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Ashford Hospitality Trust, Inc. (NYSE:AHT)

Q3 2013 Earnings Conference Call

October 25, 2013 11:00 AM ET

Executives

Scott Eckstein – IR

Monty Bennett – Chairman and CEO

David Kimichik – COO and General Counsel

Jeremy Welter – EVP, Asset Management

Doug Kessler – President

Analysts

Andrew Didora – Bank of America Merrill Lynch

Ryan Meliker – MLV & Co

Nikhil Bhalla – FBR

Robin Farley – UBS

Patrick Scholes – SunTrust Robinson Humphrey

Whitney Stevenson – JMP Securities

Thomas Allen – Morgan Stanley

Austin Wurschmidt – KeyBanc Capital Markets

Operator

Ladies and gentlemen thank you for standing by. Welcome to the Ashford Hospitality Trust Third Quarter 2013 Conference Call. At this time all participants are in listen-only mode. Following the presentation we’ll conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) I would like to remind everyone that this conference calls is being recorded today, Friday October 25, 2013 at 11:00 AM Eastern Time.

I will now turn the conference over to Mr. Scott Eckstein. Please go ahead, sir.

Scott Eckstein

Good day, everyone, and welcome to Ashford Hospitality Trust conference call to review the company’s results for the third quarter of 2013 and to update you on our previously announced proposed new platform Ashford Hospitality Prime. On the call today will be Monty Bennett, Chairman and Chief Executive Officer; Douglas Kessler, President; David Kimichik, Chief Financial Officer and Jeremy Welter, Executive Vice President of Asset Management.

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 are based upon forward-looking information and are being made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to numerous assumptions, uncertainties and known or unknown risks which could cause actual results to differ materially from those anticipated. These risk factors are more fully discussed in the section titled 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 day 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 have been filed on Form 8-K with the SEC on October 24, 2013 and also be accessed through the company’s website at www.ahtreit.com.

Each listener is encouraged to review those reconciliations provided in the earnings release together with all other information provided in the release. I will now turn the call over to Monty Bennett. Please go ahead, sir.

Monty Bennett

Thank you and good morning. Since our IPO in 2003 Ashford has realized tremendous returns for shareholders generating a 150% total shareholder return over that period compared with an 88% total shareholder return for our peers. During the same time frame Ashford has consistently outperformed the peer average and total shareholder return for almost every yearly period.

As of yesterday our one year and five year total return results were 61% and 913% respectively compared with an average of our peers of 35% and 205%. Although the return we provide to our shareholders is a function of our operational performance. We have always believed that it is also doing those small parts to the strong alignment we have with our shareholders’ interest.

One of our clear differentiators related to our peers has always been our high level of insider ownership. Our insider ownership is nearly 19% compared with the peer average of only 3%. Nowhere the management team in our sector can point to this high level of insider ownership and this strong alignment is a key catalyst to management’s efforts to generate superior shareholder returns.

For those of you that are not familiar with the details of Ashford Prime earlier this year our Board of Directors approved a plan to spin-off an 80% interest in eight-hotel high RevPAR portfolio totaling 2,912 own rooms that will be called Ashford Hospitality Prime. The spin-off will be in the form of the taxable special dividend to holders of Ashford Trust common stock it is expected to be comprised of common stock and Ashford Hospitality Prime Inc. a newly formed company to which Ashford Trust plans to transfer the portfolio interest.

Ashford Prime will be a platform that exclusively focuses on higher-end hotels. Presently, we are in the standard review and commentary period with the SEC regarding Ashford Prime’s Form-10 registration statement and the approval of the listing of Ashford Prime’s new common stock on New York Stock Exchange.

Once received SEC and the NYSE approval, we will announce the record and distribution dates for the spin-off. We expect the record date to be approximately 10 days following the announcement, and we expect trading to begin in a so-called “when-issued” market about two days prior to the record date.

The distribution date is expected to be approximately 10 days following the record date, all of which we expect to be completed sometime in the fourth quarter. During a 10-day period between the announcement and the record dates, this management team plans on hitting the road and visiting in person with as many institutional investors as possible.

Thus far, we had an aggressive campaign to educate the marketplace regarding spin-off. We have called hundreds of existing and potential investors and met with dozens of you either in person or on the phone. We’ve been very pleased with the feedback we’ve received thus far. If we’ve already met with you, please note that we’d be pleased to do so again. In either case, please let us know if you would like to be included in any of our road show meetings.

The Ashford Prime portfolio was specifically designed more conservatively to make this new public entity appealing to a broader range of investors and to be able to capitalize on hotel investment opportunities to maximize stockholder returns. Once the separation is completed, Ashford Prime will have a focused investment strategy targeting high RevPAR hotels and resorts located mainly in domestic and international gateway markets.

Ashford Trust on the other hand will continue to focus opportunistically on all segments of the hospitality industry with RevPAR criteria outside the Ashford Prime investment focus and all levels of the capital structure.

The primary elements of Ashford Prime’s appeal will be a targeted, lower leverage profile with the target ratio of 5.0 times net debt plus preferred equity to EBITDA. We expect this target leverage ratio will result in a lower cost of capital, which facilitates the implementation of Ashford Prime’s investment strategy. The platform will be launched with a net debt-to-EBITDA ratio in the mid-6s and over time we expect the platform to delever towards the 5.0 target.

Following the completion of the spin-off, Ashford Prime will have the option to acquire the Pier House Resort in Spa in Key West, Florida which was acquired in May of this year from Ashford Trust for its cost plus related expenses. The Pier House Resort is indicative of the hotels and resorts that Ashford Prime’s investment strategy will specifically target with the 2012 RevPAR of $276 and arguably the best location in the nation’s second highest RevPAR market. Prime’s targeted assets will be expected to generate RevPAR at least twice the national average currently approximately $130 and higher.

