Ashford Hospitality Trust, Inc. Q4 2009 Earnings Call Transcript

| About: Ashford Hospitality (AHT)

Ashford Hospitality Trust, Inc. (NYSE:AHT)

Q4 2009 Earnings Call Transcript

February 25, 2010 11:00 am ET


Tripp Sullivan – Corporate Communications

Monty Bennett - CEO

Dave Kimichik - CFO and Treasurer

Doug Kessler - President


Will Marks - JMP Securities


Ladies and gentlemen, thank you for standing by. Welcome to the Ashford Hospitality fourth 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, February 25, 2010.

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

Tripp Sullivan

Good morning. Welcome to the Ashford Hospitality Trust conference call to review the company's results for the fourth 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 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 annual and quarterly reports 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 February 24, 2010 and may also be accessed through the company's Web site at 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. 2009 was a challenging year on many levels. We believe however that our strategies worked to mitigate the impact of the severe economic downturn. We implemented a wide array of initiatives to maximize performance and reduce costs in three key areas, operations, debt management, and share repurchases. The primary goals have been shareholder value creation and cash flow stability.

Regarding operations, our asset management team working in conjunction with our management companies exceeded our cost savings goal. For the year, we achieved 53% flow-through from the decline in revenue to a loss of EBITDA thereby minimizing the operating margin erosion year-over-year with a performance of 406 basis points down for the year, and 297 basis points down for the fourth quarter. These metrics exceeded the performance of many of our peers. Our affiliate management Remington who was responsible for 32% of our EBITDA significantly contributed to these cost savings and flow-through benefits.

We continued to make very good progress with both Hilton and Marriott to incrementally right size cost structure with revenue. Our RevPAR yield index for the year was 120.3% compared to 119.3% a year ago reflecting a gain in market share of 100 basis points. Our debt management initiatives resulted in 285 million of new financing, load extensions or modifications during the year. Our interest rate strategy that we implemented in 2008 to swap our debts from fixed rate to floating rate contributed significantly to our bottom line. We expect additional savings in 2010 based upon the Fed’s commentary to keep interest rates low for an extended period of time.

During the fourth quarter, we repurchased 6.3 million of common stock for a total of 30.1 million shares during 2009. Since the inception of our buyback initiative, through the end of the fourth quarter, we have purchased 66.4 million of common stock and 3.1 million shares of preferred stock. By contrast, our peers issued more than 280 million shares since the beginning of 2009. At some point, we expect our stock price will recover such that we would be more inclined to issue common stock rather than to keep buying it back. In order to give a period for the strategy, which could be months or years away, we have considered various methods of accessing capital including after market offerings.

In excess equity offerings would require us to maintain a termination to end our stock repurchase strategy for the foreseeable future and allow us to tap into the market when we see proper pricing conditions and have accretive uses for the capital. We recently put in place a structure known as a stand-by equity distribution agreement or SEDA with an affiliate of York [ph] Advisors to provide us access at our discretion after our board makes the determination to seize the stock repurchase program of up to $65 million over a three-year period with an all-end 2.5% discount to market pricing. This structure provides us an efficient way to access the capital markets with precision and flexibility when needed. Raymond James started to (inaudible) structure.

Over the past few quarters, we have seen Refits raise large amounts of capital to solve debt issues and prepare for new investments. However capital raising for debt purposes is currently not a priority for us given we do not have any need for funds to meet upcoming low maturities and we are in compliance with our credit facility covenants. Our mezzanine capital to buy hospitality assets is currently not a core objective. By repurchasing our own stock that were timed at attractive values, we believe we have implemented an investment strategy of better returns than what we believe may be available in the market from hotel acquisitions.

The combination of these three key areas of our focus on operations, debt management and share repurchases generated the following results for the fourth quarter. Pro forma RevPAR for the hotels not under renovation was down 13.3% compared with the prior year. ADR was down 10.8%, and occupancy was down 181 basis points. Our hotel EBITDA margin dropped year-over-year by 276 basis points for hotels not under renovation and 297 basis points for all hotels. AFFO and CAD per diluted share for the quarter were $0.32 and $0.22 respectively. That brings us to $1.12 and $0.78 respectively for the year. We believe this performance places us at the high end of the peer group.

Turning to capital expenditures for 2009, we completed $69.2 million of projects of which $35.3 million was owner funded. Our total targeted spends for 2010 will be approximately $87.0 million, which equates to 9.4% of 2009 total revenues. During the down turn we have maintained our plans to continue to upgrade hotels to improve their better position in the market.

