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Executives

Monty J. Bennett – Chairman and Chief Executive Officer

Douglas A. Kessler – President

Analysts

Ryan Meliker – MLV & Company

Patrick Scholes – SunTrust Robinson Humphrey

David Loeb – Robert W. Baird & Company, Inc.

Robin Farley – UBS

William Marks – JMP Securities

Jason Miller – Ionic Capital

Jordan Sadler – KeyBanc Capital Markets

Ashford Hospitality Trust, Inc. (AHT) Plan to Spin-off High RevPAR Hotel Portfolio as "Ashford Hospitality Prime, Inc." Conference Call June 17, 2013 5:00 PM ET

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Ashford Hospitality Trust conference call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator instructions) This conference is being recorded today, Monday, June 17, 2013. I would now like to turn the conference over to Scott Eckstein. Please go ahead, sir.

Scott Eckstein

Thank you, operator. Good day, everyone and welcome to Ashford Hospitality Trust conference call to discuss the recent announcement regarding the spin-off of Ashford Hospitality Prime. On the call today will be Monty Bennett, Chairman and Chief Executive Officer and Douglas Kessler, President.

Notice of the accessibility of this conference call on a listen-only basis over the Internet was distributed earlier this afternoon and a press release that has been covered by the financial media.

At this time, let me remind you that certain statements and assumption in this conference call contain are based upon forward-looking information and are being made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to numerous assumptions and 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 the section entitled Risk Factors and Ashford’s registration statement on Form S-3 and other filings with the Securities and Exchange Commission. Forward-looking statements include 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 press release which has been filed on Form 8-K with the SEC 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 press release together with all of our information provided in the release.

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

Monty J. Bennett

Thank you and good afternoon. As we announced in our press release earlier today, the Board of Directors of Ashford Hospitality Trust has approved a plan to spin-off an 80% ownership interest in an 8-hotel portfolio, totaling 3,146 rooms or 2,912 owned rooms, to holders of Ashford Trust common stock in the form of a taxable special dividend. The dividend is expected to be comprised of common stock in Ashford Hospitality Prime, Inc., a newly formed company to which Ashford Trust plan to transfer the portfolio interests.

This distribution is expected to be made on a pro rata basis to holders of Ashford Trust common stock as of the distribution record date. The distribution is expected to take place towards the end of the third quarter. Ashford Prime is expected to qualify as a real estate investment trust for federal income tax purposes, and intends to file an application to list its shares of common stock on the New York Stock Exchange, under the symbol AHP.

The history of this transaction dates back to a little over year ago, when we started including in our presentations to the concept of looking at our Company as two portfolios, Portfolio A and Portfolio B. That illustration was based on a high-leverage portfolio and a lower-leverage portfolio, which led us to thinking about our Company in terms of the relative embedded value of each components of our portfolio.

We have been constantly searching for ways to maximize stockholder value given our close alignment with shareholders due to our significant insider ownership. For example, over the past year, we have made a concerted effort to improve our transparency and communications with the Investor and Analyst community regarding our historical total stockholder return, our debt management strategy and our asset performance by debt pool.

The Board analyzed several different options to maximize stockholder value and ultimately determines that a spin-off of Ashford Prime was in the best interest of the Company and its shareholders. Ashford Prime will have a focused strategy to invest primarily in high RevPAR hotels located predominantly in domestic and international gateway markets. The international portfolio will consist of eight hotels with 2,912 owned rooms.

The initial eight hotels are the Hilton La Jolla Torrey Pines, the Capital Hilton in Washington, D.C., Marriott Plano Legacy Town Center, Seattle Marriott Waterfront, Courtyard San Francisco Downtown, Courtyard Seattle Downtown, Courtyard Philadelphia Downtown, and Renaissance Tampa International Plaza.

The high quality of the Ashford Prime portfolio as well as the focused investment strategy and targeted lower leverage profile, have been designed with the goal to make Ashford Prime attractive to a broad range of investors and it capitalize on hotel investment opportunities to further enhance stockholder returns. Ashford Prime will distinguish itself from Ashford Trust based on a more conservative capital structure and focused on higher RevPAR hotels located in both domestic and international markets.

Ashford Prime will be externally advised by Ashford Hospitality Advisors LLC, which will be a subsidiary of Ashford Trust, pursuant to an advisory agreement. Ashford Trust’s operating partnership will retain a 20% ownership interest in Ashford Prime’s operating partnership. For the year ended December 31, 2012, the initial Ashford Prime hotels had RevPAR of $140, total revenues of $221.2 million, and Hotel EBITDA of $73.0 million. As of March 31, 2013, the initial portfolio also had total debt of $628 million and no debt maturities until 2017.

Turning to Ashford Trust the post-spin-off portfolio will look very similar to how it looks today. Ashford Trust will have 115 hotels with a 2012 RevPAR of approximately $95, which is only $4 less than the portfolio RevPAR pre-spin-off. Also, the leverage level for Ashford Trust will reduce slightly post-spin-off. The rationale for the spin-off transaction is as follows.

First, a creation of two focused Companies creates investment strategy clarity. After the separation, Ashford Prime will focus primarily on luxury, upper-upscale, and upscale hotels anticipated to generate RevPAR at least twice the national average currently approximately $103 and higher.

Ashford Trust will continue to focus on all segments of the hospitality industry, with RevPAR criteria outside the Ashford Prime investment focus and at all levels of the capital structure. Second the creation of two companies has the potential for a higher aggregate market value for stockholders. The separation will enable potential investors and the financial community to evaluate the performance of each company separately, which may result in a higher aggregate market value than the value of the existing combined company.