Since we acquired the Pier House in May, it has exceeded our expectations with RevPAR growth year-over-year of 13% to $240 for the quarter, and hotel’s EBITDA margin increased of an incredible $960 basis points. It’s the same Ashford Trust management team that will be managing Ashford Prime under a revolutionary new external advisory agreement that has been structured to ensure that Ashford Prime like Ashford Trust has close management alignment with shareholders.

Since announcing the specifics of this advisory agreement, we have already seen evidence of industry participants seeking to emulate the agreement structure and its several unique features. First, the advisory fees are based on market value and total shareholder return outperformance as opposed to just gross asset value. The basic management fee will be calculated on total enterprise value, the intensive fee will be a portion of Ashford Prime’s total shareholder return and excess of the peer average.

Additionally, the advisor Ashford Trust will own 20% of Ashford Prime and insiders will own approximately 19% of Prime. Because of some cross ownership, all combined Ashford Trust and Prime’s insiders will own approximately 36% of this new platform. This high level of insider ownership serves to further align management’s interest with our stakeholders. Finally, the advisor is a publicly-traded company with full transparency and broad institutional ownership as opposed to being a private company owned by handful of individuals.

Thus as a result of this revolutionary advisory agreement, Ashford Prime management will be even more highly aligned with shareholders than any internally advised hotel RIET in the marketplace today.

Other factors to consider in the spin-off of Ashford Prime include the existing relationship with Ashford Trust. From the deal flow perspective, Ashford Prime will already have agreements in place with Ashford Trust regarding existing trust assets. Aside from the option to acquire the Pier House Resort, Ashford Prime will also have an option to acquire another high RevPAR hotel, the Crystal Gateway Marriott from Trust.

Also Ashford Prime will have a right to first offer on twelve hotels in the Ashford Trust portfolio that meet its investment guidelines with any of these assets to be sold. These agreements immediately positioned Ashford Prime for growth and provided a dedicated pipeline of investment opportunities which we believe are consistent with its high RevPAR asset focus.

The performance of Ashford Prime’s portfolio speaks to a major rationale for this transaction. During the quarter, the portfolio experienced RevPAR growth of 4.3% driven by a 3.3% increase in ADR and an 87 basis point increase in occupancy.

Much of this performance was driven by our West Coast assets which continued to outperform relative to competitive sets. This includes RevPAR growth of 8.7% for our Courtyard San Francisco Downtown, 9.5% for our Hilton La Jolla Torrey Pines, and 17.3% and 11.2% for our Courtyard Seattle Downtown and Seattle Mariette Waterfront respectively.

In our financial tables that are accompanying our earnings press release, we have provided detailed financial information for the Ashford Prime portfolio as transparency has always been a priority for us. We believe it is essential that investors have ample information to make informed investment decisions.

We think it’s only logical to provide investors the same financial information that we ourselves find most useful in running our businesses. Since the Ashford Prime portfolio will initially have significantly less hotels than the Ashford Trust portfolio, we believe it makes sense to increase the level of financial disclosure, so we have provided property level operating information for the eight Ashford Prime hotels.

As a Prime grows, we anticipate maintaining this level of disclosure. Also to assist interested parties in their analysis of Ashford Prime, our team has prepared an extensive Ashford Prime questions-and-answers presentation. This presentation is available to the public on our website at www.ahtreits.com under the Investors section. The presentation contains answers to commonly asked questions we have already received on the spin-off as well as additional relevant information that should assist people in their analysis.

Additional information can be found in the Form 10 information statement for Ashford Hospitality Prime that has been filed with the SEC. Our prime presentations have been downloaded over 500 times. Since its inception, Ashford has started to create shareholder value by leveraging our core competencies and expertise in the lodging industry, one of the most effective ways we have accomplished this has been by employing new and unique strategies.

When the market turned down in 2008, we saw this is an opportunity to utilize interest rate hedges to create new streams of income while protecting our shareholders investments. We believe we were the only RIET to employ this strategy. During the time period while most RIETs were diluting their shareholders with stock issuances, we initiated a substantial common share buyback program which has already generated a large gain on investment for our stockholders as well as we have sold back into the market some of those shares at significantly higher prices.

As of today, those strategies in conjunction with others, have created over $0.5 billion in share value for our shareholders. Developing strategies such as these aimed at enhancing shareholder value, our analysis has always been methodical and extensive. It was just same rigorous analysis and core discipline that brought us to the conclusion that the Prime spin-off will be value enhancing for our stakeholders by creating an exceptional high-growth platform with enhanced access to the capital markets.

By creating two separate entities that are able to focus on the respective investment strategies with Ashford Prime and Ashford Trust will be able to capitalize on the attractive lodging industry fundamentals that we expect to continue for the next several years.

Lastly our strong total shareholder return performance has been dealing in those small parts more attractive and well covered dividend. Ashford has a long history of offering attractive dividend yields to investors. As previously announced our Board of Director declared a dividend of $0.12 per share for the third quarter of 2013 which represents an annual rate of $0.48 per share. Based upon yesterday’s closing price the dividend yield is 3.6% which is among the highest of our peer group and well above our peer average.

In fact we are one of the only couple of our peers that has both an above average dividend yield and an above average dividend coverage ratio. In addition for Ashford Prime we provided guidance for $0.01 per share for Ashford Trust share equivalent I should say per quarter including the fourth quarter of 2013.

Before turning the call over to my collogue to discuss this past quarter’s performance, I want to mention a new initiative we have underway.

