Ashford Hospitality Trust Inc (AHT) 2015 Q3 法說會逐字稿

Good day and welcome to the Ashford Hospitality Trust and Ashford Prime Third Quarter 2015 Conference Call. Today's conference is being recorded. At this time I would like to turn the conference over to Ms. Stacy Feit. Please go ahead.

Thanks. Good day, everyone and welcome to today's conference call to review results for both Ashford Hospitality Trust and Ashford Hospitality Prime for the third quarter of 2015, 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 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 are based upon forward-looking information and are being made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to numerous assumptions, uncertainties and known or unknown risks, which could cause actual results to differ materially from those anticipated. These risk factors are more fully discussed in 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 Company's earnings releases and accompanying tables or schedules, which have been filed on Form 8-K with the SEC on November 4, 2015, 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 earnings releases together with all other information provided in the releases.

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

Good morning, everyone and thank you for joining us. As we discussed at our recent Investor and Analyst Day, we continue to see very positive industry dynamics and believe that these favorable fundamentals will drive solid RevPAR growth going forward. During the third quarter, the lodging industry was negatively impacted by a couple of calendar events, mainly the shift in the Labor Day holiday to one week rather than last year, as well as the shift of some other holiday dates, both of which led us to a decrease in business travel during the quarter. In spite of this transitory issue Trust's third quarter RevPAR for all hotels still increased 5%, illustrating the benefits of its geographically diversified portfolio.

Prime's RevPAR grew 2.7%. We believe this was an anomaly rather than part of a trend. Looking ahead from a macro perspective, the fundamentals on the lodging sector continued to exhibit positive long-term trends. PKF is projecting RevPAR growth to exceed 6% in 2016 and 5.5% in 2017, indicating this cycle still has lags and thus we remain bullish on the outlook for both Trust and Prime. We continue to manage each business with the long-term interest of all of our shareholders in mind and believe our long-term track record coupled with industry-leading insider ownership among publicly traded hotel REITs demonstrates our aligned interest with our shareholders.

The Ashford management team has a long track record of creating shareholder value, since Ashford Trust IPO in 2003. Over the years, we have worked on new innovative way to maximize the value of our existing assets, also looking for accretive opportunities to further invest in the hospitality industry. Since our IPO, Ashford Trust has achieved a 144% total shareholder return. We are particularly shareholder focused as we are also substantial shareholders in both Trust, with 16% insider ownership, and Prime, with 14% insider ownership. To put that in context, the peer average insider ownership is around 2%, having so much of our personal capital invested in these platforms has created a high level of alignment between our management team and our shareholders.

Thinking and acting like shareholders has always distinguished Ashford from others in our industry. We consider it one of our main competitive advantages and the reason for our superior long-term performance. Given our high insider ownership across both of these platforms as well as the structure of our advisory agreements, we are the most highly aligned management team with our shareholders in the hotel REIT space. Ashford Prime is a lower leveraged high-quality hotel platform focusing on luxury brands and gateway and resort markets. In August, we announced a plan to explore full range of strategic alternatives for Prime including a possible sale of the Company as we do not believe Prime's current share price actually reflects the Company's intrinsic value. We have concluded that we should consider other opportunities to maximize shareholder value. The Independent Directors have engaged Deutsche Bank as their advisor, the process has been active and we will keep investment community apprised as soon as there is an update to communicate.

I'd now like to take a moment to review the recent refinements we made in the strategy for Trust. First, we've announced the planned sale of a portfolio of 24 select service hotels that received the first round of offers and expected portfolio to trade in the $550 million to $600 million range. Deric will provide some more details in a moment and we continue to expect completion of the sale in early 2016. Going forward, we will take an opportunistic approach to selling the remaining non-core select service hotels in our portfolio. Trust's refined investment strategy will focus predominantly on upper upscale full service hotels. We believe this more simplified strategy will drive superior long-term returns for Trust's shareholders and we plan to redeploy the proceeds from the select service portfolio sale to maximize shareholder value via opportunistic stock buybacks and/or accretive full-service hotel acquisitions. Further, Trust is not planning nor does it expect any future platform spin-offs, and in response investor feedback in July, Trust distributed the remaining approximately 5 million units and shares of Prime that it owned. This distribution crystallized the value of this investment for shareholders and further simplified Trust's balance sheet. Additionally, Trust will continue to target net debt to gross assets at 55% to 60%, and cash and cash equivalents balance equal to 25% to 35% of its total equity market capitalization for financial flexibility. We believe this excess cash balance provides a hedge against the downturn of the economy would also be available to capitalize on attractive investment opportunities and/or stock buybacks which did result in significant value creation for our shareholders. Accretion matters and we've been able to present AFFO per share, a full 40% higher than the prior year for Ashford Trust, the highest among our rich peers. This is due to our attractive capital structure and the accretive transactions we've completed this year.

