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Executives

Tripp Sullivan - Corporate Communications

Monty Bennett - CEO

David Kimichik - CFO

Doug Kessler - President

Analysts

David Loeb - R.W. Baird

Bryan Maher - Collins Stewart

Smedes Rose - KBW

Will Marks - JMP Securities

Nikhil Bhalla - FBR Capital Markets

Presentation

Ashford Hospitality Trust Inc (AHT) Q3 2009 Earnings Call November 5, 2009 12:30 PM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Ashford Hospitality Trust third quarter 2009 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded Thursday, November 5, 2009.

I would now like to turn the conference over to Mr. Tripp Sullivan of Corporate Communications. Please go ahead, sir.

Tripp Sullivan

Thank you, Savannah. Welcome to this Ashford Hospitality Trust conference call to review the company's results for the third quarter of 2009. On the call today will be Monty Bennett, Chief Executive Officer; Doug Kessler, President; and David Kimichik, Chief Financial Officer.

The results as well as notice of the accessibility of this conference call on a listen-only basis over the internet were released yesterday afternoon in a press release that has been covered by the financial media.

As we start, let me remind you that certain statements and assumptions in this conference call contain or are based upon forward-looking information and being made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to numerous assumptions, uncertainties and known or unknown risks which could cause actual results to differ materially from those anticipated. These risk factors are more fully discussed in the section entitled "Risk Factors" in Ashford's registration statement on Form S-3 and other 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 accompanying tables or schedules which has been filed on Form 8-K with the SEC on November 4, 2009 and may also be accessed through the company's website at www.ahtreit.com. Each listener is encouraged to review those reconciliations provided in the earnings release together with all other information provided in the release.

I'll now turn the call over to Monty Bennett. Please go ahead.

Monty Bennett

Good morning and thanks for joining us. The overall lodging market continues to exhibit downward trends in what we anticipate could be nearing the bottom of the cycle. Some positive signs of economic recovery are appearing but given the lagged response for hotels, the demand recovery is still a few quarters out. Visibility remains limited but the forecast for 2010 are indicating some small positive upticks. Once that occurs, it is likely to be a few quarters before we or the industry see traction in RevPAR increases.

In order to manage through this cycle and come out on the other end in even better shape, our philosophy is to remain proactive in several areas. First, we strive to allocate capital to generate the best returns for our shareholders. Our capital markets efforts reduce interest expense as a hedge against deteriorating hotel EBITDA. We seek to maximize operating performance with an emphasis on GOP margin and cost reductions. We seek to refinance or restructure upcoming debt maturities. And lastly, we selectively repurchase our common stock. On each topic, we will bring you up to speed this morning.

First, let's turn to some of the operating metrics. For the third quarter, proforma RevPAR for the hotels not under renovation was down 19.4% compared with prior year. ADR was down 12% and occupancy was down 626 basis points. Our RevPAR yield index for the quarter was 120.0% compared with 119.5% a year ago, reflecting a gain in market share of 50 basis points.

Our hotel EBITDA margin dropped year-over-year by 437 bps for hotels not under renovation and 474 bps for all hotels. Despite the continued decline in RevPAR, our NOI flow-through is still above 50%. Our affiliated manager, Remington, continues to outperform the other managers. Our asset management team continues to work with the other property managers to find ways to save costs and deliver better overall performance.

FFO and CADs per diluted share for the quarter were $0.18 and $0.09, respectively. This is lower than the second quarter due to our seasonality in the third quarter that is usually our weakest quarter of the year. We continue to benefit from our capital market strategies. In our opinion, the interest rate strategies which are based upon well researched correlations among key economic and lodging variables are working exactly as we intended and provide the monetary cushion to the downturn.

Turning to the capital expenditures, through the first nine months, we've completed $51.7 million of capital expenditures of which $31.1 million was owner-funded. We are projecting we will spend another $11.0 million of owner funds in the fourth quarter. We believe it is prudent to only spend where necessary or where we will expect to see an impact on market share. We witnessed some incremental weakness in our loan portfolio and took additional reserves. As a result, our book value declined from $105.9 million at the end of the second quarter to $86.5 million at the end of the third quarter.

During the quarter, we reserved the remaining half of our $18.2 million first mortgage participation in the Four Seasons Nevis mainly due to the delayed reconstruction and increased uninsured cost from a hurricane damage one year ago. We took an additional reserve on a mezzanine loan during the quarter as we signed a definitive agreement with the borrower on a $33.6 million loan secured by the Ritz-Carlton Key Biscayne to accept a discounted payoff.