Over the past couple of quarters our revenue growth has not met our internal expectations. Part of this is market driven and due to our concentration in the DC area. However, we still believe we can do better. In our last call I had mentioned that we hired a new senior executive with Ashford to drive revenue growth. Sloan Dean has begun this process to revamp our revenue enhancement efforts. Jeremy Welter here on the call will give more detail on this in a moment.

Regarding our affiliate manger Remington we have also recently taken some meaningful actions over the past couple of quarters. First we turned over and replaced our senior sales and marketing position which overseas direct sales such as group contract and preferred accounts. In addition we created two new senior positions in sales and marketing to report to this most senior position overseeing all of the hotels.

Separately on the revenue management side which overseas revenue management and electronic commerce we’ve created and have almost completely filled a number of new positions taking this department from 11 individuals to over 20 with new both senior and junior executives.

Not only are we increasing the number of executives but we are upgrading the capabilities for each position. These additions create significant increases in cost for our affiliate manager Remington but it’s the right thing to do for the platform. In addition to personnel we are comprehensively upgrading our business analytics capabilities on the RIET side and with Remington.

These investments and systems and personnel will materially increase our revenue enhancement capabilities I am personally overseeing much of this effort.

With that I will now turn the call over to Kimo to review our financial performance for the quarter.

David Kimichik

Thanks Monty. For the third quarter of 2013 we reported AFFO per diluted share of $0.25 compared with $0.31 a year ago. Third quarter of 2012 included $8.1 million of interest rate derivative income which impacted AFFO per share by $0.09 so on adjusted basis our AFFO per share is up $0.03.

Adjusted EBITDA increased 7% for the third quarter. During the third quarter we saw a steady continuing positive industry supply and demand trends which have continued to drive RevPAR growth and improve profitability in the U.S. lodging sector. Based on where we see ourselves today in the current hotel cycle we expect to see several additional years of growth as demand suddenly rises, our new hotel room supply is expected to remain at historically low levels for at least the near term.

Since existing credit availability for new hotel construction remains limited PKF continues to forecast low supply growth of 48%, 1.1% and 1.4% for 2013, 2014 and 2015 respectively. PKF also continues to forecast attractive RevPAR growth of 5.9% for 2013, 7.2% for 2014 and 8.1% for 2015. It is important to note that the industry’s recovery to-date has occurred in a weak economic environment. So any significant improvement in the macro economic situation could represent potential upside to these forecasts.

For the third quarter we’ve reported our pro-forma hotel operating statistics for both the Ashford Trust portfolio and the Ashford Prime portfolio. The Ashford Trust portfolio includes our pro-rata share Highland Hospitality portfolio but excludes the Ashford Prime hotels. In terms of our performance RevPAR increased 3.1% for the Ashford Trust hotel not under renovation driven by a 3.0% increase in ADR. RevPAR increased 4.6% for the Ashford Prime hotels not under renovation driven by 2.6% increase in ADR.

Hotel EBITDA margin increased 39 basis points for the Ashford Trust hotels not under renovation and 17 basis points for the Ashford Prime hotels not under renovation. Our Ashford Prime hotels saw an increase in incentive management fees which negatively impacted margin growth for that portfolio.

For the third quarter we reported a net loss to common shareholders of $24 million, $825,000, adjusted EBITDA of $85,502,000 and AFFO of $24,281,000 or $0.25 per diluted share. At quarter’s end, Ashford had total assets of $3.6 billion in continuing operations and $4.5 billion overall including the Highland portfolio which is not consolidated.

We had $2.4 billion of mortgage debt in continuing operations and $3.2 billion overall including Highland. Our total combined debt currently has a blended average interest rate of 5.3%. We currently have 56% fixed rate debt and 44% floating rate debt all of which have interest rate caps in place and the weighted average maturity is 3.2 years.

At quarter’s end, our Ashford Trust portfolio consisted of 115 hotels, with 22,803 net rooms and our Ashford Prime portfolio consists of 8 hotels with 2,912 net rooms.

Our share count clearly stands at 99.6 million fully diluted shares outstanding which is comprised of 80.6 million common shares and 19 million operating partnership units.

Before I turn the call over to Jeremy I would like to mention a few facts concerning Ashford Prime. When Ashford Prime has spun out it will begin with a minimum cash balance including property level working capital of $160 million. Net of our joint ventures as of September 30th Ashford Prime had GTM hotel EBITDA of $77.1 million. If you were to estimate annual advisory fees and G&A of $9 million, a trailing 12 month EBITDA would be $68.1 million and as net debt to EBITDA ratio would be approximately 6.5 times which has gone our way to a stated target of 5.0 times.

Non-recourse debt totaled $566 million with no maturities until 2017. Initially Prime will have no preferred stock. Finally Ashford Prime will launch with $150 million credit facility.

I would now like to turn the call over to Jeremy to discuss our asset management accomplishments for the quarter.

Jeremy Welter

Thank you, Kimo. RevPAR at the eight properties in our Ashford Prime portfolio increased 4.3% in the third quarter, driven primarily by rate which increased 3.3%. The four properties located on the West Coast all experienced RevPAR growth exceeding 8% led by Courtyard Seattle which was up 17.3%. This brings a year-to-date RevPAR gain for Ashford Prime’s properties to 5.9%, again largely driven by rate increase of 4.5%.

Moving to our Ashford Trust portfolio RevPAR increased 1.5% driven by rate which increased 2.7%. Year-to-date RevPAR has increased 3.1% with ADR increasing 3.4%. The third quarter proved to be a challenging quarter in terms of comparability to last year for several reasons.

First, the republic and democratic national conventions that occurred in Tampa and Charlotte greatly benefited our hotels in those markets in the third quarter of 2012. For example, the Tampa Renaissance in our Ashford Prime portfolio had a RevPAR decline of 10.2% for the quarter.