In closing, we believe the calendar shift impacts to our third quarter performance was an anomaly and remained positive on the outlook for both Trust and Prime as the industry fundamentals continue to be strong. We believe the initiatives we are pursuing for both Trust and Prime should improve the value relative to private market values for both platforms. We thank you for all your continued support and look forward to updating you on our progress in future calls.

I will now turn the call over to Deric to review our third quarter financial performance.

Thanks, Monty. For the third quarter of 2015, Trust reported AFFO per diluted share of $0.35, compared with $0.25 a year ago. This reflects a 40% growth rate over the prior year. Prime reported AFFO per diluted share of $0.39 compared with $0.42 a year ago. For the third quarter, we reported adjusted EBITDA of $104 million for Trust and $24 million for Prime. This result for Trust reflected a 26% growth rate over the prior year. At quarter's end, Trust had total assets of $4.9 billion in continuing operations. It had $3.7 billion of mortgage debt in continuing operations, with a blended average interest rate of 4.97%. The debt is currently 35% fixed rate and 65% floating rate, all of which have interest rate caps in place. Including the market value of Trust, equity investment in Ashford Inc., Trust ended the quarter with net working capital of $359 million.

Prime at quarter's end had total assets of $1.3 billion in continuing operations. It has $760 million of mortgage debt in continuing operations, of which $49 million related to its joint venture partner share of the debt on the Capital Hilton and Hilton La Jolla Torrey Pines. Prime's total combined debt had a blended average interest rate of 4.54%, and is currently 55% fixed rate and 45% floating rate, all of which have interest rate caps in place. Prime ended the quarter with net working capital of $158 million.

On the financing front, we are in the process of refinancing Trust's remaining 2015 debt maturity, as well as our only 2016 debt maturities and expect to have them closed by year-end. The total amount being refinanced is approximately $266 million, and we expect the new loan proceeds to be approximately $456 million, resulting in approximately a $190 million of excess proceeds, before closing costs and reserves. We expect the pricing on the new debt to be approximately LIBOR plus 510 basis points. While we haven't closed these financings and terms could possibly change, we hope to have more information for you soon.

As of September 30, 2015, the Trust portfolio consisted of 130 hotels with 27,581 net rooms and the Prime portfolio consisted of 11 hotels with 3,537 net rooms. Trust's share count currently stands at a 114.5 million fully diluted shares outstanding, which is comprised of 95.4 million shares of common stock and 19.1 million OP units. Trust has 20.4 million OP units, but as a result of the current conversion factor being less than one for one, these units are convertible into approximately 19.1 million shares of common stock. Prime's share count currently stands at 32.8 million fully diluted shares outstanding, which is comprised of 28.4 million shares of common stock and 4.4 million OP units. With regard to dividends, the Board of Directors of Trust declared a third quarter 2015 cash dividend of $0.12 per share or $0.48 per share on an annualized basis. The Board of Directors of Prime declared a third quarter 2015 cash dividend of $0.10 per share or $0.40 per share on an annualized basis. The adoption of a dividend policy does not commit either company to declare future dividends. Both Trust and Prime will continue to review their dividend policies on a quarter-to-quarter basis and the 2016 dividend policy will be determined and announced in December of this year.

This concludes our financial review. I'd now like to turn it over to Jeremy to discuss our asset management activities for the quarter.

Thank you, Deric. Prime's RevPAR growth of 2.7% in the third quarter was negatively impacted by shift in the holidays year-over-year, tough group comparables, and renovations at Hilton La Jolla Torrey Pines and Renaissance Tampa. The eleven Prime assets produced occupancy of 86%, an ADR of $238 and RevPAR of $204 for the third quarter. This high quality portfolio has also grown market share index year-to-date. This high RevPAR level combined with portfolio is 33.1% EBITDA margin continues to illustrate the high quality nature of these assets. Overall, we view Prime's third quarter RevPAR growth as an anomaly, it is not continued into the fourth quarter.

