Ashford Hospitality Trust Inc (AHT) 2016 Q2 法說會逐字稿

Good day and welcome to the Ashford Hospitality Trust second-quarter 2016 conference call. Today's call is being recorded. Now at this time I'll turn the conference over to your host, Marilynn Meek. Please go ahead.

Thank you. Good day, everyone, and welcome to today's conference call to review results for Ashford Hospitality Trust for the second quarter of 2016 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 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 contained 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 and unknown risks, which could cause actual results to differ materially from those anticipated. These risk factors are more fully discussed in the Company's 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, reconciliation of which are provided in the Company's earnings release and accompanying tables or schedules, which have been filed on Form 8-K with the SEC on August 4, 2016, and may also be accessed through the Company's website at www.ahtreit.com. Each listener is encouraged to view 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 second-quarter RevPAR growth was 4.9%, which significantly outperformed the industry average of 3.5%. We also posted solid adjusted EBITDA and AFFO growth and saw our margins expand by 106 basis points. We're very pleased with these results and believe they speak to the quality of our portfolio and asset management abilities.

In addition to the quality of our portfolio, we believe it is the quality, experienced ability and alignment of our management team that has driven strong total shareholder return performance since our IPO in 2003. Since our IPO, this management team has achieved a 113% total shareholder return compared to a 87% return for our peers. Key to that performance in this platform is the exceptionally high level of alignment that is created by our 18% insider ownership, which is the highest in the hotel REIT space and about nine times the peer average. Add to that the incentives to create shareholder value and outperform our peers that are structured into our advisory agreement without Ashford, Inc. and you can see why we think our management structure and management team are in competitive advantage for our platform and are key to the shareholder value that we have consistently created for our investors.

This focus on driving shareholder value was the impetus to refining our strategy at Trust to focus on acquiring and owning upper upscale full-service hotels, opportunistically execute on the sale of our non-core select-service hotels, continue to target net debt to gross assets at 55% to 60% and to target a cash and cash equivalents balance equal to 25% to 35% of our total equity market capitalization for financial flexibility as we believe this excess cash balance provides a hedge in uncertain economic times, as well as providing dry powder to capitalize on attractive investment opportunities as they arise. Along those lines, in early June Trust announced the completed sale of a five-hotel portfolio of select-service hotels for $142 million in cash. At the same time, we signed a definitive agreement for the sale of our two Palm Desert assets for $36 million and the Hampton in Gainesville for $27 million.

We believe these three transactions further validate the attractiveness of our select-service portfolio to potential buyers and the soundness of our refined sales process in divesting of non-core assets to ensure that we maximize long-term value for our shareholders. We are 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 for all of your continued support and look forward to updating you on our progress on future calls. I will now turn the call over to Deric to review our first-quarter financial performance.

Thanks, Monty. For the second quarter of 2016, we reported AFFO per diluted share of $0.60 compared with $0.51 a year ago. This reflects an 18% growth rate over the prior year. Adjusted EBITDA totaled $132.8 million, reflecting an 11% growth rate over the prior year. At quarter's end, we had total assets of $4.9 billion in continuing operations.

We had $3.8 billion of mortgage debt in continuing operations with a blended average interest rate of 5.2%. Our debt is currently 26% fixed rate and 74% 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 $435 million, which equates to over $3.70 per share of value.

As of June 30, 2016 our portfolio consisted of 127 hotels with 26,554 net rooms. Our share count currently stands at 116.7 million fully diluted shares outstanding, which is comprised of 96.2 million shares of common stock and 20.5 million OP units. We have 21.7 million OP units but as a result of the current conversion factor being less than one per one, these units are convertible into approximately 20.5 million shares of common stock.

With regards to dividends, the Board of Directors declared a second-quarter 2016 cash dividend of $0.12 per share, or $0.48 per share on an annualized basis. Based on the stock price from yesterday, that 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. Subsequent to quarter end, in early July we price an underwritten public offering of 4.8 million shares of 7.375% Series F cumulative preferred stock at $25 per share. Dividends on the preferred stock will accrue at a rate of 7.375% per annum on the liquidation preference of $25 per share.

