day-to-day business decisions on more complex strategic transactions. This remains true in both of our platforms. Our process has stood the test of time, as this management team has achieved a 230% total return to our shareholders since Ashford Trust's IPO in 2003, compared with the 147% return from our peers over the same time period. We have continued to outperform our peers in every yearly cumulative total shareholder return period since our IPO. While our Ashford Prime portfolio is still in the early stages of its development as an independent public company, we expect to continue this record of success with that platform as well.

An integral part of this methodology is our commitment to acting as shareholders in our Companies. That is really not difficult for us because we are shareholders. Our insider ownership in Ashford Trust is 17%; and following the spinoff and subsequent equity raise, our insider ownership is 13% in Ashford Prime. The next closest hotel REIT peer has 4% insider ownership.

Over the years, collectively, we have sold very little of our stock, and have made material cash purchases of shares. In fact, back in March, I bought $500,000 of Ashford Prime stock in the open market. The vast majority of our management team's net worth is in Ashford Trust and Ashford Prime stock. Because of this, we work diligently to be good stewards of our investors' capital, since our own capital is at risk with yours. We consider this to be one of our key differentiators and competitive advantages.

I believe we have the most highly aligned, stable and effective management team in the hotel industry. The same people that took Ashford Trust public over 10 years ago are all still here, with the exception of our former CFO, David Kimichik, who recently retired after a 32-year career with Ashford and its predecessor.

In terms of operational expertise, if you look at just the top 10 most senior executives in our Company, we have well over 200 years of cumulative lodging and real estate experience in a variety of roles, including acquisitions and dispositions, asset management, property management, finance, accounting, et cetera.

So, it's this same management team that continues to manage both the Ashford Trust and Ashford Prime investment strategies. Prime has a focused investment strategy targeting high-RevPAR hotels and resorts located predominantly in domestic and international gateway markets, with conservative leverage levels. It has a well-defined investment strategy, and will continue to deleverage toward its 5 times or less net debt plus preferred equity to EBITDA target. We expect Prime's execution of its investment strategy to be more traditional and steady as we continue to build out this portfolio.

Ashford Trust, on the other hand, will continue to be opportunistic, and will focus on all segments of the hospitality industry with RevPAR criteria outside the Ashford Prime investment focus, and at all levels of the capital structure. Trust will continue to operate at higher leverage levels than Prime, and will be a leveraged way to invest in the lodging cycle.

For both our platforms, I would like to reiterate that our focus remains on creating accretive growth. When we say accretive, we mean accretive to our expected five-year total shareholder returns. So, if you see us pursue an investment, you can be assured that, in our view, investors will be better off from a five-year total return standpoint with that investment in the portfolio than without it. We are not interested in growing either platform just for growth's sake. And are only interested in growing if our shareholders will be better off because of that growth.

In the first half of 2014, lodging sector fundamentals have continued to fuel RevPAR growth and improved profitability. We have experienced steady demand growth for US lodging accommodations, and expect this will remain strong for some time. The main factor driving these fundamentals is that projected levels of new supply have remained at historical lows, and we do not expect this changing in the near term.

In fact, supply growth is expected to remain well below its long-term average, with PKF projecting net supply growth of only 1.0% and 1.3% in 2014 and 2015, respectively. Presently, PKF does not see the national annual supply growth exceeding its long-term average until at least 2017. This favorable supply dynamic is resulting in strong industry RevPAR forecasts, with PKF forecasting that 2014 RevPAR will increase by 6.7% over 2013. Further, PKF's projected RevPAR growth forecast for 2015 is currently 7.1%, driven by expectations for growth in both lodging demand and ADR.

In the second quarter, RevPAR for all Ashford Trust Hotels increased 7.7%. Much of this growth was due to the new initiatives we have underway at our affiliate manager, Remington, that I've discussed in detail on previous calls.

During the quarter, Ashford Trust continued to make significant progress from a capital structure perspective. In April, Ashford Trust priced a follow-on public offering of 8,350,000 shares of common stock at $10.70, generating total net proceeds of $85.5 million. Trust used the proceeds from this equity raise to acquire two hotels.

Subsequent to the end of the quarter, Trust completed the $8-million acquisition of the 39-room Ashton Hotel in downtown Fort Worth, Texas, and a $50-million acquisition of the 357-room Fremont Marriott Silicon Valley. While the Ashton acquisition was a small deal for us, we viewed it as a compelling opportunity, given its high quality and location approximate to the Hilton Fort Worth, also owned by Ashford Trust. With the ability to install Remington as the property manager, and the synergies available with the nearby Hilton, which is also managed by Remington, we felt like this was an attractive investment opportunity.

We are also extremely pleased with the acquisition of the Fremont Marriott Silicon Valley, considering the tremendous upside potential we see for this hotel. The hotel is in excellent physical condition, with minimal CapEx needs, having recently undergone a significant renovation that was completed in 2013. Additionally, the Fremont Marriott is ideally located in a high-barrier-to-entry market that is also one of the nation's fastest-growing RevPAR markets due to its close proximity to the many technology-oriented companies located in the Bay Area. We are extremely optimistic about this hotel's future operating performance given its location, the quality of its physical product, and Remington's proven ability to improve operating margins.

Additionally, Trust recently refinanced three mortgage loans that had a combined outstanding balance of $325 million with new loans totaling $469 million, resulting in approximately $104 million in excess proceeds after closing costs and capital expenditure reserves. We were also able to unencumber two small hotels that we are in the process of marketing for sale.