Another challenging aspect of the third quarter was the year-over-year comparison in Washington D.C., our largest market in terms of rooms and EBITDA. You may recall that the third quarter was the best quarter of 2012 for our DC assets, thanks to strong summer leisure travel and resilient group business.

In the third quarter of 2013, the ongoing sequestration of government spending, fiscal uncertainty and a less robust book of group business led RevPAR declining 12% for all of our hotels in the Washington DC market area.

During the quarter government room nights at our 11 DC hotels were down 29% representing about 2.3 million in lower room revenue. Additionally, during the quarter our 697 room Crystal City Marriott Gateway and its ballroom under renovation which greatly impacted our ability to book group business. But we believe these market dynamics are relatively short-term.

In the Crystal City sub-market we are seeing the bottoming out of office vacancy related to Back with most of the space being repositioned to Class A office space which will create much stronger demand generators with less reliance on government business.

Overall we are still bullish on DC’s excellent long-term prospects. When DC is added to the adverse impact of the national political party conventions and both are excluded from our results. RevPAR growth would have been 7.9% for our Ashford Prime hotels and 4.5% for our Ashford Trust hotels.

Last quarter I shared with you that Ashford had added an important position to its organization a Vice-President of Revenue Optimization. Now in place he is intimately involved in providing a more analytical approach to driving revenues particularly with the RFPs for our top 30 hotels which comprised 54% of our total revenues.

Additionally he has strategies in place to ensure retail transient is being priced by day or week dynamically, ensure maximum profitability from all of our base in group contract business. Ensure we are layering in the appropriate group business for 2014. Ensure we are maximizing our exposure to less profitable channels such as OTAs and ensure we implement best practices to tackle e-marketing, social media and new consumer technology.

Now I would like to give you an update on the early results from some of our recent transactions. First the acquisition of Pier House Resort and Spa in Key West has been very successful as Remington implemented a streamlined cost structure as well as increasing revenues resulted in significant bottom line growth. And its first full quarter under Remington management total revenue increased 10.9% while EBITDA increased 67%.

Next the conversion of eight of our brand managed properties last quarter to Remington managed franchise properties has had a very successful story. Despite the associated short-term revenue interruption the change that management bring the eight properties saw RevPAR increased 8.5%, EBITDA margins increased by 742 basis points with EBITDA flows of 140%.

We believe this transaction is and will continue to be accretive to shareholders as Remington is not only capable of delivering superior results but we see the franchise hotels saw the premium multiple in the marketplace.

Additionally, all eight properties entered into product improvement plans or PIPs which shouldn’t further enhance the value of the properties.

Finally, last quarter we shared that we will be converting our 258 room Crowne Plaza Beverly Hills to a full service Marriott at the end of the existing franchise agreement in March of 2015. The conversion will include a tip estimated at 25 million which will include an HVAC system upgrade and extensive renovation in the guest rooms and public areas and transformation lobby renovation and exterior upgrade to enhance the guest sense of arrival.

We are especially enthusiastic about this conversion because of the essence of full service Marriott supply in the market. We are confident the newly-minted Marriott Beverly Hills will be an extremely successful property in our portfolio.

Turning to capital expenditures, Ashford continues to strategically invest in its portfolio by spending 40.2 million in the third quarter in the Ashford Trust portfolio and 3.1 million in the Ashford Prime portfolio. In the second quarter of this year we completed a room renovation at one of our Ashford Prime assets to Hilton Torrey Pines.

I must say having seeing results in person the hotel looks truly stunning and we fully expect the hotel leverages renovation in order to gain significant market share. In fact in the third quarter alone the hotel managed to increase RevPAR 9.5%. So I believe the rigorous robust capital expenditure allocation process is an effective element of our broader asset management philosophy.

Now I would like to turn the call over to Douglas.

Doug Kessler

Thanks, Jeremy. In the third quarter we remained focused on strengthening our capital structure, prepare for the plan spin-off of Ashford Prime and to better position ourselves for investment opportunities by capitalizing on today’s attractive debt market conditions.

Looking at our capital structure, in September we completed a $69 million property level debt financing for the previously closed acquisition of 142 room Pier House Resort and Spa in Key West, Florida, which we acquired in May for $90 million in cash or $634,000 for Key. As Monty already mentioned, this investment has not only met but exceeded our initial performance expectations with RevPAR growth of 13% for the quarter and hotel EBITDA margin up 960 basis points.

The new financing for Pier House of the two year term and three one year extension options with no test requirements for the first two extensions. The loan provides for floating interest rate of LIBOR plus 490 basis points with no LIBOR Floor.

We are very pleased with the success of this new property level debt financing, which demonstrates the various opportunities we are seeing currently in the debt markets. While there has been a recent uptick in the interest rates, these rates and other market conditions still remain very appealing relative to historical debt financing currently in place for several of our assets.

This affords us many opportunities to selectively pursue refinancing opportunities within our portfolio to capitalize on these market trends.

We are constantly analyzing our debt structure at the property level and we continue to look for innovative ways to maximize value for our shareholders. Presently we are exploring the potential refinancing of our MIP portfolio which matures in 2015 and consist of five hotels. The Embassy Suites, Philadelphia Airport, the Embassy Suites Walnut Creek, the Hilton Minneapolis Airport, the Sheraton Anchorage and Sheraton San Diego Mission Valley.

In addition, we are looking at possibly refinancing two smaller hotels where we think refinancing makes sense given our ability to take advantage of attractive conditions in the debt markets.