Visibility remains limited in the industry however, currently, there appears to be more optimistic perspectives on hotel and economic data. On the call last quarter, I noted that we thought we were nearing the bottom of the cycle. We do think that it continues to be the case as RevPAR declines are moderating and there are incremental positives to report. Hotel performance is a lagging indicator to many macro economic data points that we track. The early signs of broader economic recovery are still not reflected in a lodging recovery. We agree with most forecasts that 2010 will be the trough year and that pricing power will resume by market as occupancy slowly begins to increase. We believe that the diversity of our (inaudible) in major markets to strengthen our brands and the amount of capital we spend to maintain the competitiveness of our hotels, will position our portfolio to benefit from the market recovery.

Our top priorities for 2010 will be similar to what you have heard from us during the past year. First, strive to allocate capital to generate the best returns for our shareholders, which still appears to be in common stock buybacks. Second, deploy our debt to market strategies to protect the (inaudible) and hotel EBITDA and eliminate maturities at the head of the curve in 2011 and 2012, lastly to maximize operating performance with an emphasis on GOP margin and cost reductions.

I would now like to turn the call over to Dave Kimichik to review our financial results.

Dave Kimichik

Thanks Monty, good morning. For the fourth quarter we reported a net loss to common shareholders of $76, 874,000, adjusted EBITDA of $47,905,000, and AFFO of $25,999,000 or $0.32 per diluted share. We reported CAD of $17,825,000 or $0.22 per diluted share.

At quarter’s end Ashford had total assets of $3.9 million, including $165.2 million of unrestricted cash. We had $2.8 billion of mortgage debt for the blended average interest rate of 2.95%. Including the $1.8 billion interest rate swap, 98% of our debt is now floating and the weighted average maturity is 5.2 years.

Since the length of the swap does not match the term of the swap fixed rate debt, for GAAP purposes, the swap is not considered an effective hedge. The result of this is that the changes in market value of these instruments must run through our P&L each quarter as unrealized gains or losses on derivatives. These are non-cash entries that will affect our net income but will be added back for purposes of calculating our AFFO and CAD. So the fourth quarter it was a loss of $17,616,000 and for the full year, it is a loss of $31, 782,000.

At quarter’s end, our portfolio consisted of 102 hotels in continuing operations containing 22,141 rooms. Additionally, as of December 31, we owned a position in four performing mezzanine loans with total book value of principal outstanding of $75.9 million with average annual unleveraged yield of 5.1%. Hotel operating profit for the entire portfolio was down by $19.1 million or 25.5% for the quarter. Our hotel operating profit margin decreased by 297 basis points for all hotels and our flow-through from loss revenue to hotel operating profit for the total portfolio was 58%.

Our quarter end adjusted EBITDA to fixed charge ratio now stands at 1.69 times versus the required minimum of 1.25 times. Ashford's net debt to gross assets is at 59% versus a not-to-exceed level of

65% for our credit facility covenants. At year-end our share count was 79.3 million fully diluted shares outstanding, which is comprised of 57.6 million common shares, 14.3 million OP units, and 7.4 million shares of series E convertible preferreds.

Regarding asset impairments, I would like to give you an update on the Hyatt Regency Dearborn and the Westin O'Hare. As of December 1, the Hyatt Regency went into receivership and therefore its operations are no longer included in our consolidated financial results. On the Westin O'Hare, we have been working with the special servicer on the loan to arrange a consensual deed in lieu foreclosure. Based on the status, we are required to write down the book value in the fourth quarter to estimated fair market value, which resulted in an impairment of $59.3 million. If the deed in lieu foreclosure is finished, we will then record a gain of $53 million to a level of the non-recourse debt on the property or net impairment of $6.3 million.

I would not like to turn it over to Douglas to discuss our capital market strategies.

Doug Kessler

Thanks and good morning. Our capital market strategies have been a deciding factor and have continued to weather the very challenging operating climate. We recognize that several of these strategies set us apart from our peers.

We are the only REIT in our peer group significantly capitalized on the downward pressure on asset and stock valuations through our disciplined share repurchases. Since inception through year-end, we have acquired 66.4 million at an average price of $2.96. This represents a significant 46% reduction from our peek of 144.6 million shares at an average price that is 78% below our peek price of $13.48 per share. These repurchases represent nearly $200 million of value creation based on yesterday’s closing share price.

The current state of the capital markets continues to amaze us. A large amount of equity at depressed share prices has been raised over the past year. The dilutive impact of that idle capital cannot be ignored. We believe we have created more value for our fellow shareholders through our repurchase strategies. I say fellow shareholders because management and insiders continue to be the largest owners of the company at 16.9%. There is no doubt that we are very much aligned with our shareholders.