As previously announced, earlier this year Ashford Trust's Board of Directors unanimously approved a plan to spin off its asset management business into a separate publicly traded Company in the form of a taxable distribution to Ashford Trust shareholders, to be comprised of common stock in Ashford Inc., a successor company of Ashford Trust's existing advisor subsidiary, Ashford Hospitality Advisors LLC, which currently advises Ashford Prime. In connection with the spinoff, it is anticipated that Ashford Inc. will enter into a 20-year advisory agreement to externally advise Ashford Trust. In addition, Ashford Inc. will continue to externally advise Ashford Prime.

We plan to file a listing application for Ashford Inc. with the NYSE MKT Exchange. We expect this distribution to be declared during the third quarter of 2014. However, it remains subject to certain conditions. We expect to have more information to share with you about the spinoff in the near future.

Turning to Ashford Prime: During the second quarter, RevPAR for all Ashford Prime Hotels increased 4.6%. When excluding assets located in Washington DC, Chicago and the Philadelphia markets, RevPAR increased a strong 11.2% for all Prime Hotels. Much of the performance was driven by our west coast assets, which continued to outperform. This includes RevPAR growth of 12.6% for our Courtyard San Francisco Downtown, 17.5% for our Hilton La Jolla Torrey Pines, and 12.6% for our Courtyard Seattle Downtown.

While flow-through at the property level was strong, our EBITDA flow-throughs were impacted by higher property taxes and higher property-level incentive management fees. This should improve as we move into the second half of the year and anniversary some of these incentive management fee increases. We continue to be pleased with the high-quality nature of -- and the long-term growth prospects of the Ashford Prime portfolio. Jeremy will provide more insight into this portfolio a little later in this call.

Prime is currently trading at a trailing 12-month NOI cap rate of 7.0%. Based upon HPS Research, and where we are seeing similar assets trade in the private market, we estimate a private market trailing 12-month NOI cap rate of around 6.0% is more appropriate. This 100-basis-points cap rate premium, we estimate, equates to over $5.00 share in value. We are committed to maximizing values for our shareholders in both platforms, and will work to continue to execute on each Companies' investment strategy while exploring all options to realize full value.

As previously announced, the Board of Directors of Ashford Trust declared a dividend of $0.12 per share for the second quarter of 2014. The Board of Directors for Ashford Prime declared a second-quarter 2014 quarterly cash dividend of $0.05 per share. Both Ashford Trust and Ashford Prime will continue to review their dividend policies on a quarter-to-quarter basis.

I'd like to mention some of the innovative ways we are seeking to increase our transparency and communication with investors. We recently launched the Ashford App, which is a free mobile app that is available in the Apple App Store and Google Play Store for Android by searching Ashford, and is targeted toward the hospitality REITs investor community. We designed the app as a one-stop resource for everything associated with Ashford-related Companies, as well as the entire hospitality REIT sector.

Another example of our innovative spirit is that I started a Twitter profile about a year ago, and you can follow me, @MBennettAshford. I hope you will download the app, and find it to be a useful investment research tool, and that you will also follow me on Twitter.

In conclusion, we are very pleased with our market share gains this quarter for both Ashford Trust and Ashford Prime. We are very excited about the prospects for our planned spinoff of Ashford Inc.

The same management team responsible for Ashford Trust's historical outperformance will now be able to work through these multiple platforms, giving us more flexibility and resources to implement new and creative strategies to create shareholder value. Through these spinoffs, we will have taken some of the different strategies that were part of Ashford Trust, and separated them into different vehicles so that investors can invest with this management team but in a strategy that works best for their objectives. We continue to believe we are well positioned as hospitality sector conditions continue to improve, and we look forward to updating you on our progress in future calls.

Lastly, on a personal note, I want to offer my thanks to our former Chief Financial Officer, David Kimichik. Kimo recently retired, following a career spanning over 32 years with the Company and its predecessor. His many contributions were a great part of our success over the years. We are all very grateful to Kimo, and I want to personally thank him for his many years of service to Ashford, and wish him a long and happy retirement.

Deric Eubanks, formerly our Senior Vice President of Finance, has succeeded Kimo as Chief Financial Officer and Treasurer. Many of you know Deric, who has been with us since Ashford Trust's IPO in 2003, and has played a key role in our history as a public company. Deric's deep knowledge of our business strategy and the capital markets, as well as his Investor Relations experience, has resulted in a seamless transition.

With that, I will now turn the call over to Deric to review our financial performance for the quarter.

Thanks, Monty. For the second quarter of 2014, Ashford Trust reported AFFO per diluted share of $0.39 compared with $0.55 a year ago. It's important to note that the second quarter of 2013 included the operations of the Ashford Prime Hotels.

Ashford Prime reported AFFO per diluted share of $0.45 compared with $0.44 a year ago. For the second quarter, we reported adjusted EBITDA of $96.4 million for Ashford Trust, and $25.9 million for Ashford Prime. This adjusted EBITDA result for Ashford Prime reflected a 35% increase over the prior year.

At quarter's end, Ashford Trust had total assets of $3.6 billion, including the Highland portfolio, which is not consolidated. It had $1.8 billion of mortgage debt and continuing operations, and $2.6 billion overall, including Highland. The total combined debt for Ashford Trust currently has a blended average interest rate of 5.57% and is currently 54% fixed rate and 46% floating rate, all of which have interest rate caps in place. Including the market value of Ashford Trust's OP Units of Ashford Prime, and its pro rata share of the net working capital of the Highland portfolio, Ashford Trust ended the quarter with net working capital of $467 million.

