Ashford Hospitality Trust Inc (AHT) 2018 Q2 法說會逐字稿

Good day, and welcome to the Ashford Hospitality Trust Second Quarter 2018 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Joe Calabrese with Financial Relations Board. Please go ahead, sir.

Good day, everyone, and welcome to today's conference call to review the results for Ashford Hospitality Trust for the second quarter of 2018, and to update you on recent developments.

On the call today will be Douglas Kessler, President, Chief Executive Officer; Deric Eubanks, Chief Financial Officer; Jeremy Welter, Chief Operating Officer.

The results as well as notice of the accessibility of this conference call on a listen-only [basis over the Internet] were distributed yesterday afternoon in 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, reconciliations of which are provided in the company's earnings release and the company's table of schedules, which have been filed with the Form 8-K with the SEC on August 2, 2018, 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 the other information provided in the release. Also, unless otherwise stated, all reported results discussed in this call compare the second quarter of 2018 with the second quarter of 2017.

I will now turn the call over to Douglas Kessler. Please go ahead, sir.

Good morning, and thank you for joining us to discuss Ashford Hospitality Trust's second quarter results.

I'd like to begin by spending a few minutes on our recently announced Enhanced Return Funding Program, or ERFP, with Ashford Inc. Our strategies throughout our 15-year history have consistently focused on ways to create shareholder value. Many of our efforts have been economically transformational over the years. We believe that the ERFP will be another such example and see this program to be a true game changer, one that we expect to provide us with significant competitive advantage to improve asset level investment returns and hopefully, lead to improved stock price performance.

As we've discussed, the highlights of this program for our company are clear, simple and impactful. Ashford Inc. is committed to provide up to $50 million to the company on a programmatic basis, equating to approximately 10% of each new investment's acquisition price to be used for the purchase of FF&E. We believe the ERFP program has the potential to improve 5-year internal rates of return on hotel acquisitions by 700 to 1,200 basis points. We're not aware of any other REIT, lodging or non-lodging, that has a similar offering to improve property acquisition IRRs.

Given our approximately 18% insider ownership, we pride ourselves on thinking and acting like owners when it comes to evaluating and implementing strategies. And we expect the ERFP program to be another significant step to enhance our total shareholder return performance relative to our peers.

Let me be clear, we've been very disciplined in our acquisition efforts over the years, and this program does not, in any way, change that level of scrutiny. We will not grow just for growth sake. What this program seeks to accomplish is to turn good deals into great deals. How does that happen? The ERFP effectively reduces by approximately 33%, based on our current corporate capital structure, the require equity funding into new investments, thereby improving expected returns. While these are just some of the economic highlights benefiting Ashford Trust shareholders, there are other miscellaneous terms of the ERFP included in our filings that I encourage you to review.

In a highly-contested bidding environment for deals today, we see this program providing us with a significant competitive advantage in winning deals at even more accretive returns. We can be more aggressive if needed to win a deal, but then still achieve returns well in excess of what we would have achieved without the ERFP.

Looking ahead, we see this program as very promising, given the strategic and financial alignment between Ashford Inc. and Ashford Trust. Such that, in theory, it could become even larger in dollar value and more evergreen if proven successful and favorably received by our shareholders.

In fact, the ERFP agreement already has in place, subject to mutual agreement, an increase to $100 million. The existence of this program is also timely, given market conditions. More properties have recently become available that fit our focused investment criteria of full-service upper upscale hotels.

Furthermore, our conviction on a more positive lodging market direction is stronger, given supply/demand fundamentals. We also see various key economic data points to support our near-term favorable view.

The debt markets remain liquid and attractively priced for hotel financing. We have excess corporate cash on our balance sheet, which could be available for hotel investments under this program. All these combined factors make this a very opportune time for the program, especially considering the competitive edge the ERFP provides to us.

The Hilton Alexandria Old Town is an excellent first deal to benefit from the ERFP. On June 29, we completed the acquisition for $111 million, and consistent with the ERFP, Ashford Inc. has committed to provide us with approximately $11.1 million of cash via the future purchase of hotel furniture fixtures and equipment at our properties. With this ERFP funding commitment, the effective trailing 12-month cap rate for this transaction increases to 8.3% from 7.5%, assuming the program funding had occurred at closing. In most cases, as with this acquisition, the ERFP is expected to be funded over the first year.

Moreover, based upon the acquisition of an upfront funding, our initial equity contribution for this acquisition is reduced by an estimated 38%. As a result, the program is projected to meaningfully improve the estimated underwritten leveraged IRR of the acquisition from 18.2% to 29.5%, a 62% increase in returns with over 1,100 basis points in absolute improvement based upon a capital structure including 66% property level debt, corporate preferreds, equity capital and ERFP funding in year 1. We believe these types of returns are compelling.

We believe that this acquisition stands on its own. However, with the ERFP, we estimate the returns are underwritten to be among the highest of any deal in our history. We strongly believe that the ERFP provides us not only with a competitive advantage, but is also structured to substantially enhance shareholder value.