Also in early July, we announced that we intend to redeem all of our issued and outstanding shares of our 9% Series E cumulative preferred stock using the proceeds from the series F preferred [rates]. The redemption date will be August 8, 2016. Additionally, while we do not have any debt maturities until April 2017, we are continuously monitoring the debt markets and will be opportunistic when we believe market conditions are favorable to do so. 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, Derek. During the second quarter we grew RevPAR by 4.9%, with EBITDA flow-through of 61%. Portfolio RevPAR growth for the quarter outperformed our [tract] scale chain by 40 basis points. As portfolio, we outperformed our competitors across both the group and retail transient segments. Not only did we achieve solid RevPAR results, we also produced strong margin growth as EBITDA margin for the portfolio grew 106 basis points to reach an all-time high of 35.9% during the second quarter. We attribute this solid performance to the quality and diversity of the portfolio.

I would now like to discuss several successful asset management initiatives our team has undertaken at our properties that are driving very positive results. As I mentioned on previous calls, in August 2013 we announced a plan to convert the Beverly Hills Crowne Plaza to a Marriott. The Marriott Beverly Hills officially opened on July 1, 2015 and the renovation concluded in August, receiving an award for Marriott International for renovation excellence. The property's year-to-date performance through June has been stellar, with total revenue growth of 84%, rate growth of 48%, EBITDA flow through of 53% and a gain of 5,100 basis points in market share versus its competitors year to date.

Additionally, following a guest room renovation in the first quarter of 2015 and the completion of a quarter renovation in the first quarter of 2016, the 673 room Renaissance Nashville, which is our largest property, grew RevPAR by 22.7% during the second quarter, which outperformed the market by 1,210 basis points. The property's rate increased by 13% and EBITDA flow through was 64%. The Marriott Beverly Hills and Renaissance Nashville are just two of many -- of the many examples of effective deployment of capital into our portfolio.

In July 2015 we completed the acquisition of the W Atlanta Downtown. One of our team strategies was focus on a number of value-add opportunities outside of traditional hotel operations. To date we have changed out the management of the on-premise digital billboard and re-negotiated guest parking arrangements, which combined should generate over $850,000 in incremental EBITDA. In addition to these value-add opportunities, the W Atlanta grew RevPAR by 12.8% for the second quarter, with 83% EBITDA flow through. Compared to last year, total revenue in the second quarter increased by more than $700,000, while EBITDA increased by more than $580,000.

At the corporate level, our team is also focused on finding ways to reduce our cost of doing business. For example, we recently renewed our property insurance policy and reduced our property insurance premiums on a comparable basis by 11% to the previous policy year, which contributed to a cumulative increase of over 30% for the last three years. Also during the second quarter the team was successful in reducing property tax assessments about the Hilton Ft. Worth and the Marriott Sugarland, creating tax savings of approximately $725,000. I will now hand the call over to Douglas.

Thank you, Jeremy. Last June we announced that Trust would, as part of a refined investment strategy, opportunistically divest of its non-core select-service assets over time. Earlier this year, we decided to focus on selling these assets in smaller portfolios and/or single asset transactions as we believe that strategy will result in higher prices in the current market environment. To that end, in early June we completed the sale of a five-hotel 1,396-room portfolio of select-service hotels for $142 million in cash, $102,000 per key to Noble Investment Group.

The five-hotel portfolio is comprised of the 146-room Courtyard Edison in Edison, New Jersey; the 150-room Residence Inn Buckhead in Atlanta, Georgia; and a 312-room Courtyard Lake Buena Vista; 388-room Fairfield Inn Lake Buena Vista; and the 400-room Spring Hill Suites Lake Buena Vista in Orlando, Florida. The purchase price, including the projected CapEx to be invested by Noble, revisited a trailing 12-month cap rate of 8% on net operating income. The portfolio had an existing debt balance of approximately $98 million and Trust realized net proceeds from the disposition of approximately $37 million after debt repayment and transaction cost.