Moving to the Trust portfolio. During the third quarter, Trust grew RevPAR by 5% with EBITDA flow through of 55%. This performance compares very favorably to how our competitors performed for the quarter. Our margin improvement of 87 basis points is almost twice the peer average. Headwinds during the third quarter came from holiday changes, including Labor Day following a week later this year, which extended the summer season and reduced business travel and the Jewish Holiday of Yom Kippur, which fell in the third quarter of this year and the fourth quarter last year, which also negatively impacted business in the third quarter. Despite the third quarter results, we continue to see industry dynamics that favor continued expansion in hotel RevPAR. Most notably, new hotel construction continues to lag the broader economic recovery. New supply growth over the last 12 months has fallen short of Smith Travel Research's projections in gross new supply and we expect this trend to continue. Thus we believe our assets are well positioned to thrive in this industry climate.

During the third quarter Ashford began a thorough review process of our hotel's preferred business transit accounts for 2016 in order to maximize RevPAR production. Though this process is still ongoing, we expect to achieve a rate increase of over 6% across both portfolios. More importantly, we shifted many accounts to lower occupancy shoulder nights. This leaves additional vacancy during peak days, allowing hotels to yield business more favorably during the year.

In August of 2013, Trust announced a plan to convert the Beverly Hills Crowne Plaza to a Marriott. We identified a gap in the supply of Marriott rooms in that market, with no full service Marriott within 6.5 miles of the property. During the second quarter, Trust proudly announced the completion of the new product, which opened on July 1, as a Marriott Beverly Hills. The renovation officially concluded in the third quarter and we saw an almost $50 year-over-year increase in retail room rates during September. We're excited for the future performance of this property and believe it will be a valuable addition to the Trust portfolio.

Also in August of 2014, Trust acquired the Marriott Fremont in Silicon Valley, across the street from Tesla Motors facility. Our team together with our affiliate manager, Remington, optimized the asset, the remixing business, eliminating inefficiencies, and exploiting synergies within our existing portfolio. The asset has already set new high water marks during the first year of ownership. When we acquired this hotel, our conservative underwriting projected forward EBITDA multiple and cap rate of 10 times and 8.1% respectively.

The actual EBITDA multiple and cap rate after the first year of ownership was 7.9 times and 10.9%, respectively. In fact, over the last 12 months the hotel has produced over $7 million of EBITDA and RevPAR of a $134. Compared to the previous 12 months, RevPAR increased 21.4%, producing an increase of $2.5 million in EBITDA, a flow-through of 80.4%. We are very pleased with the performance of the Marriott Fremont and believe it demonstrates a significant shareholder value, we can create through acquisitions in our value-added efforts.

I would next like to discuss the meeting space renovation Prime completed in the third quarter after the Hilton La Jolla Torrey Pines, at San Diego, California. After renovating the rooms and corridors in 2013, we sought to create a cohesive group experience at the hotel. This is important because group rooms at the property sell for $13 more on average over the last 12 months, compared to transit rooms and generate more ancillary revenue, including high margin banquet and catering business.

Group business for the property is forecast to reach an all-time high in 2015, a trend we expect to continue in 2016, with renovated meeting space to attract additional business. Despite a negative impact on third quarter performance, we believe this renovation will create significant value for the Prime portfolio. I'd like to encourage all of you to go to our websites and download the case studies we placed there, they were part of our Investor Day presentation. We found that the investors that attended the meeting found the case studies to be very informative.

I'd now like to hand the call over to Douglas.

Thanks, Jeremy. As Monty discussed, Trust has received the first round of offers for its 24 pack of select service hotels for sale. The next and possibly final bidding round is the end of this week. Given where the initial bids have come in, we continue to expect the portfolio to trade in the $550 million to $600 million range, which would provide Trust with significant proceeds to accretively redeploy to increase shareholder value. Furthermore, this transaction will boost remaining portfolio RevPAR for Trust, which given the strong relationship between RevPAR and EBITDA multiple should translate into a higher trading multiple for Trust stock. In fact, the increase in overall portfolio RevPAR from the sale of the 24 hotels would be 3.6%, and following the sale Trust ultimately plans to opportunistically divest another 38 non-core select service hotels, which would increase the remaining portfolio RevPAR by another 5% based on where the portfolio RevPAR is today.

Our investment strategy would focus as Trust is focused on full service upper upscale hotels and Prime will continue to focus on investing in luxury hotels located in resort and gateway markets. We believe both these platforms are well positioned to capitalize on the attractive lodging market conditions. As always, our goal is to provide you with superior returns something our track record clearly demonstrates.

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

(Operator Instructions) Ryan Meliker, Canaccord Genuity.

Hi. Good morning, guys. I just had -- I guess one question on something you could kind of walk me through the timeline for the 24 select-service hotel portfolio sale. When did you decide to sell it? When did it hit the market? I just want to understand kind of the duration that this is taking. Thanks.