Subject to the senior lenders approval, we will receive $20 million in cash and a $4 million secured note with a maturity date to correspond with the original loan. The loan has current debt service coverage of less than 1.0 and given that we would not have received payment in full until 2017, coupled with the uncertainty in the luxury market, we believe accepting this transaction is a more prudent approach. We will continue to monitor our loan portfolio and take aggressive action where appropriate and feasible to protect our positions. We remain engaged even on those loans that have been reserved to cover recover some return where possible.

Turning to the capital markets, we note that equity issuance has been active among hotel REITs. As we've discussed before, we prefer not to raise equity until we see an obvious need or opportunity and we'll take steps to do so well in advance. Currently, and over the shorter term, we continue to selectively repurchase our shares and believe that this strategy is in the best interest of creating shareholder value. With insiders owning 15.6% of the company as of the end of the third quarter, we believe we are thinking like shareholders and we are acting in all the shareholders' best interest.

Our capital strategies will continue to be heavily influenced by our liquidity, maturity schedule, operating performance and comparative opportunities. I would now like to turn the call over to David Kimichik to review our financial results.

David Kimichik

Thanks, Monty. Good morning. For the third quarter, we reported a net loss to common shareholders of $33,627,000; adjusted EBITDA of $43 million [Technical Difficulty] cash needs. During the third quarter, we purchased two flooridors at a combined cost of $22.3 million to work in concert with our interest rate swap. The first flooridor, with a notional amount of $1.8 billion commences on December 14, 2009 and has a LIBOR range from 1.75% to 1.25% and lasts for one year. The second flooridor, with a notional amount of $1.8 billion commences on December 13, 2010 and has a LIBOR range from 2.75% to 0.50% and lasts for one year.

Subsequent to the end of the quarter, we purchased another flooridor for a notional amount of $2.7 billion with a term commencing October 1 and ending December 31, 2009. The flooridor has a LIBOR range from 2% to 1% and costs us $6.9 million in upfront fees. The flooridors seek to provide a financial hedge against deteriorating hotel EBITDA. The combination of the swap and existing flooridors in place, have generated life-to-date cash flow of $43.6 million and year-to-date of $33.2 million. This cash flow has more than paid for the initial cost of those matched period hedges of $8.8 million.

If LIBOR remains below 0.75% through the end of the year, we would have received $52.1 million in proceeds for the entire year of 2009. These swaps and flooridor transactions have had a meaningful impact of our cash flow. Should LIBOR rates remain low, we would expect to see additional benefit from the transactions next year. Another area where we have been very proactive is an eliminating near-term maturities. We've only $75 million of hard maturities in 2010 excluding the Hyatt Dearborn. We are in the progress of documenting a new loan for not only the $75 million that matures next year, but also $65 million that matures in 2011. The goal is to refinance the current debt and unencumber two of the seven hotels in the two existing loan groups.

In 2011, we have $294.3 million of hard maturities due. In addition to the aforementioned $65 million refinance, we are also in negotiations with the lender to refinance the $19.7 million loan secured by the Hilton El Conquistador and are in various stages of discussion with existing and potential new lenders for the balance of our 2011 and 2012 maturities. We noted last quarter that we were not paying interest on the loan secured with the Hyatt Regency Dearborn. That is still the case and we are working with the lender towards a resolution. Thus far, the lender has refused to accept the deed in lieu transaction and has filed for judicial foreclosure.

The Westin O'Hare Loan which matures in 2016 is still current and we are trying to work out a restructure with the servicer that is beneficial to all parties. We've exchanged proposals and hope to share an announcement on a loan modification soon.

Turning to our share repurchase initiative, during the quarter we acquired 6.3 million common shares at an average price of $3.07, reducing our fully diluted share count to 85.7 million shares. This represents a reduction of 41.2% from our peak of 145.9 million shares. We believe the potential shareholder accretion from this strategy maybe significant. The share count is comprised of 63.9 million common shares, 14.4 million OP units and 7.4 million shares of Series D preferred. The environment remains challenging but we are diligently working to strategically bring about the results that we'll have at the greatest value impact to our shareholders.

That concludes our prepared remarks and we'll now open it up to any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of David Loeb from R.W. Baird. Please proceed.