Ashford Prime at quarter's end had total assets of $1.3 billion. It had $767 million of mortgage debt and continuing operations, which had a blended average interest rate of 4.99%, and is currently 55% fixed rate and 45% floating rate, all of which have interest rate caps in place.

At quarter's end, the Ashford Trust portfolio consisted of 114 hotels with 22,667 net rooms, and the Ashford Prime portfolio consisted of 10 hotels with 3,472 net rooms.

Ashford Trust share count currently stands at 110.9 million fully diluted shares outstanding, which is comprised of 90.9 million common shares and 20 million OP Units, while Ashford Prime share count currently stands at 34.5 million fully diluted shares outstanding, which is comprised of 25.4 million common shares and 9.1 million OP Units.

I would also like to point out that Ashford Trust recorded a $10.8-million accrual for a litigation judgment in the second quarter. This judgment relates to a tenant dispute from 2008 at one of its hotels where Ashford Trust believes the tenant had violated various lease provisions of the lease agreement and was, therefore, in default. The tenant counter-claimed and asserted multiple claims, including that it had been wrongfully evicted. The litigation proceeded to a jury trial in June of 2014, and the jury awarded the tenant total claims of $10.8 million. We strongly disagree with this verdict, and are in the process of appealing it. In the results for the second quarter, we have adjusted for this accrual, for purposes of calculating adjusted EBITDA and AFFO.

I would now like to turn it over to Jeremy to discuss our asset management accomplishments for the quarter.

Thank you, Deric.

RevPAR at the 10 properties in the Ashford Prime portfolio increased 4.6% in the second quarter of 2014, as difficult market conditions in Washington DC, Chicago and Philadelphia weighed on our results. However, that 4.6% portfolio RevPAR growth translated into a significant increase in market share versus the same period last year, which illustrates the high-quality nature of the Ashford Prime portfolio. Half of the Ashford Prime properties experienced double-digit RevPAR growth in the quarter. Strength in the west coast markets continued through the second quarter where Ashford Prime's four properties produced a combined RevPAR growth of 11.9%.

I'd also like to point out that we are pleased with the strong start to the third quarter, with a year-over-year increase in RevPAR of 11.4% in July for the Ashford Prime portfolio. Among these properties is the Hilton La Jolla, which grew RevPAR by 17.5% in the quarter. This asset continues to excel since the completion of a stunning renovation of the property in the second quarter of 2013, yielding a significant return on our capital expenditures. San Francisco and Seattle continue to be strong markets for Ashford Prime, where our three properties produced a combined RevPAR growth of 10.4% for the quarter. Another source of growth this quarter came from the Renaissance Tampa property, which increased RevPAR by 13.4% due to multiple city-wide events.

It has been five months since Ashford Prime closed on the Sofitel Chicago acquisition in the heart of downtown Chicago. Our team has spent much time with the property, identifying opportunities to improve asset performance. Since the acquisition, we have already identified and implemented cost cuts that we believe will result in approximately $700,000 in annualized cost savings. While the Chicago market has had a difficult last couple of quarters, we are still very excited about the addition of this hotel to the portfolio, and are very optimistic about its long-term prospects.

Ashford Prime acquired the Pier House Resort in Key West in March. But I'd like to point out that the second quarter marked the one-year anniversary of Ashford Trust acquisition of the hotel and the conversion to Remington management. Since the acquisition, we have overhauled the entire property operations, including, but not limited to, sales strategies, parking operations, and overall cost controls. I'm excited to report that in its first full year under Ashford, and Remington control, RevPAR increased 14.2% while total revenue increased by $2.2 million. The aforementioned strategies enabled 90.2% of that revenue increase to flow to EBITDA. These outstanding financial results confirm our initial optimism about the transaction.

Overall, we are pleased with our asset performance in the second quarter, however, I'd like to bring your attention to a couple of headwinds for the market during the past period. The most significant factor is the Easter holiday moved from March last year to April this year, which negatively impacted corporate travel in the quarter. This effect was more pronounced in the upper upscale and luxury class hotels, which are more sensitive to corporate segments.

Another noteworthy mention is the materially weaker city-wide calendars versus the second quarter last year in Chicago, Philadelphia and Washington DC. However, in spite of these city-wide headwinds, the three affected Prime properties all maintained or gained share during the quarter, enabling a portfolio-wide market share increases.

I'm now going to discuss the Ashford Trust portfolio, which grew RevPAR by 7.7% in the second quarter. This came through a 4.3% increase in rate, and a 3.3% increase in occupancy. Ashford Trust also performed well against its competitors, boasting a measurable gain in market share for the quarter.

As with the Ashford Prime, the west coast drove substantial growth for the Ashford Trust portfolio. San Diego, Portland and San Francisco/Oakland assets collectively grew RevPAR by double digits in the quarter.

Another strong market for Ashford Trust was Nashville, where the 673-room Nashville Renaissance grew RevPAR by 13.2% over the prior year. This performance comes in the first full quarter since we completed a full rooms renovation in February of this year. The new product mixes modern design with a distinct influence of Music City, creating a perfect environment for corporate groups and leisure travelers alike. Nashville has been one of the strongest US markets year to date, and we believe combining a fresh product with a fast-paced growth in Nashville market, will enable the asset to deliver exceptional results for the foreseeable future.