The decision to sell the 24-pack portfolio was actually an evolution in response to shareholder feedback that we received. Previously, earlier in the year, we had talked about establishing a select-service strategy, and we went down that path in a few different ways and concluded that the most accretive opportunity for the shareholders was to engage and sell this portfolio. So clearly, another example of the management team being responsive to doing that. It was towards the back-end of the summer that we brought the portfolio sort of on a preliminary basis into the market, letting people know on a teaser that the portfolio would become available. And then the first rounds of bids were due just around the time of the Investor Day Conference, you recall we commented on that. Then we gave a couple of more weeks for people to refine their bids. And so, as I said on my comments that our expectation is that the second and perhaps the final bidding round will be at the end of this week. After that, if we don't go to another bidding round, I mean, we select a winning bidder, then it would be kind of a customary process of maybe a couple of weeks to negotiate a PSA and then a diligence period typically you see for portfolio could be anywhere from 45 days to 60 days, and then closing sometimes 30 days to 60 days thereafter. We stated consistently that we expect this portfolio to close in the first quarter of 2016.

That's really helpful. Thanks, Doug. And I guess, if I can kind of parley that timeline to the Ashford Prime strategic review, it kind of sounds like from the time you guys put it up for sale, it took about two months to get the initial bids and maybe it'll be three months before you have a deal in place. Is that the type of timeline that we should expect from the strategic review process with Ashford Prime or are there other moving pieces that are going to elongate that?

There are other moving pieces. As you know, Ryan, there hasn't been a decision to sell the Prime portfolio -- strategic review. And so, what you describe there for the 24-pack was just the timeline in order to sell a portfolio. So, first the Independent Directors are going to decide what they're going to do and then start down that timeline. And as you also know, typically the process of selling a company, if that's what they choose to do is a longer one in selling just straight out assets. But the Independent Directors are on the case, have met over it, so there's dialog going on all the time with their advisor. And -- I'm sorry, another meeting is already on the books for all the Directors to get together in person with the advisor. So, it is an active process, but a timeline has not been set.

All right. Thanks, Monty. That's helpful. And then I guess, can we expect to get an update from you and the Board, once you do determine how fast you want to go now?

I can't speak for those guys, for the Independent Directors. I guess it would depend upon exactly what they want to pursue, but I just really can't comment on that, because I'm not sure what they want to do. But I can tell you that it is a very active process.

Thanks. That's it for me for now. Thank you, guys.

Sean Kelly, Bank of America.

Hi. Good morning. Thank you for taking my question I was wondering if you guys could comment a little bit more and maybe you gave some good color already on just price expectations and timeline for the select-service asset, so maybe could you just talk a little bit more about on the type of buyer universe you're seeing, how deep is the pool, what's the level of interest, I mean, it seems like, decent valuation and the prices are moving ahead, so I'm just curious on who's out there right now?

The number of CAs that were signed was pretty deep and diverse. And so, there is interest among buyers today for this asset class, and we typically don't comment mid-process in terms of anything other than that, and I think we've given a lot of detail in terms of our expectation for the trading level for this portfolio. I think I can comment generally speaking across the market that cap rates are holding up pretty well, the private market and obviously with many of the REITs that are sitting on the sidelines for transactions, you have a slight reduction in the depth of buyer pools for assets that would generally fit REIT criteria, but having said that, there is a pretty deep buyer pool of non-US lodging REITs are actively engaged in pursuing all types of transactions in the marketplace today.

Ian Weissman, Credit Suisse.

Hi, guys. This is Kris for Ian. When we look at the performance for Trust this year, I mean, you consistently put up some of the best RevPAR results in the industry. You were to address several important issues such as spinning out the remaining interest in Prime's on select assets. What we saw on early address the issues that our clients are primarily concerned about which is the high leveraged external management and the termination fee. So, I guess my question is absent any changes to these items, it appears that the only way to remove the discount is effectively through force, I mean, that's essentially selling large parts of the Company and using the proceeds who require stock. Is that the way you see it or is there another option to kind of remove the disconnect?