Related to the Ashford Prime’s spin-off transaction in July we completed a follow on public offering of 12.25 million shares of common stock at a gross price of $12 per share. The cash raised in this offering will be contributed to Ashford Prime connection with the spin-off moving Ashford Prime substantially closer to achieving its target net debt plus preferred equity to EBITDA ratio of 5.0 times.

Our goal with this targeted leverage level is to potentially enable Ashford Prime to receive a better valuation multiple resulting in net accretion to Ashford Trust shareholders. It’s important to recall that during the last financial crisis, we purchased over 70 million of our shares at an average price of approximately $3 per share.

Selling these 12.25 million shares back into the market at $12 represents a significant gain on net investment for our shareholders.

As we were closer to completing the spin-off of Ashford Prime, we remain optimistic that our capital structure activities including the creation of this new entity will ultimately enable us to perceive accretive investment opportunities through a dual platform approach. We continue to see many potential investment opportunities in the marketplace, but many of them simply do not make sense for us to pursue given our historical capital structure and higher cost of capital.

We believe that the spin-off and low leverage strategy will provide us an exceptional high growth platform with enhanced access to the capital markets thus granting it a flexibility to pursue high RevPAR assets both in the U.S. and abroad which will serve the best interest of its shareholders.

At the same time, Ashford Trust will continue to benefit from attractive lodging industry fundamentals or pursuing a broader range of investment opportunities. Recently Ashford celebrated its 10 year anniversary as a public company starting in 2003 with the blank – just over $200 million. Since that time we’re growing substantially now having approximately $4.5 billion in total assets.

Our goal throughout our history has remained consistent to deliver superior shareholder returns through investments in the lodging industry. As Monty discussed earlier, I think our track record speaks for itself. Given our team’s experience today, we viewed a spin-off of Ashford Prime as a next phase of our growth cycle.

As 19% holders of both Ashford Trust and Ashford Prime, we invested right alongside all of you. That concludes our prepared remarks and we will now open it up for your questions.

Question-and-Answer Session

Operator

Thank you. Your first question comes from the line of Andrew Didora from Bank of America. Please go ahead.

Andrew Didora – Bank of America Merrill Lynch

Hi, good morning everyone. Monty I know you guys typically don’t give sort of an intra-quarter update, but just curious just in terms of kind of impact that DC had on 3Q if you could maybe give us any color during the government shutdown in terms of the impact that it had on your -- that it’s having on your portfolio in October?

Monty Bennett

The shutdown has an impact on our portfolio in the DC area for the quarter, but as far as specifics, we do like to kind of trend away from providing guidance for the reasons that we’ve discussed in the past. We are hopeful though that these shenanigans in DC will come to an end, but the sequestration end with the shutdown and remain hopeful that’s the case, and we are bullish on the long-term prospects of DC. It’s not uncommon during deleveraging like this where by government expense just gets cut back for a little bit for a little while, but over the long-term, DC will continue to be a great market, and we’ve got some great assets there. So, we are just going to have to weather this short-term little storm that’s going on over there.

Andrew Didora – Bank of America Merrill Lynch

Got it. Fair enough. And just in terms of the Prime portfolio, how should we think about the margins here going forward just in light of the incentive fee payments in the quarter. Do you just really kick in 3Q or have you been been paying these for a while, just trying to get a sense for when you might anniversary some of these payments?

Monty Bennett

Yes, the payments have been going on, and they have been increasing as the performance has been increasing, and I think what we’d like to do Andrew is probably offline for you and anybody else that is interested is go through those incentive fee amounts for these different properties, so you can get a handle. Some of the incentive fee amounts are as low as 20% of EBITDA above a certain level, and in some case it’s as high as 50%. So I think for your modeling purposes, it will be helpful if we went through those on a more detailed basis, and some of those, we’re in the money or I should say the managers in the money (inaudible) those fees, and in some cases, pretty good ways from earning them.

So, like I said, we just need to probably go through that individually with you so that you can construct your models a little more accurately.

Andrew Didora – Bank of America Merrill Lynch

Got it. Okay and that sounds good. And then just finally speaking with Prime here, I am sorry if I missed this in your prepared remarks, but when do you think you could exercise those options, particularly on the Pier House, do you see this as something that could happen on day one or is there a reason why you might wait to execute on those?

Monty Bennett

We’ve got options on two properties, the Pier House I think that option goes for something like 18 months, and then Gateway is something like a year, but we can’t do it until starting six months after the spin-off occurs. We’re anxious to grow the platform, and we would like to do it relatively soon, but it depends upon market conditions. Ideally, we would like to raise some capital around it in order to continue to move our debt-to-EBITDA ratio down that is something that our investors want -- that’s what we want, and so that depends upon market conditions on availability of capital. And so, we’d like to do it sooner rather than later, but it just depends upon whether we think we can do the whole package or not and how much we could potentially raise around it.

So, we’ve got some time, so if market conditions don’t co-operate, we can wade it out, but if they do, again our preference will be to move sooner rather than later.

Andrew Didora – Bank of America Merrill Lynch

Okay. That’s great. That’s it from me. Appreciate it.

Monty Bennett

Thanks.

Operator

Your next question comes from Ryan Meliker from MLV Company. Please go ahead.

Ryan Meliker – MLV & Co

Hey good morning guys. Just a couple of quick questions. I was hoping you might be able to give us some color on; first how close are you guys to determining of timing for the spin-off? Is it -- are we talking imminent within a week or two away or are we talking towards the end of fourth quarter?

Monty Bennett

Well, there are some mechanics involved in the script that went through about a 10-day period for a record date and a 10-day period for the distribution. So as soon as we get the SEC clearance, we’ve got those timelines in front of us. We are hopeful that we’ll get that SEC clearance quite soon. They’ve given us indications that we should get it soon, but it is the SEC and they can take a lot longer if they want.