I'd like to share with you another renovation we recently completed at the Crowne Plaza Ravinia in the perimeter area of Atlanta, Georgia. The property features updated rooms, corridors and lobby, with access to the stunning Ravinian Gardens. The finished product perfectly unites the sophisticated contemporary styling of a city hotel with the amenities and spacious feel of a suburban property. We believe this renovation is a timely deployment of capital as a perimeter market in Atlanta is beginning to show signs of strength after a relatively stagnant post-recessionary period. Despite still being under renovation in the quarter, the Crowne Plaza Ravinia grew RevPAR by 10.5%. This trend is likely to continue as this well-positioned hotel is poised to ride the upcycle in the Atlanta market.

In August of last year, Ashford Trust announced the conversion of the Beverly Hills Crowne Plaza to a Marriott, to be completed in the first half of 2015. As a team, we identified a gap in the supply of Marriott rooms in that market with no full-service Marriott within 6.5 miles of this property. As of the end of the second quarter, we are actively renovating the property in preparation for the conversion. I'm excited to announce the recent completion of a very attractive model room that truly embodies our concept for the new full-service property. We will soon begin the same process on the remainder of the rooms in preparation of the opening of the Marriott Beverly Hills.

The second quarter marks the end of the renovation-heavy first half of the year for the Ashford Trust portfolio. During the quarter, asset managers worked proactively with Remington Project Management and our property managers to minimize the displacement and overall impact from these renovations. This focus on mitigating renovation headwinds led the hotels under renovation to grow RevPAR by 7.3%, only 50 basis points less than the hotels not under renovation, which grew RevPAR by 7.8%.

Since completing the acquisition on the Highland portfolio, Ashford has completed renovations for many of those properties over the last three years. With a majority of the renovations for the Highland portfolio completed, the second half of this year is forecasted to have significantly less renovation displacement compared to the same period last year.

I'd like to share another exciting accomplishment for our team this quarter. June 1 commenced the renewal period for our Property Insurance Program for both Ashford Trust and Ashford Prime. And a large opportunity for us to reduce expenses. We were able to achieve significant savings on a year-over-year basis amounting to over $1.2 million or a 10.8% reduction in cost on both portfolios. This is a great example of our constant focus on adding value to our assets at the ownership level.

I will conclude by emphasizing the common trend across both portfolios in the quarter, and that's market share growth. In our past few calls, I have discussed several active initiatives within Ashford, as well as our affiliate manager, Remington, aimed at optimizing revenues and growing market share across both Ashford Trust and Ashford Prime. Some of these initiatives include hiring of new personnel, investment in sophisticated revenue management data, and implementation of an enterprise business intelligence system. Year to date, we have truly begun to see these strategies pay dividends, as both portfolios have substantially gained RevPAR against competitors.

While operational efficiency and stringent cost controls remain part of Ashford's core identity, we believe maximizing revenue growth, particularly during this favorable stage of the business cycle, will deliver optimal bottom-line results for our shareholders.

With that, I will turn the call over to Douglas.

Thank you, Jeremy. Since the end of the first quarter, Ashford Trust has continued to strengthen its capital structure by capitalizing on attractive market conditions to strategically manage our debt maturities while generating excess proceeds, to bolster our cash position, and also raising equity for two acquisitions.

During the quarter, Ashford Trust completed a follow-on public offering of 8,350,000 shares of common stock at a price of $10.70 per share, and used the proceeds from the offering to acquire the Ashton Hotel and the Fremont Marriott Silicon Valley. As a reminder, during the downturn, we purchased over 75 million shares of Ashford Trust common stock in the open market at an average price of around $3.00 per share. So, reissuing those shares at a price of $10.70 resulted in significant value creation for Ashford Trust shareholders.

Turning to financing activity during the quarter, Ashford Trust refinanced the $5 million loan secured by the Courtyard Manchester with a new $6.9 million loan. The new loan has a 10-year term with a fixed interest rate of 4.99% and 30-year amortization.

Ashford Trust owns this hotel in a joint-venture with Interstate Hotels & Resorts, where Ashford Trust owns 85% and Interstate owns 15%. The excess proceeds after transaction costs were distributed to the partners on a pro rata basis.

Additionally, Ashford Trust recently announced the successful refinancing of three mortgage loans with a combined outstanding balance of approximately $325 million. The three previous mortgage loans that were refinanced include the $135 million JPMorgan floater loan, the $101 million UBS 1 loan, and the $89 million Merrill Lynch 3 loan. The new loans total $469 million, and include a $301 million loan with a two-year initial term and three one-year extension options that bears interest at a floating rate of LIBOR plus 4.35%; a $63 million loan with a two-year initial term and three one-year extension options that bears interest at a floating rate of libor plus 4.35%; a $68 million loan with a 10-year term that bears interest at a fixed rate of 5.2%; a $13 million loan with a 10-year term that bears interest at a fixed rate of 4.85%; and a $25 million loan with a 10-year term that bears interest at a fixed rate of 4.9%.

In total, the refinancing resulted in excess net proceeds after closing costs and capital expenditure reserves of approximately $104 million and unencumbered two hotels: The Hampton Inn Terre Haute and the Homewood Suites Mobile.

As we do it with all of our capital allocation decisions, we took a very strategic approach to this refinancing in terms of the mix of fixed and floating rate loans, pre-payment terms and the asset makeup of each loan pool. We are very pleased with this strategic refinancing, and you should expect us to pursue similar refinancings in the future as we work to stay in front of our upcoming debt maturities. We continue to see improving liquidity and more favorable lending terms in the market. Spreads are tightening, LTVs are increasing, debt yields are shrinking, and terms are generally more borrower-friendly.