Let me now turn to our second quarter performance. Our comparable RevPAR for all hotels increased 1.6%, while our comparable RevPAR for all hotels not under renovation increased 2.3%. For the quarter, we reported AFFO per share of $0.42. And we reported adjusted EBITDAre of $120.7 million. We will continue to own and acquire predominately upper upscale full-service hotels at a RevPAR of generally less than 2x the national average. We're not purposely chasing the highest RevPAR hotels because we see trade-offs in RevPAR and yield. We will remain disciplined on buying and selling properties as we balance expected returns, underwritten growth and our cost of capital.

During the quarter we completed several additional transactions to further our strategy and create additional value on our platform. We sold the 109-room Residence Inn Tampa Downtown for $24 million, equating to $220,000 dollars per key and a trailing 12-month cap rate of 7.6% for a select-service hotel with a RevPAR below our overall portfolio average. We also sold the SpringHill Suites Centreville for sales proceeds of $7.5 million. Through these sales of lower RevPAR select-service hotels, we believe we have improved the overall quality of the portfolio. We hope these types of strategy executions remind investors of the potential value we can create with assets in our portfolio

As for our balance sheet, we target net debt-to-gross assets of 55% to 60%, although our current level is slightly above the target. We believe in the benefits of an appropriate amount of nonrecourse debt to enhance equity returns. We have generally run near this leverage level consistently since our IPO 15 years ago, through up and down cycles.

I'm very pleased to report that we've been extremely active in refinancing our existing debt over the past couple of years. During the second quarter, we refinanced 8 different loans comprising 56 hotels for a total of $2.3 billion. We've had great success recently in our proactive efforts to capitalize on the favorable debt markets to significantly lower the loan spreads from what we would have paid under the previous terms.

In fact, since the start of 2017, we have refinanced the mortgages on 85 hotels with $3.4 billion in new loans, or approximately 85% of our total debt. Deric will provide more details as well as the many benefits of these financings.

We seek to maintain a cash and cash equivalent balance between 25% to 35% of our equity market capitalization for financial flexibility. We note that this excess cash balance can provide a hedge in the event of uncertain economic times as well as providing dry powder to capitalize on attractive investment opportunities as they arise. In addition, at the end of the second quarter of 2018, net working capital totaled $527 million, equating to approximately $4.42 per share, representing a significant 56% of yesterday's stock price.

Also, we remain focused on our investor outreach efforts in 2018. We will continue to get out on the road to meet with investors to communicate our strategy and the attractiveness of an investment in Ashford Trust. We look forward to speaking with many of you during the upcoming events.

Looking ahead, we have a high quality, well-diversified portfolio and remain focused on accretive transactions as well as proactive asset management initiatives. We're committed to maximizing value for our shareholders as we focus on generating solid operating performance, continuing to be opportunistic and proactively managing our balance sheet.

I'll now turn the call over to Deric to review our second quarter financial performance.

Thanks, Douglas. For the second quarter of 2018, we reported a net loss attributable to common stockholders of $29 million or $0.30 per diluted share. For the quarter, we reported AFFO per diluted share of $0.42 compared with $0.52 for the prior year quarter.

Adjusted EBITDAre totaled $120.7 million for the quarter compared with $125.6 million for the prior year quarter. There are a few things that I'd like to point out about our quarterly results. First, the prior year quarter included $2.4 million of hotel EBITDA from hotels that we have since sold. Second, we have fully utilized the NOLs in our taxable REIT subsidiary, and you will see we recorded a higher tax expense in the second quarter compared to last year. Going forward, I would expect that trend to continue. Third, during the quarter, we recorded $1.9 million of business interruption income related to lost business at our Crowne Plaza Key West, associated with the BP Oil Spill in the Gulf of Mexico in 2010. We've been working on this claim for several years and finally settled the claim in the second quarter.

Finally, given our strong total shareholder return performance through the second quarter versus our peers, we recorded an accrual of $3.3 million for the incentive fee under our advisory agreement. At the end of the second quarter, we had $4 billion of mortgage debt with a blended average interest rate of 5.5%. Our debt was approximately 9% fixed rate and 91% floating rate. All of our debt is nonrecourse, property-level debt, and we have a well-laddered maturity schedule. Interest rate caps are in place for virtually all of our floating-rate loans. And including the market value of our equity investment at Ashford Inc., we ended the quarter with net working capital of $527 million. As of June 30, 2018, our portfolio consisted of 118 hotels with 24,903 net rooms. Our share count currently stands at 119.3 million fully diluted shares outstanding, which is comprised of 98.6 million shares of common stock and 20.7 million OP units.

With regards to dividends, the Board of Directors declared a second quarter 2018 cash dividend of $0.12 per share or $0.48 on an annualized basis. And based on yesterday's stock price, this represents a 6.1% dividend yield, which is among the highest in the hotel REIT space.