A few comments, say, the disconnect exists for all of our peers. There is a material difference in public market pricing versus a private market pricing, and that exists across all platforms, somewhere between 1 and 1.5 times EBITDA is the difference between private market values and public market values. But at our Investor Day, if you weren't there, I encourage you to pull it up on our website, pull up the Ashford Trust presentation. And there is a regression line that shows the relationship of RevPAR to EBITDA, and you will see that the Ashford Trust trades just maybe a half turn or so below this regression line, which is well within maybe a half of the standard deviation of where all of our other peers trade, the number of the other peers trade outside that. So we're very close to this line about where we think we should trade. So, we don't see any issues exist for the items that you are talking about. We trade right where we should. Now, the good news about that, is that we have a platform that because it's a little more leveraged, relatively small increases in that -- in our multiple can have a good size increase in our stock price, something like a third of a turn increase in our multiple increase in our stock price buyback. So that motivates us to do everything we can to get our valuation up in all regards. But as far as a disconnect that you referred to, it didn't exist, other than the disconnect that all other platforms have. So, we're going to continue to do what we think make sense to improve our share price and to post strong numbers. We had incredible numbers this past quarter. It is due to our little higher leverage and our platform has always been higher leverage since 2003. So, those investors that expect that to change are kind of waiting for a long time, because that's our model. And it's been a model that's been very successful for us. And we're going to continue to have that leverage levels between 50% and 60%, and continue to have our structure, which is much more aligned than our peers from an external management standpoint, because of the strong incentives that we got in place. So, I think we're on track, will continue to do things that make sense. And I think selling this portfolio of limited service further refines our strategy and then gives us some great proceeds at -- from current private market values that we can use to increase value accretively.

Thanks, Monty. Yes, I definitely remember that chart, but I also remember an announcement or I think a disclosure somewhere that the churn now was around, you placed it now at around $15, I think the Street has it a little bit less than that, but let's assume for the $15 (inaudible) 60% discount to NAV, and I think with the Street numbers you're probably in the 30% to 50% range, which is quite a bit bigger than peers. Can you kind of reconcile the chart that you're talking about in terms of your multiple and the discount to NAV?

Sure. That's the leverage I just mentioned. I mean, if two companies have the same EBITDA multiple discount, let's say, 1 to 1.5 times, but one's leveraged more, then the one that's leveraged more is going to have a greater stock price or equity discounts, right, it's just the math of it. So, that is what accounts for that difference, ours being greater than our peers, because we're higher leveraged to platform. So, it's going to be a greater equity percentage. But the value of the whole firm is the same.

Chris Woronka, Deutsche Bank.

Hi. Good morning, guys. Could you give us an update on the W Minneapolis, and if you think that might close anytime soon?

Sure. Chris, this is Deric. We are in the process of assuming some debt on that property and had to go through the approval process with the lender of getting approved to assume it. And we do expect it to close pretty soon.

Okay. Great. And then I wanted to switch over to the Bardessono, I know it was your first, I guess full quarter of ownership, and it looks like you traded some (inaudible) for some rate. Where kind of are you in the evolution of that in terms of what you're trying to do with margins and remixing the business?

Just getting started. I mean, we are just getting started, Remington took over management of that property and frankly, I'm not surprised that there was -- I'm surprised that there was more disruption in those numbers than there were, because management changeovers can't do that. But, we're just getting started as far as our revenue enhancement techniques and some of our margin enhancement techniques. In fact, I think we've even in our purchase sale agreement convenant that won't be the employee changes for at least the first 90 days. So, by contract there were no changes right out of that. So, we're just getting excited, started with that asset and we're very excited about its prospects.

Okay. Great. And then, just want to ask across -- I guess across both platforms. Do you see any more near-term potential management company changes, anything that could -- anything more that could go over to Remington?

Let's see, right now we don't see any changes from brand managed or other third parties to Remington, that's on the table right now. When we buy assets, many times it happens or if we trade out assets of someone inversely. And in the past, we've converted some brand managed to Remington managed, but now that's on the table as we sit here today.

(Operator Instructions) Robin Farley, UBS.

Hi. This is actually (inaudible) for Robin, thank you for taking the question. Could you talk a little bit about the group business dynamics you're seeing beyond just holiday shift between Q3 and Q4, and perhaps if you could give us some color on pace for 2016 versus this time last year for 2015? Thank you.

Sure. I can answer that. This is Jeremy. So, in Q3, we had some challenges with citywide events changes from 2014 to 2015. We had an incredible Q3 group in 2014, and we had a lot of challenges. And I would say that from the very beginning of this year, Q3 was always our need period that we spend more time of trying to address in terms of getting better group business. But for Prime group was down 10% in the third quarter. And for Trust it was actually up close to 2%, and that's in terms of group revenues year-over-year. Looking at 2016, we don't give guidance, but I will tell you that we are still very good about our group positioning for both platforms setting in 2016.

Thank you. And we have no further questions at this time. I'd like to turn the call back to Monty Bennett for any closing remarks today.

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

This does conclude today's program. Thank you for your participation. You may disconnect at any time.