So, it’s hard for us, and before this call we talked about giving guidance on it. But the problem is that it’s just not in our control, it’s all with the SEC right now like I said. They have indicated that it should be very soon that they will give us clearance within days but if that doesn’t then they might take weeks. So as soon as we know we are going to be moving forward with establishing the record date and then the distribution date. So, that’s the best we can give because that’s the best we know.

Ryan Meliker – MLV & Co

No, it’s helpful. I mean it sounds like you are optimistic that it’s not going to be towards the end of December and hopefully sooner than that, and given that dynamic and the impact of the spin-off is going to have on your financials in the quarter and the uncertainty surrounding the exact timing and the seasonality October versus November versus December track versus what you provide to the street, are you going to be able to or have you thought about the idea of giving guidance out for what AHT and AHP will do in that first quarter given it’s going to be a weird choppy type quarter with the spin-off involved or are you going to be optimistic Street is going to get it close enough to right, so there won’t be any surprises?

Monty Bennett

Well we’ve kicked that around a little bit because there is another issue and that is the fact that Marriott has changed their accounting from ‘13 period to ’12, and that also affects the numbers, and then you’ve got the split up of the platform (inaudible) through the quarter. So we’ve been sitting here internally talking about what that means. We haven’t decided to give guidance but we also know that’s an issue.

So we don’t have any answer pretty right now on that Ryan, but we do understand the issue and we’re trying to figure out the best way to tackle it.

Ryan Meliker – MLV & Co

Yeah just a shame to surprise the Street with the number that could have been avoided especially if the fundamentals end up coming in line with expectations. And then last question I had was can you give us any color, I apologize if I’ve missed it earlier in the call, but with regards to what you’re expecting for your corporate negotiations for next year, how those are tracking, and then what your group base looks like next year? I know Group isn’t a big component of your business, that’s always helpful to get that gauge?

Monty Bennett

We don’t give out on the Group side, that’s I guess a little too much in guidance for us. But as far as the rate negotiations, we’re being aggressive; our attempts in these negotiations I don’t think are different than our peers in the 4% to 7% range is what we’re targeting for those preferred accounts, (inaudible) negotiated accounts across the board and some of those are being locked down and some of them are still open., So again we’re not doing anything different I think than what our peers are in that regard.

Ryan Meliker – MLV & Co

That’s helpful and then Doug real quickly. You talked about going to market looking at the MIP portfolio when a couple of other assets, are you guys at the stage where you’re looking at the high end debt potentially refinancing that I know that’s available for – in March.

Doug Kessler

We have term remaining on the high end debt and our view there is that we wanted to be opportunistic with respect to the performance of the portfolio as well as what’s taking place in the debt capital market. So we have a fair amount of run way. Moreover I think the view that we have is that something that will certainly start discussing more about internally at the beginning of next year but it’s a little bit earlier right just start approaching that.

Monty Bennett:

Ryan to give you some color on that the frozen corns are that the sooner we do it the sooner we get out of a cash we doesn’t place on that debt. But the later we do it there more proceeds we get. And I want to emphasis that we have a partner in that and the decision to refinance is going to be made with our partner credential. I would be surprised that happen before March and as far as after that I’d say soon this case to be sometime in 2014 later in the year but again it depends upon some other issues that are going on in our platform and our cash and alike because the longer we wait the more proceeds that we can achieve. And we are giving serious considerations for those additional proceeds to setting those proceeds aside as essentially an offset against whatever debt level we have to keep our net debt levels constant or lower. So there is just a lot of consideration so it’s just hard for us to give any indication on to refine that.

Ryan Meliker – MLV & Co

Okay. But it sounds like it’s not going to be by March it will be later in 2014 if it earlier can you talk….

Monty Bennett

I would say that’s right that’s our current thinking.

Ryan Meliker – MLV & Co

Great, that’s all I had. Thanks a lot.

Monty Bennett

Thanks Ryan.

Operator

Your next question comes from Nikhil Bhalla from FBR. Please go ahead.

Nikhil Bhalla – FBR

Hi, good morning everyone. Just a question on your strategy for AHP when it comes to buying assets outside of the U.S. I think you mentioned a lot about international expansion there kind of referred to it, could you just give us some sense of how big you think that could be how soon that could be or are you looking for sort of portfolios, are you looking for single assets, just any color?

Monty Bennett

Sure. We’re looking for both, for single assets and portfolios. We have some tension there in that we don’t want to do anything too big because then it’s proportionately large for the platform that platform is being launched at about $1 billion in size plus or minus. And on the other hand you wanted to have certain size because to have assets overseas there is additional overhead and costs relative to servicing it and being involved with it.

So that’s kind of an offset, also as we look around the world all the countries are in different stages of development and different stages of where they’re and they’re deleveraging in different stages of recession.

So we’re just trying to remain thorough. We spent a couple of years now being involved in the European markets attending conferences over there, have people on ground over there looking for opportunities, And here in the more recent past we’ve really started looking in Asia as well for opportunities a number of us got back from the conference over there. So we’re trying to be very, very thorough in measuring twice and cutting ones on these acquisitions.

And as far as the opportunities that come up it’s just hard to say. We get out something like the peer house jump up that’s right here close to home which has been a great acquisition for us or an opportunities could jump up overseas somewhere. And either to say our first acquisition overseas especially we wanted to be especially cautious both for our own sake and respect for investors and not jumping out there with some large international acquisitions that are relatively large for our platform. Hopefully that provides a little color for you.

