Ashford Hospitality Trust Inc (AHT) 2016 Q1 法說會逐字稿

Good day everyone and welcome to today's Ashford Hospitality Trust first-quarter 2016 conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Miss Stacy Feit. Please go ahead.

Thank you. Good day everyone. And welcome to today's conference call to review results for Ashford Hospitality Trust for the first quarter of 2016 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 accessibility of this conference call on a listen-only basis over the Internet were distributed yesterday afternoon in a press release that has been covered by the financial media. At this time, let me remind you that certain statements and assumptions in this conference call contain or are based upon forward-looking information and are being made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to numerous assumptions, uncertainties, and known or unknown risks, which could cause actual results to differ materially from those anticipated. These risk factors are more fully discussed in both Company filings with the Securities and Exchange Commission. The forward-looking statements included in this conference call are only made as of the date of this call and the Company is not obligated to publicly update or revise them.

In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the Company's earnings release and the accompanying tables or schedules, which have been filed with form 8-K with the SEC on May 5, 2016, 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.

Good morning everyone and thank you for joining us.

Our first-quarter RevPAR growth of 2.5% was in line with the industry trends. The industry as a whole was impacted by the unfavorable shift of Easter into the first quarter as well as more modest corporate transient demands. Now that we also have faced a relatively tough year-over-year comparison; nevertheless, we posted solid EBITDA and AFFO growth and saw margins expand during the quarter. The industry outlook for the balance of 2016 remains strong, as demand growth is expected to continue to outpace supply growth, and PKF forecasts that will continue at least through 2017. Occupancy continues to be at all-time highs, which should support continued pricing power and [red] growth for the industry. Given these trends and the diversity of our portfolio, we believe we are well-positioned to drive strong operating performance in the portfolio for the remainder of 2016.

Thinking and acting like shareholders has always distinguished Ashford Trust from others in our industry. We consider it to be an important component of our value proposition, one of our main competitive advantages, and a key reason for our consistent superior long-term performance. Since our IPO, Ashford Trust has achieved a 110% total shareholder return compared to a 77% return for our peers. We are particularly shareholder-focused, as we are also substantial shareholders with 18% insider ownership -- the highest of all hotel REITs. To put that in context, the peer average insider ownership is around 2%. Having so much of our personal capital invested in the platform has created a high level of alignment between our management team and our shareholders. Additionally, the structure of our unique advisory agreement with Ashford Inc. provides significant incentives to outperform versus our peer group.

In addition to operational execution, we are always exploring ways to maximize the value of our portfolio. As we announced in January, we're focused on divesting our non-core select service assets and are pursuing a refined sales process in the form of smaller portfolios in our individual asset sales. Douglas will provide a more detailed update on our progress. We will continue to focus on upper upscale full-service hotels while utilizing moderate leverage, targeted at 55% to 60% net debt to gross assets, to maximize returns. We will also seek to maintain a cash and cash equivalents balance equal to 25% to 35% of total equity market capitalization for financial flexibility. We believe this excess cash balance provides a hedge against the downturn of the economy and also provides for dry powder necessary to capitalize on attractive investment opportunities in stock buybacks, which can drive significant value creation for our shareholders.

Finally, we will not be pursuing additional spinoffs. Rather, we will continue to execute on divesting of the non-core select service assets I spoke about a moment ago. We remain optimistic about 2016 as industry fundamentals remain strong. We're committed to maximizing value for our shareholders as we focus on generating solid operating performance and continuing to execute on opportunistic sales of our remaining select service assets. We thank you all for 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 first-quarter financial performance.

Thank you, Monty.

For the first quarter of 2016, we reported AFFO per diluted share of $0.36 compared with $0.30 a year ago. This reflects a 20% growth rate over the prior year. Adjusted EBITDA totaled $105 million, reflecting an 18% growth rate over the prior year. At quarter's end, we had total assets of $5 billion in continuing operations, had $3.9 billion of mortgage debt in continuing operations, with a blended average interest rate of 5.2%. Our debt is currently 28% fixed-rate and 72% floating-rate, all of which have interest rate caps in place. Including the market value of our equity investment in Ashford Inc., we ended the quarter with net working capital of $390 million, which equates to over $3.00 per share of value.