On the capital markets front, we set out, at the beginning of the year, with a strategy to refinance a significant portion of our debt. We believed that credit spreads would continue to tighten as short-term rates increased, which is exactly what has happened. Through these financings, we've been able to improve our liquidity, extend our maturities, resize several of our loan pools and lower our cost of capital compared to the previous loan terms.

During the quarter, we refinanced our Highland mortgage loans secured by 22 hotels with an existing outstanding balance totaling approximately $972 million with a new loan totaling $985 million. The new loan has a 2-year additional term with 5 1-year extension options, subject to the satisfaction of certain conditions. The loan is interest-only and provides for a floating interest rate of LIBOR plus 3.2%. This refinancing is expected to result in annual interest savings of approximately $11 million as compared to the prior loan terms.

We also refinanced 7 mortgage loans with existing outstanding balances, totaling approximately $1.07 billion. The new financing is comprised of 6 separate mortgage loan pools with an average size of approximately $211.7 million, but together totaled approximately $1.27 billion, and each has a 2-year initial term with 5 1-year extension options subject to the satisfaction of certain conditions. The loans bear interest at a combined weighted average rate of LIBOR plus 3.83%, which is 74 basis points lower than the previous mortgage loans. As part of this transaction, and subsequent to the end of the quarter, we purchased $56.3 million of mezzanine debt on the pool E-loan to effectively reduce our interest expense on this loan pool. The total pool E-loan amount is $216.3 million, priced at LIBOR plus 4.36%, inclusive of the mezzanine debt that we purchased. However, in effect, the net loan amount will be $160 million at a spread of LIBOR plus 2.73%. This purchase is not meant to suggest that Ashford Trust is re-entering the mezzanine lending market. We simply saw an attractive opportunity to lower our effective cost of capital and its financing.

After closing of this transaction, the weighted average maturity of our debt is 6.1 years, assuming extension options are exercised, which is the longest it has been in several years, and our net target debt maturity is a $5 million loan that matures in July of 2019.

As you can see, we have benefited from the flexibility of our floating-rate debt to efficiently refinance a substantial portion of our existing loans at a time when loan spreads have significantly compressed over the past 12 to 18 months. These well-planned sequential refinancings exemplify our ongoing strategic efforts to capitalize on market conditions and constantly seek out ways to enhance shareholder value.

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

Thank you, Deric. Comparable RevPAR for our portfolio increased by 1.6% during the second quarter of 2018. Those hotels not under renovation grew comparable RevPAR by 2.3% during the second quarter.

While we experienced a 7.3% increase in noncontrollable fixed expenses such as incentive management fees, property taxes and insurance, our operating flow-through for the quarter was approximately 50%. We've been disappointed with the portfolio-wide results from a RevPAR growth standpoint. And several factors have contributed to this performance, which I will briefly outline. First and foremost, we've experienced heavy renovation activity year-to-date, measured by both number of hotels and number of rooms. And we've also had renovations at some of our largest hotels, namely the Renaissance Nashville, Marriott Crystal Gateway and Ritz-Carlton in Atlanta. In addition to the impact from renovations, our Starwood hotels not under renovation during the second quarter were negatively impacted by the revenue management and sales integration to Marriott. Comparable RevPAR for these 9 hotels declined 3.1%, a 710 basis point decrease relative to their competitive sets. The performance of these hotels has suffered, and group room nights declined 19.2% during the second quarter.

Excluding the 9 Starwood hotels, comparable RevPAR for those hotels not under renovation during the second quarter was 2.9%, nearly flat to our competitive sets.

I'd now like to turn to a property where we have perhaps unlocked more value than in any other property in our portfolio, the Renaissance Nashville. Since we acquired the Renaissance Nashville as part of the Highland portfolio acquisition, we've grown NOI from $6.2 million to $20.3 million, more than tripling its profits. During the second quarter, we completed the meeting space renovation in addition in the Nashville Convention Center space. This phase of the renovation was completed in April, including the enlargement of the entirely refresh in Grand Ballroom and expanded pre-function space. The Grand Ballroom can now accommodate 1,500 guests for a banquet function. Upon completion of the meeting space, we began upgrading the first floor of the hotel by renovating the lobby and restaurant. And we're also adding a signature market providing a grab-and-go outlet. This work is scheduled to be completed in January 2019. Despite the disruption inherent in any renovation of this scale, the hotel managed to grow comparable RevPAR 1.8% during the second quarter, and EBITDA flow-through was strong at 79%. Impressively, this RevPAR growth surpassed that of the hotel's competitive set by 70 basis points.

As we contain to improve the product of one of our top-performing hotels, we're excited to add hotels of a similar caliber such as Hilton Alexandria Old Town to our portfolio. We anticipate that our best-in-class asset management team will unlock value at the Hilton Alexandria similar to what we have achieved in many of our other properties.