Third tailored capital structures are generally more efficient each company will have the flexibility to create a capital structure designed for its strategic goals consistent with its stockholders’ interests. In addition, these tailored capital structures should facilitate each company’s ability to grow through acquisitions and strategic alliances, possibly using units of the operating partnerships as currency.

Fourth Ashford Prime emphasized a low-leverage capital structure over time with the target net debt in preferred equity to EBITDA level of 5.0 times or lower. This will differentiate it from Ashford Trust and should allow us to also capitalize on favorable acquisition and investment opportunities.

Lastly Ashford Prime should have a lower cost of capital which should allow us to pursue opportunities that Ashford Trust is unable to pursue at this time. One of those important aspects of this transaction that should facilitate Ashford Prime’s growth is that Ashford Prime will have agreements in place with Ashford Trust regarding future acquisition opportunities.

Ashford Prime will have options to buy the Pier House Resorts and the Crystal Gateway Marriott and have a right of first offer on 12 hotels in the Ashford Trust portfolio that meet its investment guidelines should Ashford Trust decide to sell any of those hotels. These agreements position Ashford Prime for growth and provide a dedicated growth pipeline.

Ashford Prime will continue to be managed by the current Ashford Trust management team under the advisory agreement that has been structured to ensure close management alignment with stockholders, while Ashford Prime will be externally advised, it will have corporate governance and a management structure that we believe is materially more shareholder friendly than even a typically internally advised Company.

We’re excited to announce this spin-off transaction of Ashford Prime and we look forward to the opportunity this spin-off could provide. We will continue to pursue the same aggressive asset management and disciplined capital allocation program for Ashford Prime that we have employed at Ashford Trust.

Additionally, the Ashford Trust portfolio continues to offer stockholders the same opportunistic approach that we have implemented for the past decade. Further, we believe Ashford Prime and Ashford Trust will both be well positioned to grow through acquisitions and capitalize on the attractive industry fundamentals we expect to experience for the next several years.

Now I’d like to turn the call over to Douglas, to discuss the transaction in more detail.

Douglas A. Kessler

Thank you, Monty. During our decade-long history as a public REIT, we have analyzed and diligently pursued strategies to create stockholder value. Our management team and Board are convinced this spin-off is value enhancing. First, Ashford Prime will be well positioned for growth, not only is the initial portfolio located in markets with favorable growth characteristics, but Ashford Prime will also target a low-leverage capital structure that should enable to better access the equity and debt capital markets.

Ashford Prime will uniquely benefit, compared to its lodging REIT peers, from a built-in pipeline of deals due to the agreements in place with Ashford Trust to potentially fuel its external growth going forward. Regarding the option agreements on the Pier House and the Crystal Gateway Marriott, Ashford Prime will have the right to exercise the Crystal Gateway Marriott option after a six-month lock-out for a period of 12 months, and the Pier House Resort option for a period of 18 months after the date of the spin-off distribution.

The 697-room Crystal Gateway Marriott is located in Crystal City, Virginia. Just outside Washington, D.C. The purchase price for the Crystal Gateway Marriott will be determined based on fair market share of the time of acquisition determined by an independent appraiser.

If Ashford Prime exercises the option to acquire the Crystal Gateway Marriott, the purchase price will be payable in the form of operating partnership units. The Pier House Resort is a 142-room, luxury hotel located in Key West, Florida that was recently acquired by Ashford Trust.

During the first six months of the option period, the purchase price for the Pier House Resort will be Ashford Trust’s actual acquisition price plus closing cost of approximately $90.6 million plus any owner funded capital expenditures prior to the closing of the acquisition. If Ashford Prime exercise the option to acquire the Pier House Resort, the purchase price will be payable in either cash or operating partnership units of Ashford Prime’s operating partnership at Ashford Trust election.

Ashford Trust will also enter a right of first offer or ROFO agreement with Ashford Prime regarding 12 hotels currently owned by Ashford Trust that satisfy the investment criteria of Ashford Prime. The right of the first offer will give Ashford Prime the first right to acquire each of the ROFO hotels to the extent the Board of Directors of Ashford Trust determines, it is appropriate to market and sell the ROFO hotels, subject to certain prior rights granted to the hotel managers and limitations on hotels that are held in a joint venture.

Stock in Ashford Prime will also continue to be managed by this management team, which has a proven track record of delivering superior returns. Prior to the distribution of Ashford Prime common stock to Ashford Trust’s stockholders, Ashford Prime will enter into an advisory agreement with Ashford Advisors.

This agreement will require Ashford Advisors to manage the day-to-day operations of Ashford Prime and conformity with its investment guidelines. This advisory agreement was thoughtfully structured with significant improvements to customary advisory agreements. The advisory agreement will have an initial term of five years and will be automatically renewed subject to certain conditions for one-year terms thereafter.

Ashford Advisors will be entitled to a base management fee of 70 basis points of the total enterprise value of Ashford Prime, subject to a four. Ashford Advisors will also be entitled to an incentive fee based on Ashford Prime’s total annual stockholder return outperformance compared to its defined peers. The advisory agreement has been structured to ensure a close management alignment with stockholders.

Additionally, insider ownership, directly or indirectly, together with related parties of approximately 21% of Ashford Prime will be significantly above the average lodging REIT insider ownership of 2% and establishes a clear and close alignment of management’s interest with stockholders.

Ashford Trust will own 20% of Ashford Prime as a result of the 80% spin-off. A significant amount of the insider ownership and all of the external advisor’s ownership will be partnership units, which will not have any voting power on matters voted by stockholders.