While Ashford Trust expects to operate with an opportunistic view on leverage and liquidity, Ashford Prime will continue to be more conservative in its use and structure of leverage. Subsequent to the end of the quarter, Ashford Trust closed on two hotel acquisitions. In July, Ashford Trust closed on the $8 million acquisition of the 39-room Ashton Hotel in downtown Fort Worth, Texas, and in early August, closed on the $50 million acquisition of the 357-room Marriott Fremont Silicon Valley. While the Ashton Hotel represents a small deal size for Ashford Trust, we found it to be a very compelling investment opportunity for several reasons.

It's the only luxury Hotel in downtown Fort Worth. It's also located two blocks from the Hilton Fort Worth, which is also owned by Ashford Trust. With the ability to install Remington as the property manager and the synergies available with the nearby Hilton, which is also managed by Remington, we believe this investment opportunity was too attractive to pass up. Subsequent to the closing, we financed this Hotel with a $5.5 million non-recourse mortgage loan with a term of five years.

Ashford Trust's acquisition of the Fremont Marriott Silicon Valley is a great example of the opportunistic nature of its investment strategy. Ashford Trust was able to acquire this Hotel at an approximate 45% discount to estimated replacement cost. We consider this a very attractive purchase for several reasons.

The Fremont Marriott is the only full-service Hotel in Fremont, so it has an exceptional position in its market to draw corporate demand from neighboring companies in Silicon Valley and the surrounding Bay Area. The Hotel has ample facilities to accommodate this, featuring about 15,000 square feet of meeting space to spread across 19 flexible meeting areas. The Hotel is in exceptional physical condition, with minimal CapEx needs, having recently undergone a significant renovation of approximately $8.1 million or $23,000 per key, which was completed in 2013.

We were also able to install Remington as the property manager at closing. Given Remington's proven ability to increase margins at similar hotels, we saw an attractive opportunity to significantly increase the operating performance of the Hotel.

Lastly, the Hotel is located in a high barrier-to-entry fast-growing RevPAR market. On a forward 12-month basis, the purchase price represents an estimated cap rate of 8.1% on net operating income, which equates to an expected 10.0 times forward EBITDA multiple.

We financed the Hotel with a $37.5 million non-recourse mortgage loan that bears interest at a floating rate of LIBOR plus 4.2%. And the loan has a two-year term with three one-year extension options.

Turning to Ashford Prime, this was a relatively quiet quarter following the high activity we saw in the first quarter, which included the public offering of 9.2 million shares of Common Stock that was closed in January, and the acquisitions of the 415-room Sofitel Chicago Water Tower and the 142-room Pier House Resort. These two acquisitions demonstrate our strategic commitment to high RevPAR hotels in gateway and resort locations.

We do expect to continue growing this platform, but only in a manner that brings shareholder accretion. As we stated previously, we remain open to exploring all avenues to maximize value for our shareholders.

Note: Our other option property, the Marriott Gateway in Crystal City, has a 12-month exercisable term that runs from May 2014 through May 2015. Given Ashford Prime's existing exposure to the DC market and the Capital Hilton, and the current price of Ashford Prime stock, we do not expect Ashford Prime to exercise that option in the near term.

When it comes to deal pipeline, we're already seeing the strategic benefits of having two platforms. Investment activity for each Company will vary depending upon the marketed and off-marketed deal flow, along with each Companies' respective cost of capital. So far, both Companies have either announced or completed two transactions year to date, namely Pier House and Sofitel for Ashford Prime, and Marriott Fremont and Ashton for Ashford Trust.

We continue to mine the market for transactions, as well as alternative ways to invest in accretive growth. We have underwritten many transactions this year, and have shown discipline in our pursuit of investments with respect to underwriting assumptions and pricing metrics. It is worth noting that the pipeline for Prime is currently very competitive. But we're looking closely at a few opportunities.

With the existing size of Prime, each incremental transaction has greater impact to the overall performance of the Company. While Prime has a strategic focus on gateway markets, we have seen greater competition and multiple expansion on international transactions in our targeted gateway markets. As a result, any near-term foreign transaction activity is diminished since we do not see sufficient share price accretion. This is, of course, a fluid situation, and our share price performance and/or a change in the foreign investment pipeline could change this. The Ashford Trust pipeline is active, but we have to be very selective from a strategic standpoint.

We are also seeing an uptick in portfolio opportunities. This is a common characteristic at this point in the cycle. With two platforms in Prime and Trust, we have the ability to mix and match assets and capital to maintain a strong competitive bidding position against the private equity funds.

In conclusion, year to date we have continued to pursue attractive investment opportunities in both of our platforms. At the same time, we continue to be proactive with our upcoming debt maturities. In doing so, we have taken a disciplined approach to managing our capital structure.

For Ashford Trust, our focus remains opportunistic with respect to refinancing and investment decisions. At Ashford Prime, we will continue to execute on its well-defined investment strategy in a manner that is accretive to shareholder value.

Again, we are significant shareholders ourselves in both of these Companies, holding 17% of Ashford Trust and 13% of Ashford Prime. So rest assured, your management team is dedicated to maximizing shareholder value and delivering superior returns because we are invested right alongside all of you.

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

Thank you sir.

(Operator Instructions)

We'll take our first question from Andrew Didora with Bank of America.

Monty, maybe the first one, I just wanted to touch upon the margins at Ashford Trust. Up just 56 basis points on a very good RevPAR number, that's looking at the data you guys disclosed in your Press Release and it looks like it was incentive fees and some new franchise fees even to some of the upside.