During the remainder of 2018, we will continue to invest in our portfolio to manage competitiveness. For the year, we estimate spending approximately $165 million to $185 million in capital expenditures. In addition to the extensive work I just highlighted at the Renaissance Nashville, much of this spend is focused on the recently-completed guest room renovations at the Renaissance Palm Springs, Sheraton Anchorage and Marriott Research Triangle Park, as well as additional guestroom renovations at the Hyatt Regency Coral Gables, Westin Princeton, Ritz-Carlton Atlanta and Hotel Indigo Atlanta. As mentioned earlier, this heavy renovation activity affected our first quarter results, which continued into the second quarter as well. As for the balance of 2018, we're projecting an average of 5 fewer hotels under renovation per quarter relative to 2017, with 1,300 or 15.3% Pure Rooms out of service during that period. This reduction in renovation activity coupled with the improved product will have -- once all of this capital spending is completed, should provide a tailwind for our portfolio and our results going forward. That concludes our prepared remarks. And we'll now open the call for Q&A.

(Operator Instructions) We'll take your first question from Tyler Batory from Janney Capital Markets.

Just quick follow-up question on the renovation activity. Obviously, number of projects in 2017, number of projects in the first half of this year that have wrapped up. I mean, how are some of those hotels performing versus your expectations? I mean, how is the ramp going there?

It's as expected. I mean, typically what we see is the ramp is about 100 basis points of index gain as the hotel comes out of renovation. We had a significant amount of renovation activity in the fourth and first quarter of this year, continued on into the second quarter. So we haven't really had the benefit of some of that ramp, but we certainly will have that as you kind of transition into, particularly, the fourth quarter of this year and onto next year as well. Most of our CapEx is, what I would call, defensive in nature just to maintain our competitiveness. And so we do have a decent amount of ROI CapEx as well. But typically what you see is, you see quite a bit of displacement during the renovation. And then coming out of the renovation, as it ramps up, it's about 100 basis points higher than it was before even the start of the renovation, if that helps.

I'd also like to just add to that. We have, at times, looked at renovations in the path of growth. And clearly, for example, Atlanta is one of those situations with the renovation of our Ritz-Carlton as an example, given all the activity that Atlanta is expected to benefit from with athletic events taking place over the next couple of years. So -- and we're right in the thick of that. So we do have instances where the benefits of that renovation, I think, are in conjunction with some market timing events that we expect to benefit from in the future.

Okay, great. And then just to follow-up on the Starwood Marriott's revenue management and sales integration. I mean, you're being impacted by that and so are some of your peers. I mean, what's your best guess as far as the potential impact of that in the second half of this year? I mean, is that something that's going to continue? Or do you think most of this disruption is through at this point?

I think that's a great question. I appreciate it. And before I get into it, I just kind of want to give a high-level overview of kind of what is going on. Think about it that Marriott is integrating their sales and their revenue management systems. They're integrating their direct booking channels. They're integrating their rewards program and many, many other systems. Are also integrating their personnel. And so when you think about it, a lot of our legacy Starwood-managed hotels are being overseen by current Marriott management and sales managers, revenue managers, and they're not overly familiar with the legacy systems. And they're not spending the time to really get up to speed of those systems, because those systems are going away pretty soon. The actual key points to the integration are scheduled to be just in a few weeks. My anticipation, that could be delayed, but it should be in the third quarter of this year where they combine their rewards program, their direct booking channels. And I think that's going to be -- put a lot of these issues behind us. If you look specifically in our quarter, it just wasn't a good picture for our Starwood hotels. We are down in group pace. Our special corporate accounts were down 8%. Even our brand contribution on starwood.com was down 300 basis points. The rest of all our other channels were up on special corporate. They were up on direct booking. And we were -- had good group pace otherwise. So I think this is an isolated issue. It had a pretty big impact to our overall RevPAR index for the quarter. And I think that there are a lot of good things to come out of this, because I think that Marriott does have an incredible distribution system, they've got an incredible management team and they've got a great sales force. And so as we get this integration done over the next couple of quarters, I'm pretty optimistic on those hotels. In fact, specifically for our Starwood hotels in 2019, group pace is up 18%. So I think this is a short-term isolated issue. We happen to have a decent amount of Starwood exposure, but I do anticipate it to be something that, as we get through the integration, this could be a net positive for our portfolio.

Okay, that's helpful, and just last question from me, on the interest expense. Deric, you went through a number of the refinancings, which was great. But just on an annualized basis, how much interest have you guys saved year-to-date? As you look out, do you think there's opportunities to do some even more refinancings?