Unlike many privately held management advisors, Ashford Advisors will be a subsidiary of Ashford Trust, a publicly traded, NYSE listed company. Therefore fees will be earned by the public company rather than by individuals as is the case in privately owned advisors. Upon completion of the Ashford Prime spin-off, the initial stockholders in Ashford Prime will own an interest in Ashford Advisors via their ownership of shares in Ashford Trust.

I’d also like to give you some more detail on the attractive corporate governance structure that Ashford Prime will implement. Ashford Prime will have a corporate governance structure that will provide transparency to investors and promote the long-term interests of stockholders.

Some of the significant features of Ashford Prime’s corporate governance structure include, the external advisors owned by a publicly traded company. The Board of Directors will be elected annually, the Board will have five of seven independent members, including an independent lead director, or the independent directors, including the lead director will have no prior affiliation with Ashford Trust.

The corporate governance policy requires that the Board consist of at least two-thirds independent directors at all times and the Chairman is not independent. The charter provision in corporate governance policy address potential conflicts. Ashford Prime is opted out of certain Maryland law antitakeover provisions.

There is no stockholder rights plan unless stockholders approve or ratify the plan. Base management fee is calculated on a market based total enterprise value. The incentive fee is based upon total annual stockholder return outperformance compared to a peer group. There are significant advisor and employee ownership that facilitates a significant alignment of interest with stockholders.

And lastly, voting power is concentrated in the hands of the investing public rather than with the advisor or the insiders. Ashford Prime has filed a registration statement on Form 10 with the Securities and Exchange Commission with respect to the planned spin-off. The special distribution is anticipated to be declared toward the end of the third quarter of 2013, however, it remains subject to the SEC reviewing and declaring effective Ashford Prime’s registration statement as well as a satisfaction of a number of other conditions including receipt of third-party consents. We cannot be certain this distribution will proceed or proceed in a manner as currently anticipated.

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

Question-and-Answer Session

Operator

Thank you, sir. We would now begin the question-and-answer session. (Operator Instructions) Our first question is from the line of Ryan Meliker with MLV & Company. Please go ahead.

Ryan Meliker – MLV & Company

Hi good afternoon guys. Just a couple of quick questions for you on this, I think first, can you kind of walk through why you selected the properties you selected to go into this portfolio? And why Pier House and Crystal Gateway are options, as opposed to just being incorporated right away?

And then second, I was hoping you could provide some color on the leverage of the portfolio. You talked about the strategy being lower leverage, no more than five times net debt plus preferred to EBITDA, but it looks like you’re coming out of the gate well north of that level. So just help us understand and reconcile the strategy versus what the Company is starting with?

Monty J. Bennett

Sure. Thanks, Ryan. As far as the assets going in here, we wanted to put in the highest RevPAR, highest quality assets into this portfolio. The challenge we had is that a number of those assets have got debt that cross encumbers them with other assets. So and we’ve got some assets that are in joint ventures. So those assets we couldn’t put in here and so that’s why we put ROFOs on those assets.

A number of assets we could put in here, because they’re high RevPAR and quality assets, so those are just ones that we put in there. So it was a limitation on what we could do because the debt is what drove what went and in what didn’t, other than the high RevPAR criteria. And that high RevPAR criteria being double the national average, national average being about $65, and so double it being $130.

Regarding Pier House and Marriott Gateway, with Marriott Gateway, we’ve got some tax considerations. We made some indemnities when we purchased that quite some time ago. And if we went ahead and rolled that into this transaction it would trigger some of those indemnities and that would not be good for anybody. Structuring it this way allows us to not incur those tax consequences.

Regarding the Pier House, we think the Pier House is a perfect asset for this as well because of structuring and how many assets are in Ashford Prime as far as the initial assets, and the amount of cash that we had available with where we wanted to allocate the cash, it just didn’t work to put it in there right out of the box.

But while we were developing this strategy, the Pier House came up. So we thought, we just go ahead and buy it and then allow a new platform to buy it in the not-too-distant future, which we think it will do and should do, it’s an appropriate asset for us. And as you can see there is very, very modest premiums for Ashford Prime to buy this asset and that’s where we wants to put it, but we just couldn’t do it initially.

Regarding the leverage, this is a goal that we want to achieve over time. It’s not something that’s going to be ever close to where we want to be right out of the gate. This is something that it’s going to take a several years as EBITDA grows and there is other capital transactions that help bring that leverage level down.

But you’re right, out of the gate, it’s not where we want it to be. But that’s kind of why we did this whole thing. We think that there is people that like the lower-leverage platform. If we went out and took our whole platform right now and took it lower leverage, it would dilute a lot of the future value of this platform. So we didn’t want to do that. That’s why we pulled out just a few assets and will be moving that to lower leverage over time. And we think that’s the right balance.

Ryan Meliker – MLV & Company

Yeah, I mean I guess I understand that and understand why the idea of having two different portfolios that fit different types of investors. I’m just thinking if you have the opportunity to setup a portfolio with a particular strategy today, why you would set a strategy that the portfolio doesn’t seem to mesh with today. It seems like it’s going to take time, and it may not get the valuation that you would want it to get because the leverage is too high today?

And I wonder if there’s going to be fears of an equity overhang to get to that target leverage level. I mean is there plan for you to get there via a potential capital raise after the spin-off here or are you just going to try to get to that leverage level via external growth, maybe more driven by equity issuance and just general internal growth?

Monty J. Bennett

This is a multi-year plan, and we would have liked to have started out exactly at that leverage level that we wanted to be, but unfortunately these assets are unencumbered with certain level of debts already, and the price to pay them off was just not worth it. It was just too expensive with the [appeasement] [ph] and yield maintenance and the like.