Just looking back at historical performance, it seems like 1Q had some similar headwinds but grew margins over 125 basis points. The back half of the year do you think this variability will continue and then maybe, can you give us a sense of your -- of what we should think of in terms of margin growth in sort of a mid single-digit RevPAR environment?

Sure. This margin growth is lower than what we have typically achieved. Those incentive management fees in Trust were primarily paid to our affiliates Remington and that was because of some really strong performance.

The incentive management fees to Remington are capped though. They are capped at 1% of gross revenues, and so there is certainly a limitation to how many of those fees are paid on by property based on hitting budget or not.

As far as what the future holds we don't give guidance on that. But we could off-line work with you and help you calculate about how much -- how many fees were paid so far and therefore you can know at least how much more on the maximum side could be paid as a part of that incentive.

Those franchise fees headwinds were as a result of us converting some properties to franchises in May -- approximately in May of 2013, some Marriott-managed -- overall the cost structure of those assets came down even with the franchise fees. But the franchise fees do show up as a variance and that will go away going forward because we've lapped that information.

Got it. That makes sense. Kind of a similar question.

At Prime and -- I'm sorry you might've mentioned this briefly in your prepared remarks -- but I just wanted to ask you about San Francisco and Seattle both had RevPAR growth over 12% yet negative margins. What was the driving force here and how long you expect this kind of margin underperformance to continue?

Sure. The brand incentive fees hit us pretty good in the Prime portfolio. And while some of that is due, a lot of that is due just to improving performance, a lot of it has to do with how we booked them last year. We weren't as aggressive in booking the incentive fees in the first and second quarter of last year.

Therefore, being more aggressive booking them this year really hit our margins. Starting in the third quarter and fourth quarter, the booking methodology will be the same and so we don't anticipate the incentive fee impact-to-margins to be nearly as significant going forward.

Got it. That's helpful. And finally, this is for Doug. Obviously, competition for high quality hotels in top markets continues to be high. A lot of your peers, this earnings season, have mentioned on their calls that they are losing out on deals and these are peers with certainly a little bit of lower cost of capital than you guys. At what point in the cycle do you kind of make the decision that you may look to sell part of the Prime portfolio or the entire portfolio if you decide you really can't grow accretively?

We've been selling assets. We have two assets for sale right now in the Trust portfolio, maybe three assets for sale in the Trust portfolio. So we are constantly winnowing out our portfolio. So we look at that all of the time.

As far as looking at it in more larger forms, I would rephrase our answer in that, we're committed to strong returns in both of these platforms. We will pursue whatever strategies it takes in order to get those strong returns. If that involves selling a good number of assets then that's what we're going to do.

We're going to looking at that continuously, so I don't know if we will just reach a point on it. We do think that we've got a good bit of running room left in this cycle. There's no reason to do anything too dramatic right now. But we want these platforms to perform well, and we're committed to making sure that happens one way or the other, whether it's selling assets or any other moves we might consider.

Trust has been the number one performer of all of our REIT peers so far this year. But Prime has not done as well, but we really look at Prime's growth starting from when we raised capital in Prime, which was at $16.50. Looking at its starting price of when it was spun out is a bit arbitrary since so few shares were traded.

But we raised significant capital at $16.50, we had a good run up these past couple of months, but have pulled back here a little bit but we're very excited about the Platform and think that's it's going to do very well.

If I could just add a couple of points. Obviously some of groups are selling assets because it's a strategic shift but we have clearly with the benefit of our multiple platforms is that we've created those shifts already.

And that the cost of capital with respect to the opportunities are better aligned. Also, were sitting on a fair amount of capital within both platforms. So the idea of selling assets just to raise capital to redeploy at a time that it's fairly competitive doesn't sit strategically well with us either. We don't think that's in the best interest of the shareholders.

I think some industry experts are forecasting that the peak transaction period won't even be until sometime in 2018. So our view is that there's plenty of run -- room to run in the cycle and that in many cases would be leaving cash on the table selling into what we view to still be an industrywide strong RevPAR performance and increase liquidity for hotel transactions. So from that standpoint we view that our current strategy certainly makes sense.

Next question from Ryan Meliker with MLV & Company.

One quick follow-up to what Andrew just asked with regards to incentive management fees at AHT. Obviously it had impact on margins this quarter.

Can you tell us how close you are to bumping up against that 1% max at Remington? Should we expect incentive fees to be elevated and have this type of impact over the next few quarters if RevPAR continues to hold up at the current pace?

We will have to work on that calculation off-line. We don't have it right here with us, Ryan, about how much of that potential has been booked already as far as the Remington incentive fees.

Can you tell us whether we should expect if RevPAR continues at the current pace across the Trust portfolio, whether we should see similar 50 basis point impact to property margins going forward?

That depends on how that calculation I just referenced to. So I would have to sit down -- overall all of the other areas and all areas of Trust are fine and in good shape, so it's just that incentive fee that we will have to take a closer look at and see how much it might impact over the next few quarters.

But again, since we don't give guidance, we'll tell you how much has been booked so far with -- what the potential is and then you can make estimates about how you think that will impact margins going forward.

That make sense. Obviously when incentive fees are being booked it's because the properties are doing better than expected. So that's usually a positive.

Second question I have is I was wondering if you would give me a little color on the Chicago Sofitel Water Tower? When you announced the deal back in February you indicated that it was a trailing 6% cap rate and a forward 6.8% cap rate, implying that cash flows were actually growing over an NTM basis. But as we look at year-to-date, the property EBITDA is down 17%, down 10% in the second quarter.