On the financing front, during the quarter we completed the refinancing of three mortgage loans with existing balances of approximately $268 million. The previous loans that were refinanced included a $91 million UBS 2 loan, the $103 million Merrill 2 loan and the $74 million Merrill 7 loan. The new loan totals $412.5 million and resulted in excess proceeds of approximately $118 million after closing costs and reserves. The new loan is interest only and provides for a floating interest rate of LIBOR plus 5.52%. This refinancing addressed all of our 2016 debt maturities and the next hard debt maturity for the Company is in April 2017.

As of March 31, 2016 in our portfolio consisted of 132 hotels with 27,950 net rooms. Our share count currently stands at 116.3 million fully diluted shares outstanding, which is comprised of 95.7 million shares of common stock and 20.6 million OP units. We have 21.6 million OP units, but as a result of the current conversion factor being less than one for one, these units are convertible into approximately 20.6 million shares of common stock.

With regard to dividends, the Board of Directors declared a first-quarter 2016 cash dividend of $0.12 per share, or $0.48 per share on an annualized basis. Based on the current stock price, this represents an 8.4% dividend yield, one of the highest in the hotel REIT space. The adoption of a dividend policy does not commit the Company to declare future dividends. The Board will continue to review the dividend policy on a quarter to quarter basis.

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

Thank you, Deric.

During the 1st quarter, we grew RevPAR by 2.5%, with EBITDA flow-through of 49%. RevPAR for the portfolio was negatively impacted by the shift of the Easter holiday into the first quarter. However, our RevPAR growth outperformed its competitive sets.

I would now like to discuss a few successful asset management initiatives our team has undertaken at our properties that are driving very positive results. As I've discussed on previous calls, in August of 2013 we announced a plan to convert the Beverly Hills Crown Plaza to a Marriott. The Marriott Beverly Hills officially opened on July 1, 2015, and the renovation concluded in August, receiving an award from Marriott International for renovation excellence. From September 2015 through March, 2016, total revenue grew by 67%, with EBITDA flow-through of 55%. This positive trend was even more pronounced in 2016, where from January to March the hotel grew total revenue by 94%, with EBITDA flow-through of 57%, gaining 5400 basis points in market share versus competitors.

In July of 2015, we completed the acquisition of the W Atlanta Downtown. One of our team strategies with this property was to focus on a number of value-add opportunities outside of traditional hotel operations. To date, we have changed out the management for the on-property billboards signage that has great visibility from Interstate 75, and renegotiated guest parking arrangements, which together should generate over $500,000 in incremental EBITDA.

In April of 2015, we completed a full guestroom renovation at the Hyatt Regency Savannah in the Historic District. The refreshed room concept draws from the rich history of Savannah, featuring a locally inspired design to provide a memorable experience for guests. In the first quarter of 2016, the property gained 30% in market share index on a year-over-year basis, and exceeded the previous three-year first-quarter average by 11.4%. This is just one of many examples of our effective deployment of capital into our portfolio.

I will now hand the call over to Douglas.

Thank you, Jeremy.

Recently we announced a positive first step in our strategy to divest our non-core select service hotels as we entered into a definitive agreement to sell a 5-hotel, 1,396 room portfolio with select service hotels for $142 million in cash, or $102,000 per key, to Noble Investment Group. The portfolios comprised of the 146-room Courtyard Edison at Edison, New Jersey; the 150-room Residence in Buckhead in Atlanta; the 312-room Courtyard Lake Buena Vista, 388-room Fairfield Inn Lake Buena Vista, and 400-room Springfield Suites Lake Buena Vista, all in Orlando. The purchase price, including projected CapEx be to be invested by Noble, represents a trailing 12-month cap rate of 8% on net operating income. On a trailing 12-month basis, the portfolio achieved RevPAR of $84.00, with occupancy of 79% and average daily rate of $106. The portfolio has an existing debt balance of approximately $98 million and we expect the net proceeds from the disposition to be approximately $37 million after debt repayment and transaction costs.