Also in early June, we announced that we entered into a definitive agreement to sell the 150-room Courtyard Palm Desert and the 130-room Residence Inn Palm Desert for $36 million, which is $128,000 per key. The two assets have an existing debt balance of approximately $24 million that will be assumed by the buyer. After debt assumption and transaction costs, the net proceeds are expected to be approximately $11 million. The transaction is scheduled to close in the third or fourth quarter of 2016, subject to certain closing conditions.

We have also entered into a definitive agreement to sell the Hampton Inn Gainesville for approximately $27 and is expected to close in the third or fourth quarter of 2016. The property has an existing debt balance of $21 million and the net proceeds are expected to be approximately $5 million. We are continuing to pursue the opportunistic sale of our other non-core select-service hotels over time.

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

(Operator Instructions)

Chris Woronka, Deutsche Bank.

I want to ask you just general view on the asset market and what kind of changes, if any, you've seen since last quarter in terms of breadth and depth of buyers.

The appetite in 2016 for buyer demand is slowing down a bit. I think that when you look at some of the industry reports, transaction volume is down more than 50% year to date. There are buyers out there and I think we've had a fair amount of success on the assets that we have sold. Pretty attractive cap rates overall. We're continuing to mind the market, continuing to list the assets according to our plan and we remain hopeful that they'll be still attractive pricing but it is slowing down a little bit and pricing has moved out somewhat. I'd say that when you look at kind of overall increase in cap rates, I think all-in cap rates for select-service have moved up where I think -- and I'm excluding kind of the urban high-rise select-service, but we're seeing kind of mid-8% cap rates for a lot of this product on an all-in basis right now.

Okay. That's helpful and then maybe a question for Jeremy. Wanted to see what you guys' views are on the brands with the direct booking push and what kind of results you're seeing so far and if that's having any impact yet on in terms of either lower commissions or if it's helping or hurting your reported ADR.

Obviously for us for the quarter we had strong results, better than the industry. When you look at the quarter, our retail and overall leisure was strong but in terms of the brands push for what you're talking about [at the same as] mainly the new member pricing program. I think it's still early days. We're still working with the brands to get good data on the impact. Our concern is that a large portion of customers would book direct through the website regardless and so you're kind of trading down that rate. So while we're very supportive of the direct booking channels, the lowest-cost channel for us certainly is direct booking, we're concerned about too much discounting and specifically some of the brands as you know discount as much as 10% for weekends. Our position is that too much of discount but overall I think it's early days in terms of the impact it's having towards our direct booking channels.

Okay.

Does that help?

Yes. That's helpful. Thanks, guys.

Robin Farley, UBS.

This is [Arka] in for Robin. Overall the quarters saw pretty strong RevPAR performance. If you could just break down the components of it in terms of corporate transient demand versus leisure if you could quantify it. Have you seen -- how have you seen those trends survey shaping up into the July/August so far? Thanks.

Sure. This is Jeremy. I can't comment on July/August but I can tell you what we saw on the quarter. Specifically our group and transient segment were both up 4.9% in RevPAR, so they were equal. The third segment contract was less. When you look within our segments, group was strong. Overall ADR was up about 3% in group and most of that actually was driven by weekend group. Weekday group was flat. You're seeing a lot of the social events being booked and a lot of that is really a targeted effort from our teams to try to layer in the right layers of business over weekend and (inaudible) nights.

Within the transient segments, specifically retail, overall leisure was strong. Weekend retail and weekend discount segments were strong on a year-over-year growth basis as well. What lagged a little bit was corporate demand, negotiated rate demand, which is down about 3.1% in occupancy for the quarter. We're seeing that soften a little bit. It's a little bit different than prime. We actually had an increase in special corporate for the quarter, although I'd say overall corporate demand across both portfolios has been a little bit weaker than what we've seen over time.