So we just didn’t have the option to jump out there to where we ultimately want to be. But the markets and based upon our research, we believe that the market does buy into longer range goals and moving towards that goal and we’re very comfortable with the statement that we’ll get there, it will take several years and it will be opportunistic as we go on.

But we’re not in a rush to do it and we’ll just take it as it goes. So I think that that eliminates any fear of an equity overhang because we’ve always been a group that perceives things opportunistically and never felt like we had to go out and do anything immediately. So this is a long-term project and we’ll take it as we go. In the meantime, it’s a great group of assets.

Ryan Meliker – MLV & Company

All right, great. Thanks a lot, Monty. I appreciate the color. I’ll jump back in queue if I have anything else.

Monty J. Bennett

Okay.

Operator

Thank you. Our next question is from the line of Patrick Scholes with SunTrust Robinson Humphrey. Please go ahead. Mr. Scholes your line is open.

Patrick Scholes – SunTrust Robinson Humphrey

Can you hear me, now?

Monty J. Bennett

Yes.

Patrick Scholes – SunTrust Robinson Humphrey

Great, okay, I have two questions. Where did these Prime assets stand in their renovation cycles? How did this new select portfolio compared to your legacy portfolio? That’s my first question.

Monty J. Bennett

From like a RevPAR standpoint, this portfolio has an average RevPAR at the end of 2012 of $140 while the remaining portfolio has average RevPAR about $95, $96. So a pretty material increase in RevPAR, what's more is that the RevPAR of this portfolio is pretty close to some of the other REIT that have these higher level portfolios, I think the ones that are a little bit higher than this portfolio but are close, are Strategic, Pebblebrook and Chesapeake, and I think everyone else is below. So we’re trying to target this higher-end type portfolio, from a…

Patrick Scholes – SunTrust Robinson Humphrey

I’m sorry, go ahead. The CapEx question was more what I was asking.

Monty J. Bennett

From a CapEx perspective, the Hilton Torrey Pines is under renovation right now. But it will be largely complete by the time the spin-out occurs, in fact maybe just in a few weeks. So it will be in good shape. And we’ll be doing a renovation on the Philadelphia Courtyard next year. That’s the only one with really a major renovation going on going forward. But we’re going to have some more detailed CapEx information here for you pretty soon.

Patrick Scholes – SunTrust Robinson Humphrey

Okay, okay. I guess just as a way to think about it, would you say the degree of renovation over the next 12 to 18 months for the spin-off portfolio would be greater than or less than your legacy portfolio?

Monty J. Bennett

If you go online and check out the information in Form 10 that we filed as part of it, it has got estimated amount of CapEx for the next 12 months and that should give you an exact amount.

Patrick Scholes – SunTrust Robinson Humphrey

Okay, thank you. And then the second question concerns your expected payout of CAD or FAD for the new portfolio. Would it be similar to the legacy Ashford?

Monty J. Bennett

You mean as far as dividend?

Patrick Scholes – SunTrust Robinson Humphrey

Correct, yes.

Monty J. Bennett

We haven’t set a dividend policy for that new platform yet. So we’re in the process formulating that.

Patrick Scholes – SunTrust Robinson Humphrey

Any sense of the direction that that may take, having one or not the…?

Monty J. Bennett

We’ve got our own preferences, but we’re going to have to discuss it with the new Board, which is yet to be formalized, so no real indications at least, again because the Board is not even put together on it. We’ve got our own ideas, but probably better to keep that to ourselves until we have a chance to confer with the new Board members.

Patrick Scholes – SunTrust Robinson Humphrey

Okay, thanks. That’s all. Thank you.

Monty J. Bennett

Okay.

Operator

Our next question is from the line of David Loeb with Robert W. Baird. Please go ahead.

David Loeb – Robert W. Baird & Company, Inc.

Good afternoon gentlemen. Just a follow-up on Ryan’s question, I guess I don’t, I kind of agree, I don’t understand why you wouldn’t structure this in such a way so that you would essentially concur with the beginning of trading. Do a capital raise and get the leverage level where you want it, and frankly similarly why you wouldn’t set a dividend. If you’re looking to have the market value this, I would think that hitting your target capital structure and having a dividend in place might help you achieve that. Any more thoughts on why you didn’t go down that path?

Monty J. Bennett

Sure. And that’s a good question, David. I think a lot of it has to do with the fact that this thing won’t get spun-out until late September, about and so there is a long time between now and then. As far as capital raise, a capital raise it’s certainly possible upon spin-out.

But it could be done sometime after that as well and when it comes to capital raising public capital raising activity, you know our policy is always to be very circumspect about how we talk about that, because people love to make a different assumptions and then on and on.

So I think we’ve got plenty of time on the dividend policy as well, we’ve got plenty of time to properly formulate that, and we just want to go through this through a very proper procedure and along the way we could even listen to what investors might have to say, but that will be formulated here over the next number of weeks. And you will probably even see it in our next filings, when they come back on the SEC. So we’ve got sometime before all that’s need to be communicated.

David Loeb – Robert W. Baird & Company, Inc.

Okay and then I guess similarly, you seem very sensitive to corporate governance in this spin-off. Again, why would you do an external advisor, as opposed to having a dedicated management team for this? I understand that a lot of the bells and whistles and the way you structured this make it look very different from the RMR companies, but do you really want to be in that company?

Monty J. Bennett

We have spent a lot of time talking about that, David, because we’re sensitive to comments about it being externally managed and certain people have opinions about that. But when you look at HPT, for example, it stays in line with how it should considering its RevPAR and the quality of its assets. So there is no trading difference because of that. If we put a new internal management team in place and did that, then we are splitting up our whole management team and going in different directions.