Nikhil Bhalla – FBR

Sure, thanks Monty for that. And just a follow up question on the revenue side I think you referenced some revenue initiatives that you’re taking and Remington is taking briefing up the revenue management team. Could you just give us some sense of where the opportunity might be to increase the revenues there I mean what could specifically happen?

Monty Bennett

Sure. First of all it’s not like the revenues taking in context this quarter, they were okay if you could turn your eye to what’s going on with BC and then this year-over-year problems in these Charlotte and these other markets. So we’re pretty pleased with that revenue performance aside from those sectors.

So that being said we think there is always room for improvement and so we want to be very intensive about our efforts there as far as the areas of improvement. I couldn’t give you one specific area looking at across the landscape we think that there is opportunities really just about everywhere with be contract in wholesale of IT business, preferred account business, group business all that’s on the direct sale side or overall on the electronic commerce and the revenue management side of all the different booking channels over there and yield management, revenue management.

We’re seeing, that whole industry is seeing a move more and more away from direct sales towards electronic commerce and there has been a trend that’s going on for 10, 15 years and continues to move that way. And because of that we just wanted to double down on our electronic commerce and our revenue management capabilities the personnel number in order to make sure that we’re always ahead on that front.

But at the same time not to peddle over on the direct sales approach and we brought in some new people recently great people and created a few new positions. We just want to continue to be a leader when it comes to revenue. You see the great numbers that we turned in on the Pier Houser Resort and it’s delivering these types of numbers which gives investors great confidence and in Ashford and what leads to our performance and so what’s just vital to us to continue to be on the cutting edge.

Nikhil Bhalla – FBR

Thanks, Monty.

Operator

Your next question comes from Robin Farley from UBS. Please go ahead.

Robin Farley – UBS

Two questions one is I know you talked a little bit about DC in Q4 you didn’t want to really be giving guidance. So without quantifying it can you just sort of talk a lit bit qualitatively about since the end of the shutdown whether you’ve seen occupancy in business levels kind of fully return to normal right away or do you think there is still some lingering impact or some cancel travel that didn’t like in other words how quickly has it snapped back without even quantifying if you don’t want just qualitatively can you give some color?

Monty Bennett

Well, it’s hard to say what’s normal in DC these days right, because pre-sequestration post sequestration itself was compressed over small number of months that’s to be changing so there is a number of moving parts. We also have as you know the headwind of this new Marriott opening up in the spring there as we speak. But Jeremy is there anything you can answer there for Robin without providing guidance?

Jeremy Welter

Yes, what I would say is the new baseline was set in May of this year over the last five months with the – government – it was fairly conception month-to-months in our portfolio and it was around 30%. There was probably a little bit more in September in anticipation of the government shut down but heading into this new fiscal year in October the sequestration cuts are not as savior on a month to month basis.

So, sequestration should have lesser impact in the fourth quarter to the industry as well as the first quarter of the next year and then when you cross over to the second quarter of 2014 on a year-over-year basis you are kind of compared to apples-to-apples where sequestration is – with the numbers.

Monty Bennett

Now really just talking about sequestration and not about the shutdown.

Jeremy Welter

That’s correct.

Monty Bennett

Yeah, and then of course you got inauguration in January that some of that hotels in DC did benefit from in 2013 as well as the whatever may or may not happen with the new government budget in January whether the extent of the deadline.

Robin Farley – UBS

Okay. And sort of any thoughts on through the last week to 10 days whether to the degree that there had been some disruption specific to the shutdown whether you feel that to come back?

Monty Bennett

We just rather not give that level of detail of guidance at this point Robin.

Robin Farley – UBS

Okay, sure. And then just the other question is you talked a little bit about corporate – rates and what you are targeting for next year, roughly where do you feel that they ended up coming in for 2013 kind of what level of increase?

Monty Bennett

For this past year?

Robin Farley – UBS

Yeah.

Monty Bennett

May for next year?

Robin Farley – UBS

No, no in other words I know right now I mean November is the time when your nailing down 2014 rate until you have certain target I am curious where you feel the average came in for 2013?

David Kimichik

It’s now 45% on average.

Robin Farley – UBS

Okay, great. Thank you.

Operator

Your next question comes from Patrick Scholes with SunTrust Robinson Humphrey. Please go ahead.

Patrick Scholes – SunTrust Robinson Humphrey

Hi, good morning. Mont you said high level of question for your as it relates to your how do you feel going into 2014? Would you say you feel since the last – on earnings backed in August do you say you feel more optimistic in that time the same or maybe not quite as optimistic just directionally?

Monty Bennett

I feel optimistic about 2014 with the carious of government business and what’s going on in DC that’s just a bigger note. But absence that absolutely quite optimistic for 2014.

Patrick Scholes – SunTrust Robinson Humphrey

Would you say you feel more optimistic today than we did a couple of months ago with the exception of the government?

Monty Bennett

I would say about the same.

Patrick Scholes – SunTrust Robinson Humphrey

Okay. And then more specific questions just on the quarterly result I didn’t apologize that they didn’t us in the report. What was the RevPAR growth for the Ashford legacy portfolio and Highland portfolio and that’s the first part. And then what was the margin improvement if there was improvement for the Highland portfolio?

Monty Bennett

You didn’t find it in the numbers because we have changed our reporting this time Patrick we started reporting on Ashford Price just quarterly and I just made the call that reporting on Ashford Prime versus Ashford Trust and then within Ashford Trust of legacy versus Highland and then Highland being a 71% interest all that was just too complicated.

So we just consolidated Trust reporting and versus Prime’s reporting meaning that for Trust. It’s not broken out anymore between legacy and the Highland portfolio.

Patrick Scholes – SunTrust Robinson Humphrey

But can you I guess provide that at this moment, what was it?