We plan to use the proceeds for general corporate purposes, including net debt reduction, stock buybacks, or the acquisition of full-service hotels in line with Trust's refined investment strategy of acquiring and owning upper upscale full-service hotels. Transaction is scheduled to close in the second quarter, subject to certain closing conditions. We will continue to pursue the opportunistic sale of our other non-core select service hotels over time to maximize value for our shareholders. This transaction validates the opportunistic approach we're taking to sell our non-core select service assets. We continue to expect this refined sales process in the form of smaller portfolios and/or individual asset sales to garner higher values in the current market environment. We will keep you apprised and we will continue to execute on this strategy.

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

(Operator Instructions)

Robin Farley, UBS.

Hello. Thank you.

This is actually [Haarke Neit] for Robin. Could you just talk a little bit about, outside of Easter's shift, what you saw in corporate transient demand in general, across your portfolio? And when you are looking to Q2 what are you seeing in those trends?

And if you could talk a little bit about group pace for the year now versus three months ago. Then I have a quick follow-up.

This is Jeremy. I can comment on the 1st quarter. I can't really talk about what is going on in the 2nd quarter, but I can talk about the 1st quarter.

We saw a change in the mix of business. I'm going to quote just room nights, I'm not going to quote total room revenue or RevPAR. But the shift in room nights -- we did have -- transient was up, just a little bit in our portfolio in Q1.

But that was a change in the mix. Special corporate was down for us about 4%, that is your negotiated corporate rate. Retail was up slightly, about a percent. We did see a big increase in the discount channels of 7.6%, and that was commensurate with the rest of our competitors.

Fortunately as well, wholesale was down an additional 12%, so some of the lower rated hotels declined. And then we saw a decrease in group room nights of 3%. But the rate was pretty good growth. So overall, group revenues were up in the 1st quarter.

And as it relates to the balance of the year, I think our group positioning is strong. I don't know if I can comment on what that exactly looks like at this point.

Thank you for the color. You talked about higher variations for individual hotel sales or smaller portfolios? When we look at the most recent sale of five select service hotels, was that $142 million pretty much in line with what you are expecting?

Because I think for the 24 hotel portfolio, you had given a number of $550 million to $600 million in aggregate, which implies price per key of $125,000 to $136,000, per key. And this, obviously, came in at $102,000 per key. Can you just comment on whether that expectation is still in place, in terms of that portfolio of 24 select service hotels generating about $550 million to $600 million in proceeds? Thank you.

This is Douglas.

In terms of trying to do the math and reverse engineer in terms of what would be the remaining value of that portfolio. It is not necessarily the right exercise. Because when we reassess the portfolio trade of that group, and came back and told the market that we were going to break down our entire portfolio of select service hotels of some 60-odd select service properties, part of the strategy was to also adjust the timing of some of the sales.

And so some of those transactions that may have been part of the original group of 24, could be moved back to a later point in time as we methodically put these properties either individually or in small groups of assets out into the market. The trade that we did with Noble -- we thought was a market trade. Keep in mind that it is not just about the price per key component.

We're looking at comparisons of -- maximizing the lowest possible cap rate we can get. In some cases, there is a maximum per key amounts that investors will pay. We're trying to balance all of that along with our building to maximize net operating income with these assets in the midst of possible CapEx expenditures for certain properties or where we're coming out of CapEx expenditures were we don't want to leave money on the table.

We want to capture some of the value add or remove the disruption from trailing 12 numbers. So it is a fairly fluid process. When we went out to the market and said that we thought the price range of that group of assets is in the range that you mentioned, you will recall that we also commented that pricing per bulk portfolios of that scale actually backed up.

And we pivoted to have a view that by selling off smaller pools of assets or individual assets, that we would achieve better values than the values that we were getting in terms of the pricing on those assets. So we are out in the market. We are engaged with brokers on certain components of the portfolio.

Obviously, when we made that announcement, we had been responding to inbound inquiries for specific assets that buyers have targeted and come to us on an off market discussion. So we're looking at this in all possible ways to maximize the value and fulfill our stated strategy of selling these select service assets and making Trust a platform that is focused on upper upscale full-service hotels.

Thank you.

Chris Woronka, Deutsche Bank.

Good morning. One quick follow-up on the disposition question. The transaction you announced that the five hotels -- I mean, could we think about it as, you found the buyer -- maybe there was a geographic or other interest -- do you think it is more likely that we see -- small portfolios like that? Or do you think it is more likely that all the rest of those assets are one offs?