And then there is potential of the two platforms getting into each other’s business and overlapping and it’s just was messy and not very clean. Also, initially from an overhead standpoint, you have to staff two complete overheads, which doing it this way, you don’t have to do. So you can keep the overhead down.

So, for a number reasons it just seems it makes sense that we should go this way. But in order to, to do it this way, we wanted to clearly distinguish ourselves from these other platforms. And that’s why you won’t see an externally managed or frankly an internally managed platform, that is as aligned with shareholders as this one is. I mean the insiders of this transaction owns and the advisor owns 36% of the outstanding shares and units, but have no voting power, very little voting power over the Trust.

All the things that people like in governance are in this transaction. And even the fees associated with, even the base fees are based upon performance and not based upon just building for building its sake. So it’s a good question and we spend a lot of time talking about it but in the end we felt like this strategy makes more money for our existing AHT shareholders and that is why we wanted to pursue it.

David Loeb – Robert W. Baird & Company, Inc.

Could we talk a little bit on comparing multiples with HPT, because just six months ago, it was trading at a very different multiple? And I think the market’s reacted to a low-interest environment in looking at that, so I just - it is one little asterisk on that. But I guess the question then becomes, you talk about them not getting into each other’s backyard, but over time shouldn’t they become two totally independent Companies with different missions and different shareholders and doing their own things?

Monty J. Bennett

I think what the future holds is what the future holds, and it’s up to the Board of each entity. But what our vision is that we want to be able to do transactions that accrete to our shareholders. That’s what we are interested in, right? We are big shareholders, and we want to do it. Over the past couple of years, we’ve been frustrated because our cost of capital is too high. And we have seen deals done at prices that we thought were reasonable but they wouldn’t work in our structure, they wouldn’t accrete to our shareholders because our cost of capital is too high, and it’s too high for a couple of reasons.

So we are frustrated in that knowing that if we were an all cash platform, we could go out there and do these deals and make money but because we would be issuing shares at prices that’s, again, it is too expensive, we couldn’t do them. So we beat our head against the wall, how can we do this? How can we take advantage of these opportunities in the marketplace for ourselves and our shareholders?

Well, one way is to completely lower leveraged our platform right now. We think one reason that our multiple is trading to a discount to our peers, may be because of our debt levels. But unfortunately if you did that, then you totally dilute ourselves and all of our shareholders. So that is robbing Peter to pay Paul, so you don’t want to do that. So in thinking about it, this seems to be the best way to do it.

Take a separate platform, lowest leverage over time, but then have it grow and it do accretive transactions, which it will be able to do. When we’ve run almost every deal that was traded last year through our new platform, and in the new platform all except maybe a half dozen would have been accretive to it. So this is why we wanted to create the separate platform as far where it goes in a future, that will time tell.

But we know over this medium term, we believe over the medium term that we can create shareholder value in accretion and when I say accretion, I mean long-term shareholder accretion, whenever we talk about accretion here. We’re talking about long-term, total shareholder return accretion and long-term being about five years. We believe that will be the maximum out of accretion is by splitting it up this way. So we’ve spend a lot of time and a lot of efforts going to all the different strategies for the reasons I just laid out. That is why we came to this conclusion.

David Loeb – Robert W. Baird & Company, Inc.

And one follow-up from that if you don’t mind, you said that you looked at other transactions and presumably other assets that REITs bought and they would have been accretive. Can you give us a little color on what kind of multiple you assumed for the new Company when you did that analysis?

Monty J. Bennett

I don’t have that right in front of me, but what we did is we summed a multiple more consistent with its higher RevPAR of $140, instead of our existing platform of about $100. And there is a material EBITDA multiple differences between those two and that’s what we were looking at.

And also though beyond that, we believe there maybe a discount to our multiple right now just because of the debt issue. So with the high RevPAR and with the less debt that creates EBITDA multiples, which allows us to raise capital at better multiples lower cost of capital, which then is accretive to that new platform, which is not accretive to our existing platform.

David Loeb – Robert W. Baird & Company, Inc.

I see. Okay, thank you.

Monty J. Bennett

Sure.

Operator

Our next question is from the line of Robin Farley with UBS. Please go ahead.

Robin Farley – UBS

Thanks, yeah. I guess I’m trying to get my arms around kind of what do you think are your cash costs of having your separate management and corporate governance? Just sort of the cash cost I guess the dyssynergies of the two companies? Is there a way you can help us think about the total costs?

And then also when you were thinking about anticipating kind of higher aggregate value for the two companies, did you factor in or what was your thought process around having the smaller market cap of two companies that to the degree that that could affect valuations as well?

Monty J. Bennett

Sure, regarding the market cap question, we’ve look at debt issue extensively of that number of years. And there is only a very, very, very minor if that all discounts for being smaller rather than being larger, it is very tiny. However, we know that our shareholders like the bigger market cap for the obvious reasons.

The problem is that right now our market cap can only get bigger the thought price goes up. It’s not going to get bigger for issuing shares by and large, because it’s too expensive to raise capital. However, once we had a separate platform while initially it will be smaller for obvious reasons. It will be in a position to raise capital and to grow.

So you have to get a little bit smaller in order to get bigger and that’s how we thought about that. So number one, we don’t think there will be a discount, because the stats say that there’s not a discount at least the way we see them and will be happy to spend some time to show that you where we get that data. And number two, over time, this is going to provide a bigger market cap, which is what a lot of our investors want.