Monty Bennett

I don’t know one of these here on the phone may be these guys call afterwards. to be able to give….

Patrick Scholes – SunTrust Robinson Humphrey

Okay, no problem. Thank you.

Operator

Your next question comes from Whitney Stevenson with JMP Securities. Please go ahead.

Whitney Stevenson – JMP Securities

Hi there guys, thanks for taking my question. It’s perfectly possible that I have completely missed that somewhere but have you said that peer group that Prime would be benchmarked again?

Monty Bennett

Yes, it’s in our filing.

Whitney Stevenson – JMP Securities

Okay, perfect. That was my only question, thank you.

Operator

Your next question comes from Thomas Allen with Morgan Stanley. Please go ahead.

Thomas Allen – Morgan Stanley

Hi, good morning. Renovation is appeared that you may have been more of a headwind this quarter than quarters past, can you help us think about the impact and then what should we expect as we go into the end of the year next year I know you give this chart at the back of your release but unfortunately I can’t really read it. And then if there could be any color I think most of the renovation disruption over the past few quarters has been at – and JV is that still the case? Thanks.

Monty Bennett

Regarding your comment about not being able to read it in the back is that because you can’t see the…

Thomas Allen – Morgan Stanley

Meaning more I am sure if I was a better analyst I could say that I can add up the number of rooms that are renovated and maybe say that 4Q would be more of an impact in renovation in 3Q but maybe I am not.

Monty Bennett

I think it’s not helpful as it could be I guess. Okay, no problem. Let’s go to information personnel because we might change reporting so it can be more helpful. Jeremy you want to answer this question?

Jeremy Welter

Yeah, we are going to have a little bit more rooms under renovation in the fourth quarter in 2013 and then if you look at our proposed 2014 we are very similar in the first quarter and total room to be out with a little bit more in the second quarter. That’s 2014.

Thomas Allen – Morgan Stanley

Okay, that’s helpful. And then was it more, is it still mostly the Highland JV the headwind or is that…?

Monty Bennett

Yeah we’ve got a lot of it is Highland and once you get through the second quarter of next year the Highland portfolio is going to be in great shape from the capital standpoint. We are very excited about it.

Thomas Allen – Morgan Stanley

Okay, that’s helpful. Thank you. And then just in terms of the national market, I know you are renovating the – but you are seeing the recent opening of the – I think at the end of the September, is that had an impact on your forward bookings or any impact on trends in business so far? Thanks.

Jeremy Welter

Yeah, I can’t comment on because of guidance but what I can say is that if you look at the tap report for Nashville in 2014 and 2015 it is one of the strongest markets that we have hotels in. So we are going through the renovations as fast as we can just because we want to benefit from all of that businesses which is going to come in 2014 it’s a huge lift. So even though there has been a lot of new supply that convention center has been fantastic in forward-looking bookings for the city as a whole.

Monty Bennett

Typically we find that when a new convection center opens even though there is a lot of supply coming in the first year to you get a good lift it’s after that you’ve got a shut down and worried about whether the supply and demand dynamics are good for the long-term.

Thomas Allen – Morgan Stanley

Okay, helpful, thank you.

Operator

Your next question comes from Jordan Sadler with KeyBanc Capital Markets. Please go ahead.

Austin Wurschmidt – KeyBanc Capital Markets

Hey guys it’s Austin Wurschmidt with Jordan. I just had a question related to DC. I was just curious if there was any disparity in the performance along your suburban and more centrally or urban hotels across the metro?

Jeremy Welter

Yeah sure I can take that, this is Jeremy. The district did perform better than our Crystal City and non-Crystal City DC assets. Capital held in was impacted on a year-over-year basis because had incredible group business in the third quarter of 2012. And Crystal City Marriott Gateway did have a smaller amount of renovation as well and so that kind of disproportionally hit it. But when business is soft in the DC market and there is not a lot of compression within the DC market then those hotels outside of DC do tend to perform a little bit worse on a year-over-year basis and that certainly played out in the third quarter of this year.

Austin Wurschmidt – KeyBanc Capital Markets

Have you guys considered lining up your suburban exposure in the DC metro given it is your largest market, so just curious your thoughts on that.

Jeremy Welter

We have and we have talked about it the only problem is just worst time to do it. So if we did it with way towards a more favorable climate in order to do that.

Austin Wurschmidt – KeyBanc Capital Markets

Thanks, that’s helpful. And then based on the information that you guys had given on AHP Q&A presentation which was very helpful by the way. It seems that AHP plans exercise its auction to acquire the Crystal Gateway Marriott. And if so what would Prime’s exposure to DC be pro-forma of that transaction because I think it’s already around 20% with the capital of Hilton?

Monty Bennett

Well, the decision to exercise adoption will be a discussion of the Board when time come and that exposure to the DC market will be one of the big points for the Board to consider. And in that case it also depends upon valuation because that price has not been predetermined so it is a concern it is an issue and it will be looked at very closely. So don’t consider that it will automatically be brought over. Prime need to look at it and see if it’s in the best interest of Prime to do so or not.

Austin Wurschmidt – KeyBanc Capital Markets

That’s fair. Is there any debt associated with that property?

Monty Bennett

Yes there has been associated with that property. If you are looking at the amounts here you are looking at up for you.

Operator

There are no further questions at this time. I’ll turn it over to management for closing remarks.

Monty Bennett

Just to finalize, just to answer that question about the debt amount do we have it here 102 million is the amount that’s on that property. That is all of our comments. We look forward to talking to everyone on our next call. In the mean time we hope to have the successful launch of Ashford Hospitality product. Thank you.

Operator

Ladies and gentlemen that does conclude the conference call for today. Thanks for participating. You may now disconnect your lines.

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