We will be nimble. Obviously if someone came to us and said, we are interested in a large portfolio trade, we will certainly consider that. We think the buying audience for that segment is not as deep as it was a year ago at this time.

So our strategy will be a mix of really looking at the debt pools that we have these assets located in. And so some of them are one asset debt pools. Some of them are five to six assets. So we will -- and in other cases, it is a little bit larger. So we will try to be nimble and minimize the associated defeasance costs as we take these assets into the market.

And we will find that there are groups that are interested geographically. We will find that there are groups that want brand manage. We will find probably an even bigger audience of groups that want management-unencumbered assets. So we will try to modulate through all of those different buyer appetites and timing situations that I described in response to the earlier question, and do our best to maximize the value that we can obtain from these assets for shareholders.

Okay. Fair enough.

And then, I just want to clarify, on the ROFOs with Ashford Prime on those assets, there is no expiration date to speak of on those, is there?

No. There is not an expiration.

Okay, great. And then -- I just want to quickly ask about the Marriott-Starwood merger -- you guys are big Marriott owners. Anything -- have you had any conversations with them about ensuring that there is no or minimal disruption -- as they get the integration done?

Sure. This is Jeremy.

We're very actively involved with Marriott, we've got an incredible relationship with Marriott. And I can just tell you that they are very buried on the transaction. They have got a good amount of folks that are on the integration team. And there are a few issues we are working through. Nothing overly significant or material. We are closely involved with them.

I think overall, I do think it is going to help our Starwood product. And one of the things that we are pretty vocal on with other owners is just that the concept of brand proliferation and the fact that Marriott's going to have so many brands, and working through what that means to us as it relates to new hotel development and things like that.

Okay. Very good. Thanks.

Ryan Meliker, Canaccord Genuity.

Good morning. I was hoping, and this is probably more for Jeremy, it looks like margins were down 200 basis points in the quarter? Was there anything in particular that was driving that? I apologize if I missed it earlier in your prepared remarks.

Yes. Overall, the EBITDA flows were pretty strong. I think the margins were positive in the quarter.

We did have an impact in specifically one department, which was F&B. And that was mainly due to a mix of the business that we had in the 1st quarter. As I mentioned, group room nights were down, but overall group room revenues were up. So we had less banquet and catering revenue.

Ryan, it's Deric, I would like to chime in here and point to the earnings release. We had to change our hotel EBITDA table. So what you are referring to basically ties to the GAAP income statement, which doesn't have a full year of prior-year acquisitions -- or acquisitions have been completed since the prior year. So what you need to focus on is a comparable hotel EBITDA margin, which shows the increase of 43 basis points.

Oh, got you -- I'm looking at the one that shows down 200. Okay.

That is not an apples to apples.

That is helpful.

That's all right, I was looking at the comparable.

That makes sense. I was just looking at the wrong thing. That is really helpful. And congratulations on getting the portfolio sale done.

Obviously, I think it that's what you were focused on, so well done. Pricing looks pretty good. Can you give us any indication -- was there a substantial amount of CapEx that needed to go into these assets with regards to PIPS that might make the pricing look even more attractive from a seller's standpoint relative to a buyer?

The CapEx was nothing really unusual on the asset. You know, circa, $10 million to $12 million plus, that kind of range. When we looked at this, I think in the market today, quite frankly, is looking at all-in cap rates, are really the focus of the buyer, really zeroing in on what their net cap rate is based upon the future spends.

Not really underwriting a lot of the benefit, particularly on these select service. What we're seeing are cap rates in the -- I will give you a broad range of circa high $7 million to mid-$8 millions: in that broad range. Really depends upon the age of the asset, encumbered-unencumbered, location. But that is generally what we are seeing. We thought that this pricing was square in the middle of that. Ryan, to give a little bit of color. The major CapEx for the portfolio is a Courtyard and it needs to be renovated within the next probably 14 months.

Great. That is helpful.

And then, last question I had was, your stocks obviously are trading at a discounted value. You have nice proceeds coming in from this portfolio sale.