Regarding incremental expenses, we think that the incremental expenses when you put everything together it’s something like in the single digit millions of dollars, maybe $3 million, $4 million as far as the incremental cost, total incremental cost to run these two platforms.

Robin Farley – UBS

Okay, great. Thank you.

Operator

Our next question is from the line of Will Marks with JMP Securities. Please go ahead.

William Marks – JMP Securities

Thank you. Good afternoon. You may have mentioned this, but the cost of actually putting this whole thing together, what is that figure? And how is that allocated between the two Companies?

Monty J. Bennett

Sure the initial transaction cost of this, our internal budgets is laid out in the information statement in Form 10 and it’s approximately about $8 million we think, although on getting that number is moving around based upon maybe closer to 12. It really depends upon how much these lender, consenter costs us. So I think what we are saying is $12 million but we think it hopefully is going to be lower. That cost is going to be borne by Ashford Hospitality Prime. Does that answer your question?

William Marks – JMP Securities

Yes, it does; so the entire amount?

Monty J. Bennett

Yes.

William Marks – JMP Securities

Okay. And then the second question, just a little bit of follow-up on David, and some earlier questions. I know you didn’t want to mention a valuation of the new company, or let’s say a multiple. But do you anticipate being able to make accretive acquisitions fairly quickly based on the current market conditions and current market pricing for those high-quality assets that you will be seeking?

Monty J. Bennett

You know you’re kind of asked me to predict the stock market, which is always tough, we hope so. But it’s always difficult to say how something will trade. We know we believe over time based upon history how this platform will trade whether that happens right away or not, so it’s just hard to say. We hope so, we think that’s, how it should trade but around a trend line, sometimes the platform will be above it for a while or below it and vice versa.

William Marks – JMP Securities

Okay. I leave it at that. Thank you.

Operator

Our next question is from the line of Jason Miller with Ionic Capital. Please go ahead.

Jason Miller – Ionic Capital

Hi I’m relatively new to the company and I’m a little confused. How do you think about your existing leverage?

Monty J. Bennett

Our existing…

Jason Miller – Ionic Capital

Yeah sorry.

Monty J. Bennett

Sure. Our existing leverage, on our existing platform, we’re happy with it.

Jason Miller – Ionic Capital

And what do you think that number is?

Monty J. Bennett

It’s about bringing 55% or so is what the leverage amount is that’s higher than most public companies but lower than most private companies. And we’re happy with it. However, we know that quite a number of public investors are not happy with it. And I’ve encouraged us to lower that number over time.

But again, we find ourselves caught in this trap, if that we rush out to lower it, then we’re giving up what we think could be some upside going forward as the industry continues to recover. This is a way to split the baby and to create a platform that is lower-leveraged for those that like that lower-leverage but want the benefit of this management team, the benefit of these great assets we have got.

Jason Miller – Ionic Capital

Isn’t the new entity going to be leveraged by 8.6 times?

Monty J. Bennett

Right out of the gate, it will be high. It will have to come down over time.

Jason Miller – Ionic Capital

Right. So how does that help you lower your cost of capital to make acquisitions? That’s sort of the disconnect that I have. I understand the five targets, but I don’t really understand how separating the companies with a very high-leveraged newco really helps you get to your goal. What am I missing?

Monty J. Bennett

It won’t initially. I mean it takes time. This is a process. It is going to take several years in order to bring that leverage down.

Jason Miller – Ionic Capital

Okay. And I also heard you say that you would consider, though, an equity raise around the time of the spin-off, is that correct?

Monty J. Bennett

We consider equity raises all the time, or not all the time, it just depends upon whether we think it’s a good time to do it and we need the cash. But over time, again over time we want to bring the leverage level of this platform down but what we’re very sensitive about is communicating with the market when we might go do something like that because of the obvious nature that happens with what investors will do and they will bid down your stock. And so, we’ve always been opportunistic and that we will just wait and sit back and when the time is right, we’ll do it.

So at the very worst, we split this company up and we’ve got two platforms, whose combined leverage obviously is the same as the leverage today. No harm done, but over time we’ll bring the leverage down at one platform, it just will take some time.

Jason Miller – Ionic Capital

And so let’s talk about the remaining platform. What is the strategy for that business going forward? And why should I be excited about that strategy if you’re spinning off your higher growth and higher RevPAR assets?

Monty J. Bennett

Did you see our investor presentation that we did in New York a few weeks ago?

Jason Miller – Ionic Capital

I did not.

Monty J. Bennett

I’d encourage you to jump online and look at it. It’s a much more total of an answer than I can give you right now. But we’re bullish on the hospitality industry generally, and then when you look at the leveraged nature of our platform, we think that means good things for not only the industry, but for ourselves as well. And after the spin-off, we go from 125 hotels to 115 and from RevPAR of $100 to $96. So our existing platform looks hardly different at all from what we talked about on our Investor Day. So I think that will be a good answer for you. If not just give us a call and we’ll be happy to answer your questions personally as well.

Jason Miller – Ionic Capital

Thank you very much.

Monty J. Bennett

You bet.

Operator

Our next question is from the line of Jordan Sadler with KeyBanc Capital Markets, please go ahead.

Jordan Sadler – KeyBanc Capital Markets

Thank you and good afternoon. First question, is there a mechanism to ultimately internalize the external manager in the agreement?

Monty J. Bennett

(Inaudible)

Jordan Sadler – KeyBanc Capital Markets

So in the event that the independent Board members and newco shareholders ultimately would like AHP, Ashford Prime, to be internalized, say they would want the management company internalized at some point, is there a mechanism for that to happen and if so, what is that mechanism?