Yes. So in terms of the first question. And this isn't necessarily a year-to-date, but in terms of all the financings that we have completed since the beginning of 2017, in total, we've saved about $30 million in interest of what our interest expense otherwise would have been under the previous loan terms. So that's significant savings. As I mentioned, we've now pushed our debt maturity schedule, average maturity of 6.1 years, which I feel very comfortable with. We've got just a small loan that's maturing in 2019. We've got a couple of hundred million in 2020, and then we've got nothing in 2021. So I think from here, the opportunities to refinance are probably limited. We've got some fixed-rate loans in there that are maturing in 2020 that we're reluctant to pay the breakage cost or the defeasance cost associated with early refinancings there. We have some floating-rate loans there. But -- that we could possibly refinance, but we'd probably like the underlying performance of those properties to be up a little before we refinance those. So I expect the refinancing activity to slow down quite a bit, but we'll continue to be opportunistic. And if the market is there and available, we will capitalize on it.

We'll hear next from Jim Lykins from D.A. Davidson.

Just a couple things for me. First of all, given the economic data we're seeing right now, specifically GDP, how are you guys thinking about RevPAR growth? And also, is there any color you can provide us with on how that is trending thus far into the current quarter?

Jim, you're right, I think there are some very strong economic fundamentals that are backdrop to the benefit of our industry. You mentioned GDP growth. I think the last quarter report was 4%, slightly north of that. We look at a lot of economic indicators, not only that. Obviously, that's one of the most highly correlated to hotel room demand. But we're also looking at other components that contribute to both transient business and -- as well as group business, leisure and business, et cetera. So, for example, we're tracking non-residential fixed investment, which continues to be healthy. Obviously, we're all aware that the jobs reports are very strong and consumer confidence is very high. I think that one of the general trends, while we don't provide any specific color, as you know, on our corporate RevPAR, but we're certainly seeing, I think, across the industry, a rotation into improved business transient travel. That has been the big question, I think, that all of us in the industry have tried to get our arms around, which is why that hasn't been stronger, why that hasn't accelerated sooner. And obviously, there's a lag effect that corporations have to feel comfortable with that profitability and willingness to spend dollars on business travel, which is obviously, for many organizations, is a variable component of their expense structure. And we're seeing more business travel; we're seeing a pickup in that. And that is important for our platform, because we view that most of our hotels in the Trust portfolio are mainly business transient type hotels. So hopefully that answers your question.

That's very helpful commentary. And also, regarding supply, what are you seeing right now, and do you still think that, that may crest in 2019 or possibly even sometime later this year?

Well, we have reported previously that, based on the industry data that we have been seeing, that the crest was expected to be sometime in 2019. And recently, we came across a report from, I believe it was Lodging Econometrics, that actually indicated that, that crest may not actually occur until the following year, that they saw actually a slight uptick in forecast supply. I think this is something that we're digging into more just to better understand that data, because that is the first report that I have come across that suggested a slight change in the cresting of the new supply coming in. Nevertheless, when we look at the new supply, I think one of the comments that we have made previously is that the supply setup still for the industry is, I think, very strong from the standpoint of a lack of new supply. The last cycle, new supply hit the 2% level in the 54th month. We are into the 100th month this cycle, and just barely beginning to hit that 2% supply level, in the face of what continues to be fairly strong hotel room demand. So we like the setup. Even if the supply cycle is extended just a little bit longer, I still think the dynamics, in terms of the relationship between supply and demand, are fairly healthy.

The only thing I'd add to that is that, when you look at the supply for our markets and tracks for our portfolio over the last 2 years and what's actually come in, on a forward-looking basis for the next 2 years, it's pretty commensurate of what we would project, of what we have recently experienced.

We don't see anything ticking up necessarily, but it's basically the same type of supply growth we've had in the last couple of years. That changes dramatically by market, obviously.

So when you mentioned that you think that crest could now be 2020, I can't remember who you said those assumptions or where those estimates came from, but you do you know what assumptions might have changed? Has construction lending maybe gotten easier? What the -- any color on that?

I think the large percentage of that is just coming from not new construction, but really coming from projected or planned projects, which obviously have the highest potential attrition rate of construction that's either forecast or planned or under construction, et cetera. There's a natural progression of attrition relative to the early stage of a planned project. So that's really where we understand most of that to be coming from as opposed to actual in-the-ground under construction. But again, this is a report that, I think, just came out, and we're looking more into it as well just to better understand the data.

We'll move next to Chris Woronka from Deutsche Bank.

Want to follow up just a little bit on the Marriott Starwood issue. It sounds like you think that's temporary. And so my question is, maybe you can just confirm, is there not really a cure? Is Marriott providing a cure for owners in the near term? Or is this something that is just supposed to kind of level out as we move forward?

In terms of a cure, you mean like a make-whole? Or what do you mean? Or just a...

Yes, I mean, obviously, it would -- on anything they -- I assume, anything they manage, it could, I guess, in theory reduce their IMF if it got to a level. But are they doing anything other than essentially trying to fix the problem?