How are you balancing use of proceeds from acquisitions versus stock repurchases? I know that is always a difficult question to answer? And just because the stock is at a certain valuation today doesn't mean you will be at that evaluation when you have that cash and ready to play it. But can you give us color on how you are thinking about it?

Sure, Ryan. This is Monty. I think you hit the nail on the head. We don't have any cash from those sales coming in yet.

And so we just have to assess the situation as it comes in. We are above the targeted leveraging levels, 55% to 60%, so that is something we want to bring back down. Other than that, we'll just have to assess the situation when those proceeds come in.

All right. That is helpful. Thank you.

(Operator Instructions)

Bryan Maher, FBR & Company.

Good morning.

I was hoping you could address, kind of on a higher level, your comfort with leverage, the 55% to 60% range. I know you have been there a long time. A number of us have covered you since the IPO.

Some of your peers have, in the last six to nine months, shifted down fairly dramatically to somewhere around 20% to 30%. And it would seem, with low interest rates that they are now, that by doing so, they are leaving earnings on the table for shareholders. Can you talk about how you think about that internally?

Sure. Thank you, Bryan.

Your equity will always performs better the higher the leverage you've got. All the PE firms use 65%, 70%, 80% leverage. The reason they do that is they can get better equity returns doing it with a higher leverage. The risks are that you increase the chance of bankruptcy. And you also might have higher volatility in your stock. And so those are the trade-offs.

We did go into the worst recession that we have had as a country since the Great Depression at the 60%, 65% -- or the 55%, 60% levels. As you know, we came through it with flying colors and were able to have enough cash to buy back half of our stock during the downturn. And so the rationale to have even lower leverage levels to us, seems misplaced. It seems like if you can survive and do well during the great recession with leverage levels of 55% to 60% and overall, your returns are going to be higher with higher leverage, why take it down? We know some investors like it that way.

So, I think that is why a lot of the other companies including Prime, target lower leverage levels. But we run this platform a little more opportunistically, and a focus on just the returns, even if this part of the platform or that part of the platform is not the way some specific investors like.

Just to add to that comment. Our debt is non-recourse, and we do run the platform at a slightly higher cash position relative to our equity market cap. And we keep that cash, really for safety reasons, but also for opportunities.

One of the things we learned in the last downturn was that, not that we had too much debt, but that we did not have enough cash to even capitalize even more then we did, than any of our peers, in terms of taking advantage of that situation. We are not holding that cash because we think the market is heading in that direction, but we think that what we learned from our prior execution will benefit our future execution. So just an added comment there.

Would you be willing to take a stab at how you view the current lodging cycle as its stacking up now from a timing standpoint? The typical cycle -- seven years, we all know, give or take, looks to play out a little bit longer than that. Would you guys be willing to speculate on what you are seeing and thinking in that regard?

Sure. We don't have the typical cycles anymore. We just went rounded the corner on a long-term debt cycle. The typical business cycles, you are aware of. The long-term debt cycles occur about every 70 years, debt to GDP peaked in 1929 that created the crash.

And because of lowering GDP actually peaked at 33, then, for a number of reasons, the debt to GDP number came down drastically. And then over the ensuing decades, built back up in 2008. And then we had another almost depression with this high debt.

So over the past number of years, this cycle has been unusual, in that we have not had one year of 3% growth or more. So growth in this high debt world is different. It is obviously a lot lower.

So here is the question. We are deep into this recovery, but it has been a very lackluster, very tepid recovery. What does that mean? Does that mean that we're going to have even deeper downturns when they come? That is not my belief.

My belief is that, when the recessions come, they will be shallower because we never really overheated. The credit creation is not off the charts. It is a little on the higher end, but it is not off the charts. And new supply growth is still modest. All the past recessions, we have been up to about 3% of supply growth by now. We're still at around 1.5%.

So in a way, we have been kind of in a recession the past five years, right, with the supply growth being some muted. So while we think we're in a cycle, we think we are not seeing the excesses that you usually see built up towards the end of the cycle. So this could very well go for quite some longer period of time.

Thank you, Monty. That is helpful.

With no further questions in the queue, I would like to turn the conference back over to Monty Bennett for additional or closing remarks.

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

Ladies and gentlemen, that does conclude today's conference. Thank you all for joining.