Is this -- it doesn't sound like this is what you're underwriting initially given your were expecting cash flows to -- or NOI to be growing. What's missing or is this what you were expecting? And now are you going to see a pretty sharp uptick over the next couple quarters?

We do expect the back half of the year to be stronger. Better than in the first half of the year. Both just in general and because of the convention calendar. So that's happening.

When we underwrote this Property, we knew that the convention calendar was going to be weak in the first part of the year and this Property's own bookings and so that's not new.

What was new was that winter that just absolutely tore us up up there, both us and the market. I think we even lost some share at that Property during that period of time. But that was a difference, was that winter.

I had to sit down and really look at the numbers and maybe the convention calendar was a little weaker than we expected. I'm not sure offhand, but it was primarily due to that brutal winter and the fact that we expected the gains to be more backloaded than frontloaded.

I'll just add a little bit. In the second half of the year, there is two more citywides in Chicago so the group outlook definitely looks more favorable for the City. One of the things that I mentioned on the call is we have cut a decent amount of costs at the Hotel already that will help offset some of the revenue drops.

Were those cost cuts implemented after the end of the second quarter?

They were towards the latter part of the second quarter.

Okay. Great.

It's a process of working with the Brand and the Management team on site.

Next question will come from Robin Farley with UBS.

Just circling back to the incentive fee question again. I wonder if you could quantify for us, what percentage of your properties are incentive fee payers? Were incentive fee payers in Q2 versus the prior year? Just to get a sense of the number of properties that are reaching those thresholds.

That's hard to give you here off the top here so let's just give you that off-line. All of the Remington Properties are subject to incentive fees but they're capped at 1% of gross revenues based upon exceeding budgeted levels, budgeted GOP levels.

The non-Remington managed, the property managed -- the Brand-managed properties, most of them have incentive fees as part of the Management contracts. Not all of them. Those are based upon a certain owner priority levels that we will just have to spend a little time with you off-line in order to help you with that.

I'm trying to get a sense, I guess, of whether even if the Remington Properties are capped, do the non-Remington Properties start to kick in here with RevPAR going. So even though the Remington Properties may be capped that you have similar issues at your other owned properties.

A lot of the ones that have the bigger shares of split so to speak, above owners priority have already kicked in and specifically for the Prime portfolio five of the -- about approximately half of the assets are currently paying incentive fees. They just happen to be a little higher incentive fees than some of the other non-Remington hotels that we have in the Trust portfolio.

Jordan Sadler with KeyBanc Capital Markets has our next question.

Hey, it's Austin Wurschmidt here with Jordan. Doug, I just have one question related to your comment about -- on the Trust portfolio -- about having to remain very strategic on the acquisitions side. I was just curious if you could provide a little color as to what you were referring to?

I think we're just strategic with respect to both Platforms. Nothing specific in that comment.

I think the opportunities in the market today are broad-based, single-assets portfolio opportunities, as well. I think were just being strategic in both Platforms, looking at mining the market for situations that fit either platform.

To add to that a little bit is when we look at opportunities, we share the way we measure accretion is a five-year total shareholder return based upon raising capital and deploying it in that asset We are looking at on a leverage-neutral basis versus not doing anything. And are the total shareholder return based upon stock price and dividends higher or lower to our shareholders? That is a very strict discipline that we stick to and why our returns are so much higher than our peers.

We get some questions about are we going to sell some of the Right-of-First-Offer properties from Trust to Prime or we can do this or that. And the answer, not to be cute about it, but the answer truly is we will conduct some of those transactions with it accretive to both Platforms. At that time, we will bring it to both the Trust Boards and the Prime Boards that it's in their best interest to do so, as it would be if it's accretive to both Platforms. So when we are strategic in our pursuits, everything has to pass through that filter and that's the discipline we will continue to keep.

So then just looking at the opportunities both on a one-off versus portfolio basis, are you seeing more accretive opportunities on the larger portfolios or more where you can go in and mine some of the one-offs?

We've obviously done a couple one-offs so, heretofore that's been on the smaller individual assets. But I don't know if that's necessarily a rule. I think that's just how we've happen to go out there and grab a few assets.

To answer it another way, I think in the future there very well may be individual asset transactions and our portfolio transactions. I don't think you should assume it should be one or the other.

Thanks for the detail there. Jeremy, you mentioned some renovation disruption in the second quarter.

I'm just curious what the expectation is going forward and do you expect that to provide a little bit of a tailwind in the second half of the year? And then similarly, can you just provide an update on where you guys are in the process of implementing the revenue management initiatives?

I'm going to take the first part on the renovation. So if you look at the Trust disclosure that we put out in terms of the upcoming renovation schedule, we have about seven hotels or so in the third quarter of less renovations and about five in the fourth quarter.

On a year-over-year basis, the second half has significantly less renovation activity than what we had in 2013. As for Prime, there's really not a lot of renovation going on in that portfolio. So that looks pretty good. Especially on the fourth quarter.

And then -- what was the second question? I'm sorry.

Where you are in the process of implementing the revenue management initiatives. Are there still initiatives underway? Do you anticipate some additional tailwinds?

We see now RevPAR sort of accelerate into the first half from the back half of last year, and I'm just curious if we should expect that continue as additional initiatives are put in place?

We think that we know that there is further initiatives that -- some that have just been put in place and some that have not even been put in place yet. Those initiatives will continue to be put in place through the end of the year and even the first part of next year and we should be getting some of the benefits from those. We're optimistic about our revenue performance.

Our next question will come from Chris Woronka with Deutsche Bank.