Additionally, we are one of the only REITs in our peer group to actively seek to offset the economic downturns impact on NOI flow-through with our interest rate strategies. The benefit of our capital market strategies is clear. Through the combination of our swap and flooridors, we were able to save $52.3 million in interest expense in 2009. We believe the global recession is expected to keep LIBOR low for some time. However, it is worth noting that given the structure of our interest rate hedges, it would take greater than a 50 basis point movement upward in rates before we would see any reduction in the benefits from our swap in flooridors. Moreover, we continued to derive additional economic benefit from the swap from now until March 2013 so long as LIBOR remains below 3.2%, a 14-fold increase from its current 0.23% level.

We stayed ahead of the curve on our financings as well. For the year, we completed $285 million in new financings, modifications or extensions on six separate loans. In the quarter, we secured $145 million in non-recourse loans at refinanced maturing debt in 2010 and 2011, provided excess capital for improvements and unencumbered two hotels. We also refinanced the Hilton El Conquistador maturing in 2011 with attractive financing. Given the continued lack of mortgage capital in the sector, we believe these financings are a significant achievement. The net result of this refinancing initiative is that there are no remaining 2010 debt maturities and only $209 million maturing in 2011.

Subsequent to the end of the quarter, we reached a preliminary agreement to modify the Capital Hilton and Hilton Torrey Pines $156.6 million loan. Pursuant to the term sheet in exchange for a $5 million pay down in a modification fee, we would be able to obtain the full extension of the loan to August 2013 without any extension tests and also reduce covenants tests to minimize the likelihood of cash being trapped. We continue to pursue extension on other loans that mature in 2012 and 2013. We are also thinking ahead with respect to plans for our credit facility even though that does not mature until 2012.

In terms of transactions and investments, we do not see many opportunities. However in select circumstances, we have monetized the assets in our loan portfolio. During the quarter we completed the $13.6 million sale of the previously diseased Westin Westminster loan. We are also able to sell the note in excess of the par amount due to the high pay coupon compared to current market rates. Subsequent to the quarter’s end, we completed the previously announced discounted payoff on the $33.6 million Ritz Carlton Key Biscayne loan for $20 million in cash along with a $4 million note.

The anticipated overflow of deals from distressed owners and lenders just is not there. Hotel owners that are able to hold on are waiting for the cycle to improve. Banks and servicers have been unwilling to (inaudible) recovery is not very far away. Meanwhile there is an abundance of capital, both domestic and offshore competing for few deals. We do not expect much yield flow until the bid ask spread tightens. We believe most of the tightening will be to the benefit of the seller and as a result values should increase.

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

Question-and-Answer Session


Thank you. (Operator instructions) Our first question comes from the line of Will Marks with JMP Securities. Please proceed.

Will Marks - JMP Securities

Thank you and good morning everyone. Can you talk about maybe year to date what you have been seeing in your markets and also I want to hear a little about (inaudible) growth.

Monty Bennett

Sure, this is Monty. That is providing too much guidance for the quarter, which we try not to do. Our portfolio typically attracts the national averages, for each month maybe a few points above or a few points below. So what you are seeing nationally usually is not too different from what we track, and I think that the figures came back till last week nationally were pretty positive. I think last week it was down just 3% or so in RevPAR. So we are pretty encouraged by that, pretty encouraged for the whole industry seems to be recovering at a pretty good clip. I think most predictions were down zero or flat to down 5% for the year. It looks like it will be towards the higher end of that range at least if this pace keeps up. And what is the --

Will Marks - JMP Securities

Sorry, should we be looking do you think at the total US or, I mean, last week for example the luxury side, I know you are not in the luxury side, let’s say the upper upscale side was flat. Upscale was down 3%. How do you think we should focus on the segment side?

Monty Bennett

We have got one luxury asset and the balance half is upscale and the other half is upper upscale. And again, we will typically track a couple of points above one of those segments or a couple of points below those segments depending upon the mark but pretty close to it.

On the supply side, Doug is just going to make a comment here.

Doug Kessler

Hi Will. I think there was a study that one of your banking peers produced -- looked at all of the public companies and did a fairly granular micro analysis of specific markets and the exposure in supply and it confirmed what we already knew, which is that our portfolio is one of the lowest exposures to new supply coming in, in directly competitive sub market. So, we feel pretty good about the diversity of the portfolio and the lack of exposure to any impact. We are really focused on the recovery of the market.

Will Marks - JMP Securities

Great, thanks, just one final question, did you talk about or publish a number of year-to-date share repurchase?

Monty Bennett

No, we have not disclosed what the year to date number is although we have been in the market since January 1, and we still are interested in share repurchases.

Will Marks - JMP Securities

Great, thank you.


Thank you. (Operator instructions) Mr Bennett, there are no further questions at this time. I will turn the call back to you. Please continue with your presentation or closing remarks.

Monty Bennett

Thank you for your participation in today’s call. We look forward to talking again at next quarter’s call.


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.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!