Thank you, that's helpful. Could you comment at all on group pace over the next 12 months sort of what you saw -- what you're seeing today and what you saw a couple months ago?

I can't really -- we can't give guidance but I can tell you I've read a lot from what our peers have commented on and from our position, overall group has been still relatively strong for us.

Okay. Thank you.

Ryan Meliker, Canaccord Genuity.

Looks like you guys had a pretty good quarter with regards to operation, so kudos to that. I had a couple of questions. I think first of all, Jeremy, maybe you can give us some color. Nashville was up 23% in the quarter on RevPAR. Was there anything unique going on there? I know that's market that's had some pretty gang buster economic growth but also is facing a lot of supply growth.

Sure, Ryan. In the quarter we had six citywides in 2016 that were either new citywides or much larger than the previous year. That created a lot of compression. As I mentioned in the script, we outperformed the market by, I think, about 1,200 basis points. But when you look at a tract scale component, I think the tract for Nashville was that maybe 16% so the central business district, our location did quite a bit better and then we outperformed the market.

A lot of that is driven by -- versus what we've done in prior years, Nashville was always, for us, is a big group house. It's about 50% group and in previous years sometimes we've actually lost out because we been over sold with too much group on the books and so we've had a little bit less group. We've been a lot more selective in the group that we've had in Nashville and that's allowed us to get a high rate of transient demand, and specifically in the quarter are transient ADR was up 23%. It's really focus on right mix of business for us in the quarter and then taking advantage of an overall very, very strong market.

That's helpful. It sounds pretty good. Second on LA, RevPAR was strong. I'm wondering if you have any idea what if any impact there was from the gas leak out there on the top line and then why flow-through wasn't stronger with EBITDA up not nearly as much as we would've expected with that type of RevPAR growth.

Most of what we have is driving the growth for us, and I haven't quantified the impact of the gas leak, but is Beverly Hills is driving a lot of that growth, as you know. As it continues to ramp up, we've added some -- expanded concierge lounge, made it more accessible to guests and so that's had a little bit of an impact on some of the flow throughs at that property. Overall we continue see that property ramp up. It's been less than a year since its -- since the renovation's been done.

If those revenues, Ryan, were same brand-over-brand revenue increase, we would have expected higher flow throughs, but we've got a higher staffing structure there as a Marriott compared to a Crowne Plaza.

Okay. That's helpful. A couple quick things. I think first of all, I know in the strategic review at Ashford Prime, the Board which, obviously, Monty, you're Chairman of both, elected to remove the investment in the hedged equity platform run by the external advisor. It doesn't look like that has happened at Ashford Trust. Any thoughts about making that type of change at Ashford Trust as well?

No plans at this time.

Any color as to why not? Why does it make sense at one platform but not the other?

Just not prepared to talk about it. We think that right now it seems to be fine in Trust, so just hanging in there for now.

Okay. The last question I had was you guys on the Ashford Prime call have talked a little bit about the potential to engage the external advisor with regards to potentially whether it's restructuring or renegotiating, something that could materially alter the termination fee from the external advisor. Whether that plays out or not is obviously another story, but would you expect any changes that happen with Ashford Prime in that regard to be echoed at Ashford Trust? Would Ashford Trust's Board be looking to mimic those changes if any changes materialize?

There's been some discussions about that very point. The Boards kind of went back and forth on all that. I think the thoughts right now is to let Prime go through their process and hopefully they'll be able to get something finalized here. At least right now they plan on putting it to a shareholder vote and then as soon as that's public for Trust to reach out to it shareholders and to say -- all right, guys, is this the kind of trade that, something like this, that you guys would be interested in for us to do as well? Over on Prime, there's been some calls to do all that but it does come at a cost, not a trade, and what's unknown is whether those costs are going to be acceptable to the Prime shareholders and then of course whether to Trust shareholders as well. We just thought that would be a better way to just kind of plumb the market after prime comes out with hopefully with their proposed revisions to it.