David Loeb - R.W. Baird

Doug, this one's for you. If I understand the nature of the economics of the flooridor transactions, you have essentially used capital that in essence prepays a portion of your interest and then pays you more if the LIBOR stays low. So I think that's really clever. It's basically you've used your balance sheet to make sure that you stay in compliance of your coverage covenants. What I'd like to try to understand is what the total amount you have spent on those, the total amount of capital invested on those which will help us figure out how to value that.

Monty Bennett

Sure. This is Monty, David. I've got Kimo pulling the total amount. Let's see if we've got that right here. Because as you know, we've got a swap and we bought caps and then we bought the flooridors; if we've got that broken out here. So we'll see if we can get it. The primary use of those flooridors while it does have effect in different ways on our covenants for either a credit line on the security capital is to hedge our cash flows. And as was read in the script here, the impact to our cash flow and the offset of our interest expense has been substantial so far this year. So we are still looking at those numbers, see if we can find them for you.

David Loeb - R.W. Baird

I'm not arguing that, Monty. Clearly it's done that. It's been a great hedge of your cash flows. But it's also effectively been able to keep you in compliance by spending money upfront in order to lower the interest expense. Suspending capital rather than expense. Am I reading that correctly in terms of the dynamics of the transaction?

Monty Bennett

Kind of. It's different for each of the two tests and it's measured differently. The calculation of how it affects it is different from the two tests. But maybe that's a conversation better to have offline.

David Loeb - R.W. Baird

It does generate EBITDA that counts for the covenant tests.

Monty Bennett

It does for one of the tests. Here, I think we've got this number.

David Kimichik

All totaled, the flooridors totaled $40 million and that is for a series of flooridors through 2011.

David Loeb - R.W. Baird

Okay, so that $40 million, you've burned off some of that value but the bulk of that value continues through 2011?

Monty Bennett

Yes, a bunch of it. Can we give this number here?

David Kimichik

Yes.

Monty Bennett

Does that open up in our fair value statements? What we have done is that on some of those flooridors, they've already started to pay off and then their values change over time because they are financial instruments and effectively are mark-to-market. And the value of those $40.6 million worth of flooridors today if you count the income we've already received from it plus the value of the flooridor in the marketplace recently valued is about $56 million. So it's increased.

David Loeb - R.W. Baird

That's very helpful.

Monty Bennett

The majority of the benefit that we received thus far though has come from the interest rate swap which is not in those numbers. The economic benefit.

David Loeb - R.W. Baird

Right, once you did the swap, then you're at floating rate and you certainly had benefit from the swap in and on itself which is separate from that.

Monty Bennett

Right.

David Loeb - R.W. Baird

Just one brief follow-up on Dearborn. It seems like its pretty ordinary of course that they would either negotiate with you or foreclose. And it sounds like they are choosing foreclosure. Is that unusual or unexpected or was that kind of what you thought would happen?

Monty Bennett

Totally unusual. There's some legal reasons why sometimes you might want to foreclose instead of take a deed in lieu. But I would imagine part of it is this is a very, very difficult property and that the servicers have got to figure out what they're going to do with it. So I imagine that's going into their decision-making as well.

David Loeb - R.W. Baird

Right, but they are actually beginning that process of foreclosing?

Monty Bennett

Yes, the foreclosure process has begun and in that state, it's what's called a judicial foreclosure which takes longer in some states which have so-called non-judicial foreclosure which is more quick.

David Loeb - R.W. Baird

Thank you very much. If I have more, I will queue back in.

Operator

(Operator Instructions) Bryan Maher from Collins Stewart. Please proceed with your question.

Bryan Maher - Collins Stewart

A quick question just it is kind of an upside. You guys own a lot of stock in the company and you pretty much always have, and given where we are in the cycle and given where you are stocks trading, given projected RevPAR trends or hand in '011, how do you think about valuing Ashford relative to all of its moving parts as you make the determination to increase your ownership and to buyback stock?

Monty Bennett

How I look at it, is mainly on a discounted cash flow basis. You can't really look at it the way a lot of people look at it, is what do we think the market value of the properties are and then compare the debt to it because the debt itself is not market. We have debt much better than what you get in the marketplace today. So we take those projections that I'm sure you see from HVS and PKF, make our modifications to them such as they are. And look at our maturities and what we think we might could refinance and what we can't and on and on; and then do a discounted cash flow analysis and then determine for ourselves what we think the returns would be if we reinvested into the stock.

Bryan Maher - Collins Stewart

And how are you thinking about the cycle as it relates to RevPAR in '10 and to a lesser extent '11 as you do your analysis? I'm not asking you for guidance or a forecast, just kind of how are you thinking about the industry here.