I realize you don't give guidance, but I want to ask about the SG&A more so on the Trust side. I see the added $1.2 million of spin-off costs back.

Was there anything else unusual that was kind running through SG&A, or what kind of impact -- what are some of the things that impacted the timing on that if you can?

The other thing that I point out that was in the Trust G&A was the compensation adjustment related to the modified employment terms. That was something else that was in there that we adjusted for.

But other than that, there's nothing really in the transaction costs like you mentioned. There's nothing else that I would point out as different than what we typically have.

Is there, on the stock based comp, is there typically a lot of fluctuation quarter-to-quarter?

No. Not necessarily. The adjustment that I mentioned, the compensation adjustment, part of that was in stock comp and part of that was in other G&A. The movement in that, in the stock comp amount was partly related to that adjustment.

Okay. Got you.

And then on the Ashton acquisition, I'm guessing it's maybe a little bit too small for that to end up in Prime, but is Fremont something that could potentially end up there? Either of those?

No. The Fort Worth assets, it's not only small but it's in Fort Worth and that's not in keeping with our Prime strategy. And as far as the Fremont assets, it is not in the gateway markets. It's also has a RevPAR that's too low. So no. You shouldn't expect any of those to ever go to Prime.

You mentioned two limited-service hotels that were unencumbered with the latest refinancings. Could we read into that that those are sale candidates? Is there kind of a direct correlation that we see there?

Yes. Yes. We're marketing those for sale, it's the Homewood Suites in Mobile and it's The Hampton Inn in Terre Haute. Those are the two assets that are being marketed for sale.

One more from me. Just as you think about -- we see the two platforms and is there a way to creatively, could you buy -- could you use more leverage on the Trust side to compete with some of the buyers for these assets and then flip them over to Prime? Is there an avenue to do that?

Yes. There is an avenue to do that.

That's one of the creative approaches that we're looking at, that Doug is looking at in very detailed to see. We want to take advantage of these platforms to help themselves and help the sister platforms as long as it's neutral or helpful to the first platform. We're never going to do something to the benefit of one if it's at the expense of the other. But if there's opportunity to help each other then that is what is going to happen.

Considering what's going on in the marketplace, where higher leveraged transactions are taking place and in order to be price competitive you have to have a little higher leverage. It may make sense, in some form or fashion, to purchase them in the Trust, warehouse them and at the appropriate time have them move over to Prime. But we would have to spend sometime on that because we want to make sure that the Trust shareholders, if we did that, get a fair shake. And get compensated for playing that role.

And so as we're evaluating platforms we are looking at any and all different kinds of ways in order to create value. We're also more open than before over on the Trust side to get into some joint-ventures and do a little more creative type things now that we spun the Prime platform out.

Hopefully we can apply our creativity to this market that we believe, both in values and RevPAR, is going to continue to improve for the foreseeable future in order to take advantage of those facts to the benefit of our shareholders.

Nikhil Bhalla with, FBR Capital Markets has our next question.

Hi, this is Weston Bloomer asking on behalf of Nikhil. Most my questions have already been answered but I was wondering if you could give an update on your stance on share buybacks especially given age, piece, share discount to NAV at this point.

Is that something you are considering or is it too early in the portfolio's lifecycle? Any update on that would be great.

That's not something we're considering now for Prime. It is early in the lifecycle of Prime. It is trading, we believe, at a material discount to net asset value, to private market values. But we also have a desire to grow the platform and you don't grow it by buying back shares. So we are patient with that for now and have no intention of buying back stock.

I think that generally, what you're going to see from us is not buying back stock hardly at all in either platform during these more robust times in the industry. It's just been a better use of capital to go out and buy assets.

Where you'll see us buying back shares, if we do it, will be during a downturn. Almost exclusively on these -- never say never but that's generally what you're going to see. I'd be hard-pressed to say that you'll see us buying back shares in Prime or Trust.

As a confidence boost to the marketplace, I went out there personally and bought some shares in Prime and although it is not material in the size of Prime, it's not an immaterial number at all to me, personally. So we're going to keep getting on the road with potential investors for Prime and keep selling the story. We have been getting some great feedback from investors and we're going to keep up those efforts to educate the market on Prime.

Something that I think is very important, not only is a Prime structure more highly aligned with Management than all of the other internally managed assets, but in a way is one of the most purest ways that one can invest in a real estate platform in that you're investing straight in the assets, and don't have a Management Team that may be embarking on other initiatives. So we think it's a great structure and a great platform, and we think that over time the returns will prove that out.

(Operator Instructions)

We'll move on to Patrick Scholes with SunTrust Research

Just a quick question for you. Curious as to your appetite for taking on lengthy turnaround projects given where you think we are at this juncture of the cycle. Thanks.

Sure. We will take on some turnaround projects. We think that we've got multiple years left in the cycle.

Unless it's a new development, which we typically don't like to get involved in, a turnaround where you spend a year or year-and-a-half renovating and re-positioning and then getting the benefit of the run-up. We still think we have plenty of time for that. So we're definitely not counting those out at all in either platform.

That's all the questions we have at this time. I turn the conference back over to Management for any additional or closing remarks.

Thank you all for your participation today. We look forward to speaking with you again on our next call.

Ladies and gentlemen, this concludes Ashford Hospitality Trust and Ashford Hospitality Prime second quarter 2014 conference call. If you'd like to listen to a replay of today's conference please dial 888-203-1112 or 719-457-0820 with access number 733-5033 followed by the pound sign. Thank you for your participation in today's conference. You may now disconnect.