Monty J. Bennett

I don’t know if I can answer your question exactly off-hand, but it’s in our information statement offline – online I should say. But the idea here is that even as an external manager, investors can invest in the external manager. So this is not a deal where the internal managers some mysterious private company somewhere, the shareholders gets the benefit, because there is one of that what that external manager is getting through their ownership in AHT.

And so it will be transparency and people can see what that benefit is if it exists. As far as severing that relationship in the future, I’m sitting here trying to talk to some people around the room to get the specifics and I’m not to be able to communicate it well. So want to go to our information statement or call us separately and we will be happy to give you those details.

Jordan Sadler – KeyBanc Capital Markets

Yeah, I can certainly do that. As a comment, I see the justification for the spin-off, and why that may make sense to a certain subset of investors, who may desire that type of company. But it seems to be that the potential in that structure maybe from a multiple standpoint, maybe mitigated by the external management structure, which it sounds like you guys have done a lot of thinking about on some level.

So that’s why I was asking the question. The other question is really just a function of, I did get an opportunity to go to your Investor Day and listen to sort of the merit of running a Company with a little higher leverage over time, which would seem to make some sense and you guys have a lot of justification for it.

I’m curious, how do you guys get your heads around the merit for an Ashford Prime in the public markets and how will you participate from a Board level and from a leadership level running a Company that maybe doesn’t have the same strategic goals or views that you should have laid out at the Investor Day couple of weeks ago?

Monty J. Bennett

Sure. As far as the external manager, remember the whole purpose of this transaction is still that over time those shareholders who own stock in AHT right now will be better off economically. That’s the whole point, so everything else we’re talking about strategy and this and the other, that’s all nice and that’s great. But the point is to provide this longer-term accretion and that’s why we did this, all right. That’s the whole point behind it. As far as multiples regarding externally managed platforms and discounts related to it, statistically that’s just not there. And it doesn’t exist and we looked at it extensively and we’ll be happy to go over that data with you. So please call us and we’ll go over in detail.

So while the benefit that it could be mitigated over time based upon the data we’ve looked at and we’ve looked at essentially it shouldn’t be because that just doesn’t have. As far as strategy what we really like about is, is that we got both. We still believe everything we shared in our Investor Day and our platform is still there. Ashford Trust is still there and we’re still going to pursue everything with Ashford Trust, because what we wanted to do is to take advantage of transactions in the marketplace today, because we see good deals.

But the problem we’ve had is our cost of capital was two high and we didn’t want to give up what we see as some benefits going forward in existing platform. So we struggled with this. How do we do both and what we discovered is, this is what we think is the best way to do it, where we’ve got both?

We’ve got one platform, that’s Ashford Trust. That continues same strategy, same program as it’s going today, more opportunistic, higher leverage. Separately, we have this other platform, which is over time lower leveraged in higher RevPAR type assets. And so we can attract investors to each platform as they desire them and then we can run them in our shareholders of shareholders today it’s the benefit of both of those platforms increasing value over time.

From a management standpoint, it’s much easier and simpler to run a lower leveraged high RevPAR on platform that’s our experience and in order to run a higher leverage opportunistic platform to be able to generally much, much complicated this more financing and financial engineering involved. So this will be a welcome relief to some folks around here, because they are just much easier to operate into oversee. Usually bigger assets, so you can spend your time on fewer bigger assets than more assets spread around. So we think that all is going to mesh in very nicely.

And again we’re doing it all right now. It’s just that the difference going forward is that instead of investors just being able to invest in the existing platform or not, they can invest in Platform A or Platform B and this kind of take in two different kind of risks, but both overseeing by this management team, which we think we build up a lot of goodwill with investment community over the past ten years, for a number of reasons not the least of which is our out-sized shareholder returns.

Jordan Sadler – KeyBanc Capital Markets

Last question, how many incremental people would you envision having to add just to run Ashford Prime administratively or what have you?

Monty J. Bennett

We think its five maybe, six, seven, not material. Most of those costs that I mentioned earlier are in a separate D&O insurance coverage, separate Board of Directors fees. That’s what – runs up the costs not so much on fund personnel, not maybe, but a separate audit, well that’s going to almost double your audit costs, even though it’s the same number of hotels we have announced the way first. So with those professional fees that drives that dollar difference, it’s not bodies. Again, we’re running always hotels now and accounting for.

Jordan Sadler – KeyBanc Capital Markets

I have one last, if I may. In the event, it sounds like Ashford Prime will participate in these higher RevPAR opportunities; Ashford Trust participates in all opportunities. In the event that there’s an opportunity that’s north of the $130 RevPAR, I mean could there ever be a situation where a hotel or two hotels, or a small portfolio ends up in the Ashford Trust? It’s just a better fit for Ashford Trust as opposed to Ashford Prime?

Monty J. Bennett

That’s a great question we thought through all those conflicts and obviously the advisor’s duty will be to allocate assets appropriately in the each respective vehicle base, one is investment guideline. But we just have an interesting example whereby perhaps there was a portfolio opportunity it has a mixed bag of assets.

We think having these two vehicles out there actually gives us a competitive advantage with Ashford Prime and Ashford Trust because we have the opportunity perhaps to spilt up the portfolio, appropriately priced assets based upon investment criteria and capital availability to chase after those and provide us with a competitive advantage that maybe gives us a leg upon on REIT peers and possibly a leg up relative to our private equity funds that we compete against on deals. So it’s a great competitive advantage having these two platforms out there together.

Let’s take the example where perhaps there is an overlay of assets and either because of the nature of the assets because of you have mixed bag of high RevPAR and medium RevPAR assets, but the debt structure is such that you can’t step right the assets.