Monty Bennett

You know, it's hard. We look at the longer-term projections of that HVS and PKF have. And generally, we think that those projections seem to have some merit to them. Over the short-term, it definitely is hard to call. Just for our own planning purposes for example, if you look at next year, the ranges are anywhere between plus 5% for Steve Kent out at Goldman Sachs to I think negative 3% by maybe PKF, I'm not sure, negative 4%. And so just to make sure that we're conservative, this is not our expectations for next year. But we will plan for something on a more conservative end just to make sure when we do those cash flow analyses, we're covered. But it is difficult and it has been difficult to forecast.

As you know, this industry lags the general economy with the strong growth in the third quarter. We're very helpful that in the first quarter, things will start to pick up. Something that's of record, I don't know if you've seen it Bryan; but my comp, both my salary and my bonus goes into a deferred comp plan which buys Ashford shares and has been buying all year. So I don't think that shows up in the traditional metrics of insider buying because it's technically the company buying and held on my behalf because it's a deferred comp plan. But I am buying.

Bryan Maher - Collins Stewart

That's great and I really wish more of the CEOs were out there doing that as well. And just lastly, a topic that's coming up more and more is the whole rate versus occupancy situation, whereby occupancy is picking up in a number of markets and rate is lagging severely. What kind of discussions are you guys having with your operators and in particular as it relates to the affiliate, Remington, with respect to moving rate closer to where it needs to be to match up with the occupancy? And I will end there.

Monty Bennett

I will tell you rate is tough because we instruct our folks, both the affiliate, Remington, and the other managers, to hold rate. However, whenever anybody in the marketplace starts to cut, we feel we have to match; otherwise we will start losing share and do even worse than if we don't. So we believe it's only in very, very rare circumstances that you can actually travel by cutting rate. So really most of our focus is now not so much increasing rate, but staving off the cuts and that's what we do and we try to hold as much as we can. Even in some cases when a competitor will cut, we will try to hold for as long as we can until we feel like we're losing share.

Really most of the focus is on the occupancy side. As I'm sure you've noticed, an interesting positive trend is that of the past number of weeks upper upscale, upscale and I believe even luxury's occupancy has performed better than the overall general industry which may be some trading off that's going on. And that's where most of our hotels follow, indeed most of the hotels of all the publicly traded REITs.

And so that's an encouraging trend. But it's when the occupancy starts to stabilize that the strength or the wherewithal or the fortitude to start raising rates comes from. Now it's just such a tough psychological battle in even our own people to raise rates whenever possible.

Operator

Our next question comes from the line of Smedes Rose from KBW. Please proceed.

Smedes Rose - KBW

Just a housekeeping question here. The corporate expense line for you guys is quite a bit higher then what at least we were looking for. Just wondering, was there something in there in the quarter? Is that a good run rate going forward?

Monty Bennett

That's a good catch. Kimo, why don't you respond?

David Kimichik

The G&A was $2.6 million over our run rate for the year if you compare it to the first two quarters. And there was several one-time events in the number. There was $1 million of legal activities surrounding primarily the ESH loan. There was $900,000 for bonus accrual catchup based on some bonus increases that were filed September 3. And then there was a one-time payment of $600,000 for a tax indemnity for assets that we sold last year. So all that combined is a pretty significant increase. I think it's primarily one-time.

Operator

And our next question comes from Will Marks from JMP Securities. Please proceed.

Will Marks - JMP Securities

I had a question and I may have missed this as I was also cut off I guess on the call. But anything new on covenants and just the prospects for any violation there?

David Kimichik

Nothing really new on the covenants. We have got some covenants on our credit facility and some on our security capital B. And I think that information was included in the release about where our ratios are. But, no, I think the threshold is something like a 1.25 credit facility and we are at 1.60 I think for the end of the third quarter and seem to be in pretty good shape there.

And then we are doing even a little bit better on the security cap covenants. Those are the main covenants. There's a few other covenants such as tangible network and the amount of non-recourse debt that we can default on. Then there's one more but FCCR, fixed charge coverage ratio is the one we watch the most and feel pretty good about it.

Will Marks - JMP Securities

Do you think that here with potentially further deterioration of rates or just tough, tough comps in the first half of next year you would not be violating covenants?

Monty Bennett

It's really hard to predict. But clearly as the numbers get worse, that ratio gets worse. But you know, it would kind of be giving guidance if I commented to much on that. But let's just say we watch it closely.