It's more focused on trying to fix the problem. They've been spread so thin with integration. And they're moving as quickly as possible. As I mentioned, there is not really a good story on any of the channels that you look with those Starwood legacy hotels in the recent quarter. But I view this as a temporary issue. And I actually would anticipate that as a result of the merger, the Starwood hotels actually should disproportionally benefit from where they were prior to the merger than your core legacy Marriott hotels. So I think it's just kind of a necessary evil. We've got to take some -- a few steps backwards to take a few steps forward. So -- but there's nothing I think anything in particular that they're doing other than we're getting some synergies -- some cost synergies. And there's going to be some savings in the reward program for our Starwood hotels. But that's just part of the integration itself.

Okay, that's helpful. And just on the CapEx, I saw -- I understand, it sounds like the -- you start to get more benefits from ramp-up in the second half or a recovery, whatever you want to call it. What was the genesis of the higher CapEx last year and this year? Did you guys get off-cycle? Or it just so happened that the number of hotels kind of lined up for the cycle renovations at the same time, is that correct?

Yes, it's the latter. I mean, we try to push and defer renovations as much as possible, because you can quantify the displacement that we experience during a quarter when we have heavy renovation activity. So it just was kind of where the stars were aligned where you had a decent amount of hotels that required renovation. And then I've also continued to defer even some additional projects that, quite frankly, the brands desperately want to be done, but I'm pushing those back another year as well. So it's just -- some years we have a little bit more, some years we have a little bit less. We had a quite a bit more in the fourth quarter 2017 and in the first quarter of 2018. And so I think that there should be some tailwinds with less renovation activity in the upcoming quarters.

And I also want to just highlight the fact that because of the ERFP we basically have now a source funding for $50 million of potential CapEx, depending upon what our acquisition pace is. And again, I think we can't underestimate the power of this ERFP program to add value to the platform. And I'm very enthusiastic about it. It goes right to the core of FF&E type work that's done at the property, and whether it's at a property that we acquire across the portfolio, that's a flexibility that we have with the program. I should highlight that with this program in place, again, we continue to be extremely disciplined in our acquisition approaches. We did announce the Hilton Alexandria Old Town, a great asset that we're extremely pleased with. The expected returns from that are very attractive. The platform will benefit from the ERFP. But yet, even with that transaction, I think as a clear indication of looking for situations to make good deals great, we've continued to be active in pursuit of transactions. And in fact, we've recently been outbid on a few deals that just didn't meet our return thresholds even with the ERFP. So again, I think that points to the discipline that we have in finding accretive transactions to really enhance shareholder value.

Okay, fair enough. And Douglas, just a follow-up real quick on that comment. So the ERFP, obviously, you guys quantify how it improves your returns. So do you think it's enough to -- you said you've been outbid on a few hotels. In general, is it going to be enough, do you think, to put you over the finish line against the private equity bidders? Or is the spread so wide that it's going to be hard to overcome, even with that?

No, I think that the ERFP actually gives us a competitive advantage. But keep in mind that there are, on occasion, very aggressive buyers that, whether it's because of some sort of emotional reason that they want to own that asset, or if it's because of some strategic reason that they have to own that asset, that -- look, we've seen some situations where people, in my opinion, may have overpaid, or certainly paid more than what we were willing to pay to stay consistent with kind of the discipline that we've had on achieving the best possible returns. Look, you have one time to buy and you better buy right. And so our view is, let's continue to stay with the same discipline. Sure, the returns with the ERFP still may have achieved an adequate return, but we're looking to make good deals great. And so for that reason, we've seen some deals go away from us. Obviously, we've been active in underwriting deals. Obviously, I can't comment on anything that we're currently in the process of underwriting. But we're optimistic. We are optimistic that we will find deals that are consistent with our strategic focus of upper upscale full-service hotels, and that the ERFP will enable us with that competitive advantage of having those funds available to win deals. And when you think about the timing of the announcement of the ERFP, it's really just been a short couple of weeks. And deals have a schedule. Brokers are in the market and transactions follow an offer time frame. And so we're in that stream of deals right now and we remain hopeful that the ERFP will put us over the finish line and provide our shareholders with some real value-add economics to what would have already been a good deal on its own, just like the Hilton Alexandria. So I just only highlighted the fact that we've lost a couple of deals, only to demonstrate that we're staying disciplined, Chris, in terms of what we're pursuing. So all in, we're extremely excited about what's in front of us and what the ERFP can do for us. And just to enhance kind of maybe your perspective on the transaction environment, the transaction environment for the first half of the year, in terms of large hotel purchases, and again, there is a certain tracking above a certain dollar amount of trading, I think there's been about 120 or so transactions that have traded, at least according to the report we read in Real Estate Alert. And that transaction volume is up 27% through the first 6 months of the year, relative to last year. I think the total was just about $10.7 billion. So we're clearly seeing an increase in transaction availability in the market. And we're participating in that. And we believe that the ERFP will enhance our opportunity to win deals.

(Operator Instructions) We'll move to the next caller in the queue, Bryan Maher from B. Riley FBR.