But then what we’ll do is we will access a variety of other metrics whether it’s the debt, the timing, the capital availability, the respective platform that has the best opportunity for that debt and if you can’t separate and what will happen is there will be a rights of first offers to over time reallocate assets with respective vehicle based upon those RevPAR guidelines. So it’s something that’s been well bought through and it’s part of our external advisory agreement. And we think it is productive and it’s structure for both vehicles and opportunistic as well.

Jordan Sadler – KeyBanc Capital Markets

Okay, thank you.

Operator

Our next question is a follow-up question from the line of Ryan Meliker with MLV & Company. Please go ahead.

Ryan Meliker – MLV & Company

Hey, just one follow-up. I’m not sure, maybe it’s in the Form 10, but I haven’t had a chance to go through it all yet. But can you break down what the incentive fee structure will be for the external management agreement?

Monty J. Bennett

Sure, so there is a base fee, which we’ve highlighted and the incentive fee is one that’s formula and what we like about it and we think that shareholders will like about is that it’s purely based on upon our performance relative to a defined peer group, and that is a total shareholder return calculation that will be conducted annually. And the way it works is that you take the relative outperformance of Ashford Prime relative to that defined peer group and then you multiple that times 10%, and then you multiple that times to the equity value of the Ashford Prime vehicle and that will determine the incentive management fee.

So it’s very much aligned with shareholders. If the managers outperforming, then the manager is able to receive an incentive fee, and we think that it’s a revolutionary construct relative to most of the existing management alignments, where really advisors were just paid for the sake of growth. And even if you look at our base fee, you’ll know that it’s not based upon gross asset values as most advisors fees are based on, it’s based upon total enterprise value.

So the total enterprise value of our Company, even with growth could actually decline. Obviously, we’re not anticipating that to happen. We’re not buying assets for that to happen. But that can happen in markets and so we’ve adjusted it and way that really are far more shareholder friendly and far more alignment with the shareholder base.

Ryan Meliker – MLV & Company

So given that based on both your base management fee and your incentive management fee are partly based on stock price, if the stock price declines, is there any type of call back from AHP, getting some of their fees paid to you historically back or how is that going to work in an environment where your incentive fee might be negative or maybe something along those lines, I guess?

Monty J. Bennett

Sure, we went through that extensively and BMO helped us through all of this, because they helped us to construct something that they believe it would be very attractive to investors, and we went around-and-around this a lot. One concern we had on the total enterprise value fee, the base fee is that what if something happens like the financial crisis where this is going to be lower leverage.

So a lot of your enterprise values to be based upon your equity value, and those equity values crashed. Well, those won’t really relate it to performance, it was liquidity crisis in the marketplace and that back-up in fees could be huge and will be huge. And so we’ve had to work through some of those mechanics.

On the incentive fee side, we thought that the incentive fee actually should be higher than 10%. However, when we started to work into these clawbacks and actually how they would work and the mechanics of it, it just got too complicated.

So the compromise was to not have a clawback but have it be lower at 10% instead of something closer to 20%. So it’s not perfect, so while there is not a clawback, our next year’s base fee will be substantially reduced right because (inaudible) will be down, if we underperformed.

So again not perfect, but it’s far more perfect than the compensation given to the leaders of internally managed REITs right, right now what clawbacks do they get if their stock price or happens to them, if stock price goes down none. And what about their alignment that they’ve got with shareholders a very little, they still get their base salaries, their cash doesn’t change much and even their share grants doesn’t changed much.

I encourage you to go back and look at my comp specifically back during the financial crisis. My comp dropped 50% during the financial crisis, my total comp and I think that was appropriate. The average of my peers increased by 3% during that financial crisis, so this has been a team that has been always much more sensitive to what’s happening to the shareholders than all these other internally managed platforms.

So again, not perfect, Ryan, but it’s much better than the existing structure. Because the existing structure of internally managed platforms there is very, very little alignment and I think that’s why you see a difference in performance for our firm versus some of our peers. Our alignment is much, much better than internally managed platforms.

Ryan Meliker – MLV & Company

Fair enough. That make sense. And then just one quick follow-up is have you identified what the peer group of AHP is going to be? Or at least how you’re going to define who falls into the peer group? I’m sure it will change from time to time, but just help us understand that?

Monty J. Bennett

Yes, we’ve got in our information statement. Let me see if I can tell it to you from memory. Its Pebblebrook, its Strategic, its Chesapeake, its DiamondRock, its LaSalle and Sunstone. We didn’t include Host because Host is the so large that comparing them for a number of purposes really lacked out all the ratios, percentages. So we got this other group and their high RevPAR internally managed and we think that’s a fair comparison.

Ryan Meliker – MLV & Company

Okay. That sounds good. Thanks a lot.

Monty J. Bennett

You bet.

Operator

At this time, I show there are no further questions in the queue. I would like to turn the conference back to management for any closing remarks.

Monty J. Bennett

Thank you all for dialing in and participating in today’s call. And we look forward to speaking with you again on our next call.

Operator

Ladies and gentlemen if you would like to listen to a replay of today’s conference call, please dial 1-800-406-7325 or 303-590-3030 and enter the access code 4625803 followed by the pound sign. Those numbers again are 1-800-406-7325 or 303-590-3030 and enter the access code 4625803 followed by the pound sign. This concludes the Ashford Hospitality Trust conference call. Thank you for your participation. You may now disconnect.

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Source: Ashford Hospitality Trust's CEO Hosts Plan to Spin-off High RevPAR Hotel Portfolio as "Ashford Hospitality Prime, Inc." Conference (Transcript)
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