Operator

(Operator Instructions). And our next question comes from Nikhil Bhalla from FBR Capital Markets. Please proceed.

Nikhil Bhalla - FBR Capital Markets

I had a quick question on the note receivables portfolio. Would you just remind us again where in the seniority order these notes actually fall? Are these kind of [mess] pieces? Are they B-notes or are these senior notes? Just to get a sense of what the level of seniority is for most of the receivables loan portfolio. Thank you.

Monty Bennett

Sure, they are fairly junior. Many times the first loss, although not exclusively, I'd say that most of them are the first loss piece and most of their mezzanine positions, although I think in one or two situations are B-notes. But we can take that through in more detail if you would like to call us later. But they're pretty junior positions which explains why we have had to take so many write-downs on them.

Nikhil Bhalla - FBR Capital Markets

I thought so as well. I couldn't remember where and what you had said before. But I think that is consistent with what we are thinking. Thank you.

Operator

And we have a follow-up question by the line of Smedes Rose from KBW. Please proceed.

Smedes Rose - KBW

Sort of a nitpicky question, but we were looking through your various mortgages and one of them looks like it may be starting to amortize in the quarter, mortgage-backed by two assets, $128.2 million. Was there a trigger that happened that's causing that to amortize? I thought these were all kind of interest only.

Monty Bennett

We are looking that up. There was no trigger that occurred on any of them, but some of them do start to amortize over a certain period of time like anniversaries in light. But there's no trigger that caused that to do that. I'm trying to remember offhand which note that was. That’s right there. We all know its switch. I think it happened in the second quarter or so, sort of amortize.

Operator

And the next follow-up question is from the line of Bryan Maher from Collins Stewart. Please proceed.

Bryan Maher - Collins Stewart

Smedes is pretty good picking those things up. In the light of what Sunstone is doing and how aggressive they are being with their CMBS and hand backs and how does that play into your thought process in some of the loans you may have and how aggressive would you consider being there?

Monty Bennett

Well I think one thing that's nice about Sunstone is they're kind of leading the way and that it makes through all the rest of us not to appear as aggressive on some of those. On the Dearborn, I think we have shared with you that we think what's in the best interest of our shareholders is to hand that property back. And if you look through our loan portfolio, we've got a few maturities coming up and we have also have some that our cash flow is not happening or where it's difficult. You've just got to do, what's in the best interest.

And I don't know if I'd characterize it as aggressive or not aggressive. It comes down just to an economic analysis. If it doesn't work to keep it and to carry it, then we are not going to. And if it does, then we will. So we are talking to the appropriate lenders or servicers where those situations arise. So I wouldn't say it's affecting us one way or the other. Again, it's just a very straightforward economic decision on our part.

Bryan Maher - Collins Stewart

Can you give us an order of magnitude to the dollar amount of the loans roughly speaking that we're talking about? Are we talking about $50 million or $500 million that are on your radar screen?

Monty Bennett

What's first on our list is those properties that have maturities coming up in 2010, 2011 and those two years. And in the release and the script, we talk about those 2010 maturities. Other than Hyatt Dearborn, there's a $75 million loan that we're looking to refinance and hope to have done over the next few weeks.

And then in 2011, there is a $65 million loan that we're in the process of refinancing that should be done in a couple of weeks as well and a $19 million loan that comes due in 2011 that we're in the process of refinancing. In 2011, there's another bigger loan that's $150 million or so in size that comes due at the very end of the year of 2011 that we really haven't started attacking yet. And the reason is because it's cash flowing and its maturity is not for a couple of years. And it's very difficult to get the servicer's attention on a loan like that. Same for another loan in the spring of 2012 which is about $165 million, same thing. It's cash flowing but the loan's probably underwater but you just can't get the servicers attention for something that far out.

Bryan Maher - Collins Stewart

Well there is one way to get their attention is to stop paying the loan.

Monty Bennett

There can except when you are in a cash trap. They have got the locks on all that. And we really like not to have to do that. But we are working on it as you can imagine. And then other than all of those, only the really other loan that we're looking at pretty closely is the $100 million Westin O'Hare loan. That's not due until 2016. However, it's having cash flow difficulty. So we are in discussions with lenders about modifying that loan.

Operator

And there appears to be no further questions at this time. I will turn the call back to you. Please continue with your presentation or closing remarks.

Monty Bennett

Thanks, everybody, for joining the call today and we look forward to talking to you at the end of the next quarter.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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Source: Ashford Hospitality Trust Inc. Q3 2009 Earnings Conference Call
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