Kind of sticking with the ERFP guidelines a little bit more. I don't want to beat a dead horse. But Doug, how much do you think it expanded your pipeline? So if you were looking at 2 properties before that were realistic, is that now 4, or is that now 6, or is that now 8? Like how impactful is it to your pipeline?

Well, there's a couple of components to that. One, the pipeline, universally, I think, is getting larger. There are more deals. But it certainly enhances the bandwidth of our pipeline. Because deals that maybe on the margin we weren't going to be able to win, we can slightly increase the price, and yet, because of the massive benefit, when you think about the equity requirement that's reduced by about 1/3, you think about the impact to the IRR, you think about the effective elongation of our capital utilization, because we now have capital coming in from Ashford Inc. that otherwise Trust would have had to spend on FF&E whether for the newly acquired asset or somewhere else on our portfolio. So we can bid slightly more if needed and still have a materially increased return despite that slight increase in purchase price I hope would put us over the edge in what still, quite frankly, is a very competitive situation. And it's competitive enough to where we are seeing sometimes a third and final round actually becoming a fourth round of bidding. So it is a significant advantage, we believe, for us, an advantage that we are not aware of any of lodging REIT peer, or for that matter, any other REIT has that type of source of capital to be used in the way that we're using it. So yes, it increases the scope, and our team is very busy underwriting prospective acquisitions for Ashford Trust currently.

Can you kind of rank, first, second and third, who you are running into in these bidding wars. Is it other REITs? Is it mostly private equity? Is it family offices or rich individuals? How would you rank the competitive set?

I think it's really all of the above. But it sort of breaks down a little bit differently depending upon asset types and location. And when I say it's all of the above, there is significant pent-up demand for lodging assets today. I think when you look at the macroeconomic picture of the economy, people want to rotate into lodging assets and have a better understanding of the direction of the economy. Despite the fact that this cycle has now gone on for 100 months, I think people are now becoming a little bit more comfortable recognizing that historical cycles and the time that they last really doesn't necessarily have any correlation to a future cycle. Because the fundamentals dictating the outcome of that cycle can all be very different. And we all know that most lodging cycles have been more dictated by exogenous events, disrupting events rather than supply/demand fundamentals. And, as I said earlier, the supply/demand fundamentals, I think, are fairly healthy right now, so what would disrupt this cycle? And absent knowledge of that, I think, people with the improved economic picture and GDP growth are more comfortable having lodging as a portion of their portfolio. For the type of assets which I think we have clearly a competitive advantage, and by that, I mean, if you look at most of REIT peers, they are either focused on luxury or they're really chasing the highest possible RevPAR in major gateway markets or they are pursuing select-service hotels. We have a very broad landscape to work with in the first place. Because we will buy in most U.S. major, primary and secondary markets; suburban or urban locations; brand managed, not brand managed; brand encumbered, not brand encumbered. We have greater access to the deal pipeline that's available, which gives us the ability to be selective. And so in the urban centers, we're still bumping up against some of the REITs bidding. We're seeing some international buying activity. Obviously, the Chinese buying activity has slowed down, but we continue to see some activity from foreign buyers that we've bumped up against. And the private equity funds are obviously active, because they sit on a substantial amount of capital. So our footprint is large. And we believe that we will be successful in making good deals great and finding attractive opportunities to benefit from this ERFP program.

That was quite an answer, Doug. For Jeremy, just quickly, obviously you had some weak markets, which kind of weighed on your RevPAR results. Can you talk to kind of the 2 or 3 weakest markets you guys are operating in? And if you see those environments changing anytime soon?

Yes. So we underperformed pretty significantly in Orlando. And that was more of an isolated issue with our Residence Inn Sea World being under renovation. It was down over 20% RevPAR for the quarter. So that was a disproportionate impact. So I view that as kind of non-recurring. Minneapolis, another market that we underperformed. 3 of our 4 assets are -- we have quite a bit of Starwood's exposure in that market. So that's part of the reason. And like I said, I think that we'll see these Starwood hotels transition to stronger growth in the upcoming quarters, and that's our expectation. Houston was another market that we underperformed quite a bit. And that was isolated to just a group shortfall for one of our properties, pretty significant. And what it was, was kind of a tough comparable as well to the prior year. So I don't see there is anything that's -- there's certain markets that I am concerned about -- that's certainly I'm pretty excited about. When you look at our portfolio, being having heavy exposure in Atlanta, 2019, Atlanta is going to be incredibly strong for us. Our group pace is up significantly. Obviously, you have the Super Bowl. San Diego looks to be fairly strong for us. San Francisco is going to be a very strong market for us as well. So I think we have a lot more markets that I think I see more positives versus negative. Obviously, this was not a great quarter for us. We lost 100 basis points in RevPAR index. But I think there's brighter days ahead.

We'll hear next from Michael Bellisario from Baird.

Just wanted to go back one more time to the ERFP. And I understand it's a small sample set so far, just a few weeks in. But how far have you been on those few deals that you referenced in terms of percentage on the bid?