Okay. I appreciate the insight. That's it for me. Thanks.

Bryan Maher, FBR and Company.

There's a lot of bifurcated views on lodging right now, whether people should be buyers or sellers. Clearly there's a lot of assets on the market for sale, including your select service. Are you seeing any of this kind of evolve into an opportunity to grow the full service side of Ashford Trust? If so, are there any markets in particular that you're not in now that you would steer towards?

We think that pricing has come down for assets and it's certainly getting closer to an environment where some acquisitions might be attractive, of course depending upon our stock price and our cost of capital. We have not transitioned over to that point yet where Ashford Trust is going to be out there buying full-service assets. To your point, I think it's a good one because the markets are moving that way. The pricing is getting better for buyers. We probably hit our peak, you might agree, maybe a year ago or year and a half ago or so, as far as private market pricing. Anyway, it's an interesting opportunity and something we've looked at but we just don't because appropriate at least right at this time.

Thanks, Monty.

Gregory Miller, SunTrust Robinson Humphrey.

I'm calling on behalf of Patrick Scholes. Two questions, first I'm curious if you've seen any evidence of leisure demand shifting to the domestic market this summer, particularly focusing on upper [up-scale] scale and luxury. You have a couple of assets, Anchorage, One Ocean, Savanna and others, that might be beneficiaries of demand shifting from Europe to the States.

I haven't seen anything that's really significant. If anything, we've been probably impacted by some of the exchange rates with some of the other international countries.

Okay, great. Second question I had, I'm curious how [extensive demand] is holding in light of softening corporate transit trends. I'm curious how you're replacing this lost weekday demand.

This is Jeremy again. It's been a touchy environment is what I describe it. As we go through, every time I look at that 30-day forecast we're missing it pretty significantly. It could be on the upside, could be on the downside. It's just been volatile in terms of sometimes we're getting the short-term pickup that we've seen in previous quarters and sometimes it doesn't come, so it's been a little frustrating and it's been difficult to manage against. I think our team is done a very good job of keeping apprised and making sure that we yield the best possible way that we can. Fortunately, we've been able to get some good group on the books and we been able to stimulate some good retail and leisure demand.

Great. That's it for me. That's a lot.

Shaun Kelley, Bank of America.

Just one big-picture question for me which is, so I was curious on your overall performance in the quarter in your top-10 markets versus what you might've seen outside the top 10. Any noticeable pattern there, particularly as we think about where some of the supply is concentrated, supply growth, I should say, is concentrated?

This is Jeremy. I don't recall seeing anything real significant across -- I mean, there's certainly markets that outperforms quite differently then the rest of the markets but overall I don't recall seeing anything that was really different from top 10 versus non-top 10. What we look at with Trust is really outside top 25 and inside top 25.

Okay, but even across those two differences, relatively consistent, yes?

I don't think there's a material difference.

Okay. That's helpful. My only other question is could you just remind us of overall for the portfolio where you guys stand, what's your just leisure and group mix -- sorry, leisure and corporate mix just overall?

Leisure versus corporate?

Yes.

Our mix is probably about 25% group and that's going to be predominantly a corporate group and then the rest is going to be split between transient and then contract and then the majority that's going to be business transient. I'd say, just guessing, 70% to 80% of our transient tends to be business transient versus leisure.

Great. Thank you very much.

You don't always have good information when someone books on the website through retail on whether or not they're staying for business purposes or for leisure.

No, understood. Thank you very much.

That does concluded today's questions-and-answer session. Will turn the call back over to Management for closing remarks.

Thank you everyone. I appreciate your participation on the call today. We look forward to speaking with you on our next earnings call.

Please and gentlemen, this does include your call for today. Thank you for your participation. You may now disconnect.