Well, in one case we had a real outlier bidder come in on a kind of must-have asset that not only blew us away, but we think blew away everyone else. We sort of believed that we were the cover bid. So that was a material order of magnitude, but I can't say that, that ended up being an economic buyer. I think most of the people we have bumped up against have been economic buyers. We took a look at an asset that was a Southern California property that we thought we could be competitive for, but the cap rate started to dip to a level that, again, we just felt like even though you might have achieved kind of low, mid-teen returns, that's not what I'm trying to accomplish with the ERFP money. I'm trying to make good deals great. That would have made a marginal deal good. And we are looking to utilize the ERFP to enhance shareholder value, not just to get deals done. And so -- but as I said, there's other deals that we're pursuing now. And we remain hopeful in a very competitive environment that with our discipline in underwriting and our approach on looking at assets not just on the purchase price, but how we think we can operate them and enhance the performance, that in conjunction with the ERFP, that we will be successful in announcing deals that, I think, shareholders will be pleased with, and that's our objective. There's no rush. We've got plenty of time. The ERFP has a 2-year time frame to it. And so we're going to be -- we're going to do the right thing with this capital to find great deals.

Makes sense. And then back to the Starwood commentary, because kind of what you said and what you are seeing is different from what a lot of peers have said. They pointed to group-specific weakness, but I think that 2 of the things that you guys mentioned, kind of more on the transient and the kind of customer booking side of things? Is that why -- one, is that correct? And the two, is that why you are seeing it across all legacy Starwood hotels, not just legacy Starwood managed hotels like your peers are?

Yes. So it is different. One of the things that impacted the quarter quite a bit was for our Starwood managed hotels. Marriott consolidated a lot of their corporate accounts. And they didn't extend rates to some of the smaller accounts that we have some really good business with at our legacy managed Starwood hotels. And so that's been impactful to our special corporate, or negotiated corporate business for the year. Specifically, for the quarter, our non -- or, I guess, our brand-managed legacy Starwood hotels were down 15% in negotiated corporate business in volume. And so that was pretty significant. That brought the entire Starwood portfolio down 8%. But we're actually up in our ready-to-manage franchise asset. So that component was more isolated to the brand-managed Starwood hotels. But overall, like I said, we also have issues on brand.com. 8 of our 10 Starwood hotels had declines in bookings at Starwood.com. You know what's going on the industry. You know all the amount of significant spend that the brands have made on all their direct booking channels. We are seeing growth in Hilton.com. We are seeing growth in Marriott.com. We are seeing growth in our direct bookings pretty much across the board with the exception of Starwood. And so that impacted both our franchise and our managed hotels. So I think it's -- there's just a lot of moving parts as part of this integration. And it has brought down both our managed and franchised. But in certain components it was definitely was a little bit more impact on our managed hotels.

And you just have 3 managed hotels, is that correct, in Atlanta and Minneapolis?

Yes. Yes, and we have 10 total Starwood hotels. And the rest are Sheratons, with the exception of a Westin in Princeton. We also have [guest rooms] on renovation. Yes, okay.

Robin Farley from UBS.

This is actually Arpine on for Robin. Could you talk a little bit more about flow-through for the quarter and what impacted that? I know you addressed it a bit earlier, but even when you look at comparable hotel metric, the flow-through was a bit softer. And then how you expect that to play out for the back half? Are there some cost items that are expected to persist into the back half?

Sure. So as I mentioned on the prepared remarks, our operating flow-throughs were very strong and healthy, especially given the tepid revenue growth that we had for the portfolio. So I was very pleased with our operating flow-throughs and what we were able to bring down to the bottom line. What impacted our flow-throughs for the quarter were what we call noncontrollables or fixed expenses, which are property taxes, insurance and incentive management fees. And it's kind of hard to -- property incentive management fees are what I'm talking about, by the way. It's hard to believe that we actually had an increase in property management incentive fees, but that was a really component of the mix of hotels that performed really well were the ones that had some lucrative incentive fees. So that's an anomaly for us. Typically, with strong flow-throughs across the board is when we typically have an increase in incentive fees. One of the things that I want to highlight that we were able to do in the quarter, we made a huge push. We were concerned about, heading into the quarter, our group pace positioning. We were concerned about the transient pace that we had. And so we made a big push on all of our ancillary revenues. And there's a lot of strategies that we have behind it. One of the positive takeaways was that our other revenue that is not room related and not F&B related was up 28% for the quarter. And I'm very proud with the way that our team executed on all of those initiatives, because that mitigated some of the downside that we would have otherwise had.

That does conclude today's question-and-answer session. I will now turn the call over to management for any closing remarks.

Well, thank you for joining today's call, and please be on the lookout for a save the date for our Investor Day that we plan to host again in New York City in October. We look forward to speaking with you again next quarter.

That does conclude today's teleconference. We thank you all for your participation.